UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Form
10-Q




(Mark
One)


 ̈
            Quarterly
      report pursuant Section 13 or 15(d) of the Securities Exchange Act of
      1934


For the
quarterly period ended June 30,
2009


 ̈
            Transition
      report pursuant Section 13 or 15(d) of the Securities Exchange Act of
      1934


For the
transition period from _______ to _______.




Commission
file number000-53187




STRATOS
RENEWABLES CORPORATION




(Exact
Name of Registrant as Specified in Its Charter)




Nevada
                (State
      of Incorporation)
              20-1699126
                (I.R.S.
      Employer Identification No.)





9440
Santa Monica Blvd., Suite 401


Beverly
Hills, California  90210


(Address
of Principal Executive Offices) (Zip Code)




(310) 402-5910


(Registrant’s
Telephone Number, Including Area Code)




N/A


(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)




Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 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.  YesxNo ̈




Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period than the registrant was required to submit
and post such files).  Yes ̈No ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈  (Do
      not check if a
                smaller
      reporting company)
              Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈ No
x





As of
August 12, 2009, the Company had 120,975,982 outstanding shares of common stock,
par value $0.001 per share.





STRATOS
RENEWABLES CORPORATION AND SUBSIDIARIES


(A
Development Stage Company)


Consolidated
Financial Statements





Contents





PagePART
      I.
                                    FINANCIAL
      INFORMATIONItem
      1.
                                    Financial
      StatementsConsolidated
      Balance Sheets as of June 30, 2009 and December 31, 2008
                                    3Consolidated
      Statements of Operations and Other Comprehensive Loss for the three and
      six months ended June 30, 2009 and 2008, and for the period from February
      27, 2007 (date of inception) to June 30, 2009
                                    4Consolidated
      Statement of Stockholders’ Equity (Deficit) for the period from February
      27, 2007 (date of inception) to June 30, 2009
                                    5Consolidated
      Statements of Cash Flows for the six months ended June 30, 2009 and 2008,
      and for the period from February 27, 2007 (date of inception) to June 30,
      2009
                                    6Notes
      to Consolidated Financial Statements
                                    7Item
      2.
                                    Management’s
      Discussion and Analysis of Financial Condition And Results of
      Operations
                                    23Item
      3.
                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                    35Item
      4.
                                    Controls
      and Procedures
                                    35PART
      II.
                                    OTHER
      INFORMATION
                                    36Item
      1.
                                    Legal
      Proceedings
                                    36Item
      1A.
                                    Risk
      Factors
                                    36Item
      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
                                    36SIGNATURES
                                    38




2


PART
I – FINANCIAL INFORMATION




Item1.  Financial
Statements





Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Consolidated
Balance Sheets


As
of June 30, 2009 and December 31, 2008





June
      30,
                                
                                
                                December
      31,2009
                                
                                
                                2008(unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                
                                $
                                47,923
                                
                                
                                $
                                761,257Funds
      held in trust for the Company
                                
                                
                                -
                                
                                
                                
                                92,652Debt
      issuance costs
                                
                                
                                509,088
                                
                                
                                
                                1,013,326Prepaid
      expenses and other current assets
                                
                                
                                499,199
                                
                                
                                
                                712,111TOTAL
      CURRENT ASSETS
                                
                                
                                1,056,210
                                
                                
                                
                                2,579,346PLANT
      AND EQUIPMENT, net
                                
                                
                                5,399,779
                                
                                
                                
                                5,223,296LAND
      DEPOSITS
                                
                                
                                303,250
                                
                                
                                
                                302,632VAT
      CREDITS
                                
                                
                                1,314,292
                                
                                
                                
                                1,225,130OTHER
      ASSETS
                                
                                
                                123,341
                                
                                
                                
                                118,958TOTAL
      ASSETS
                                
                                $
                                8,196,872
                                
                                
                                $
                                9,449,362LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable
                                
                                $
                                1,911,333
                                
                                
                                $
                                906,495Accrued
      interest
                                
                                
                                980,373
                                
                                
                                
                                425,329Other
      payables
                                
                                
                                826,036
                                
                                
                                
                                620,084Accrued
      redemption premium
                                
                                
                                321,251
                                
                                
                                
                                296,615Short-term
      note payable
                                
                                
                                275,000
                                
                                
                                
                                -Convertible
      promissory notes, net of debt discounts of $1,851,008 and $3,692,790 as of
      June 30, 2009 and December 31, 2008, respectively
                                
                                
                                7,443,992
                                
                                
                                
                                5,602,210Accrued
      derivative liabilities
                                
                                
                                362,077
                                
                                
                                
                                2,652,692TOTAL
      CURRENT LIABILITIES
                                
                                
                                12,120,062
                                
                                
                                
                                10,503,425COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITY (DEFICIT)Preferred
      stock; $0.001 par value; 50,000,000 shares authorized; 8,400,009 and
      8,571,429 shares issued and outstanding as of June 30, 2009 and December
      31, 2008, respectively
                                
                                
                                8,400
                                
                                
                                
                                8,572Common
      stock; $0.001 par value; 250,000,000 shares authorized; 65,360,279 and
      63,495,180 shares issued and outstanding as of June 30, 2009 and December
      31, 2008, respectively
                                
                                
                                65,360
                                
                                
                                
                                63,495Additional
      paid-in capital
                                
                                
                                9,383,163
                                
                                
                                
                                12,649,041Other
      comprehensive gain (loss)
                                
                                
                                (980
                                )
                                
                                
                                (272,344
                                )Deficit
      accumulated during the development stage
                                
                                
                                (13,379,133
                                )
                                
                                
                                (13,502,827
                                )TOTAL
      STOCKHOLDERS' DEFICIT
                                
                                
                                (3,923,190
                                )
                                
                                
                                (1,054,063
                                )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                                
                                $
                                8,196,872
                                
                                
                                $
                                9,449,362





The
accompanying notes are an integral part of these consolidated financial
statements.


3


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Consolidated
Statements of Operations and Other Comprehensive Loss


For
the Three and Six Months Ended June 30, 2009 and 2008 and


For
the Period from February 27, 2007 (Date of Inception) to June 30,
2009





For
      the period fromFebruary
      27, 2007Three
      Months Ended June 30,
                          
                          
                          Six
      Months Ended June 30,
                          
                          
                          (date
      of inception)2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          to
      June 30, 2009(unaudited)
                          
                          
                          (unaudited)
                          
                          
                          (unaudited)
                          
                          
                          (unaudited)
                          
                          
                          (unaudited)REVENUE
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -COST
      OF REVENUE
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -GROSS
      PROFIT
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -OPERATING
      EXPENSESConsulting
      fees
                          
                          
                          29,532
                          
                          
                          
                          362,318
                          
                          
                          
                          61,552
                          
                          
                          
                          1,107,788
                          
                          
                          
                          1,536,586General
      and administrative
                          
                          
                          504,167
                          
                          
                          
                          651,238
                          
                          
                          
                          975,594
                          
                          
                          
                          1,533,202
                          
                          
                          
                          4,434,540Professional
      fees
                          
                          
                          306,722
                          
                          
                          
                          466,448
                          
                          
                          
                          499,616
                          
                          
                          
                          1,138,391
                          
                          
                          
                          3,097,664Salaries
      and wages
                          
                          
                          712,993
                          
                          
                          
                          713,898
                          
                          
                          
                          1,316,939
                          
                          
                          
                          1,145,274
                          
                          
                          
                          4,020,710TOTAL
      OPERATING EXPENSES
                          
                          
                          1,553,414
                          
                          
                          
                          2,193,902
                          
                          
                          
                          2,853,701
                          
                          
                          
                          4,924,655
                          
                          
                          
                          13,089,500LOSS
      FROM OPERATIONS
                          
                          
                          (1,553,414
                          )
                          
                          
                          (2,193,902
                          )
                          
                          
                          (2,853,701
                          )
                          
                          
                          (4,924,655
                          )
                          
                          
                          (13,089,500
                          )OTHER
      INCOME (EXPENSES)Amortization
      of debt discounts and debt issuance costs
                          
                          
                          (1,184,888
                          )
                          
                          
                          (98,941
                          )
                          
                          
                          (2,373,572
                          )
                          
                          
                          (708,258
                          )
                          
                          
                          (6,153,938
                          )Interest
      expense
                          
                          
                          (298,722
                          )
                          
                          
                          189,763
                          
                          
                          
                          (662,782
                          )
                          
                          
                          (541,757
                          )
                          
                          
                          (2,691,675
                          )Change
      in fair value of accrued derivative liabilities
                          
                          
                          905,884
                          
                          
                          
                          557,490
                          
                          
                          
                          4,073,818
                          
                          
                          
                          760,573
                          
                          
                          
                          8,672,115Other
      income (expenses), net
                          
                          
                          (18,499
                          )
                          
                          
                          23,305
                          
                          
                          
                          (14,767
                          )
                          
                          
                          (130,512
                          )
                          
                          
                          (114,435
                          )TOTAL
      OTHER INCOME (EXPENSES), net
                          
                          
                          (596,225
                          )
                          
                          
                          671,617
                          
                          
                          
                          1,022,697
                          
                          
                          
                          (619,954
                          )
                          
                          
                          (287,933
                          )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                          
                          
                          (2,149,639
                          )
                          
                          
                          (1,522,285
                          )
                          
                          
                          (1,831,004
                          )
                          
                          
                          (5,544,609
                          )
                          
                          
                          (13,377,433
                          )PROVISION
      FOR INCOME TAXES
                          
                          
                          50
                          
                          
                          
                          50
                          
                          
                          
                          850
                          
                          
                          
                          850
                          
                          
                          
                          1,700NET
      LOSS
                          
                          $
                          (2,149,689
                          )
                          
                          $
                          (1,522,335
                          )
                          
                          $
                          (1,831,854
                          )
                          
                          $
                          (5,545,459
                          )
                          
                          $
                          (13,379,133
                          )OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      currency translation gain (loss)
                          
                          
                          315,801
                          
                          
                          
                          (624,472
                          )
                          
                          
                          271,364
                          
                          
                          
                          62,339
                          
                          
                          
                          (980
                          )COMPREHENSIVE
      LOSS
                          
                          $
                          (1,833,888
                          )
                          
                          $
                          (2,146,807
                          )
                          
                          $
                          (1,560,490
                          )
                          
                          $
                          (5,483,120
                          )
                          
                          $
                          (13,380,113
                          )LOSS
      PER COMMON SHAREBASIC
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.09
                          )
                          
                          $
                          (0.24
                          )DILUTED
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.09
                          )
                          
                          $
                          (0.24
                          )WEIGHTED
      AVERAGE COMMON EQUIVALENT SHARES OUTSTANDINGBASIC
                          
                          
                          65,179,117
                          
                          
                          
                          60,229,333
                          
                          
                          
                          64,479,252
                          
                          
                          
                          59,529,968
                          
                          
                          
                          56,508,833DILUTED
                          
                          
                          65,179,117
                          
                          
                          
                          60,229,333
                          
                          
                          
                          64,479,252
                          
                          
                          
                          59,529,968
                          
                          
                          
                          56,508,833





The
accompanying notes are an integral part of these consolidated financial
statements.


4


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Consolidated
Statement of Stockholders' Equity (Deficit)


For
the Period from February 27, 2007 (Date of Inception) to June 30,
2009





DeficitAccumulatedAdditional
                    
                    
                    Other
                    
                    
                    During
      the
                    
                    
                    TotalPreferred
      Stock
                    
                    
                    Common
      Stock
                    
                    
                    Paid-in
                    
                    
                    Comprehensive
                    
                    
                    Development
                    
                    
                    Stockholders'Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Gain
      (loss)
                    
                    
                    Stage
                    
                    
                    Equity
      (Deficit)Balance,
      February 27, 2007
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Purchase
      of shares for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    45,000,000
                    
                    
                    
                    45,000
                    
                    
                    
                    (44,666
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    334Shares
      issued in connection with reverse merger transaction
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,000,000
                    
                    
                    
                    10,000
                    
                    
                    
                    (9,789
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    211Common
      stock issued for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,666,794
                    
                    
                    
                    2,667
                    
                    
                    
                    1,442,065
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,444,732Preferred
      stock issued for cash
                    
                    
                    7,142,857
                    
                    
                    
                    7,143
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,334,254
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,341,397Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,021
                    
                    
                    
                    -
                    
                    
                    
                    14,021Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,587,257
                    )
                    
                    
                    (1,587,257
                    )Balance,
      December 31, 2007
                    
                    
                    7,142,857
                    
                    
                    $
                    7,143
                    
                    
                    
                    57,666,794
                    
                    
                    $
                    57,667
                    
                    
                    $
                    5,721,864
                    
                    
                    $
                    14,021
                    
                    
                    $
                    (1,587,257
                    )
                    
                    $
                    4,213,438Issuance
      of common stock and warrants for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,410,639
                    
                    
                    
                    2,411
                    
                    
                    
                    1,173,586
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,175,997Cashless
      exercise of warrants (595,713 warrants exercised for 325,763
      shares)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    325,763
                    
                    
                    
                    326
                    
                    
                    
                    (326
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of preferred stock and warrants for cash
                    
                    
                    1,428,572
                    
                    
                    
                    1,429
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    611,405
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    612,834Conversion
      of convertible notes to common stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,166,605
                    
                    
                    
                    1,167
                    
                    
                    
                    815,457
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    816,624Reclassify
      beneficial conversion feature from liability to equity
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,686,051
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,686,051Cashless
      exercise of warrants (1,956,302 warrants exercised for 903,239 shares) on
      November 10, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    903,239
                    
                    
                    
                    903
                    
                    
                    
                    (903
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cashless
      exercise of warrants (285,714 warrants exercised for 132,652 shares) on
      November 18, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    132,652
                    
                    
                    
                    132
                    
                    
                    
                    (132
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of 239,488 shares of common stock for legal services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    239,488
                    
                    
                    
                    239
                    
                    
                    
                    167,403
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    167,642Issuance
      of 650,000 shares of common stock related to consulting
      agreement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    650,000
                    
                    
                    
                    650
                    
                    
                    
                    454,350
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    455,000Beneficial
      conversion feature associated with convertible notes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    20,286
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    20,286Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (286,365
                    )
                    
                    
                    -
                    
                    
                    
                    (286,365
                    )Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (11,915,570
                    )
                    
                    
                    (11,915,570
                    )Balance,
      December 31, 2008, as previously reported
                    
                    
                    8,571,429
                    
                    
                    $
                    8,572
                    
                    
                    
                    63,495,180
                    
                    
                    $
                    63,495
                    
                    
                    $
                    12,649,041
                    
                    
                    $
                    (272,344
                    )
                    
                    $
                    (13,502,827
                    )
                    
                    $
                    (1,054,063
                    )Cumulative
      effect of reclassification of warrants and conversion
    options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,706,338
                    )
                    
                    
                    -
                    
                    
                    
                    1,955,548
                    
                    
                    
                    (1,750,790
                    )Balance,
      January 1, 2009, as adjusted
                    
                    
                    8,571,429
                    
                    
                    $
                    8,572
                    
                    
                    
                    63,495,180
                    
                    
                    $
                    63,495
                    
                    
                    $
                    8,942,703
                    
                    
                    $
                    (272,344
                    )
                    
                    $
                    (11,547,279
                    )
                    
                    $
                    (2,804,853
                    )Conversion
      of preferred stock on January 8, 2009; 171,420preferred
      shares converted into common shares
                    
                    
                    (171,420
                    )
                    
                    
                    (172
                    )
                    
                    
                    183,864
                    
                    
                    
                    184
                    
                    
                    
                    (12
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of 326,463 shares of common stock for additional interest
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    326,463
                    
                    
                    
                    326
                    
                    
                    
                    110,466
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    110,792Issuance
      of 970,682 shares of common stock for consulting services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    970,682
                    
                    
                    
                    971
                    
                    
                    
                    246,776
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    247,747Issuance
      of 384,090 shares of common stock for compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    384,090
                    
                    
                    
                    384
                    
                    
                    
                    83,230
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    83,614Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    271,364
                    
                    
                    
                    -
                    
                    
                    
                    271,364Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,831,854
                    )
                    
                    
                    (1,831,854
                    )Balance,
      June 30, 2009 (unaudited)
                    
                    
                    8,400,009
                    
                    
                    $
                    8,400
                    
                    
                    
                    65,360,279
                    
                    
                    $
                    65,360
                    
                    
                    $
                    9,383,163
                    
                    
                    $
                    (980
                    )
                    
                    $
                    (13,379,133
                    )
                    
                    $
                    (3,923,190
                    )





The
accompanying notes are an integral part of these consolidated financial
statements.


5


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Consolidated
Statements of Cash Flows


For
the Six Months Ended June 30, 2009 and 2008 and


For
the Period from February 27, 2007 (Date of Inception) to June 30,
2009





For the period fromFor the Six
                            
                            
                            For the Six
                            
                            
                            February 27, 2007Months Ended
                            
                            
                            Months Ended
                            
                            
                            (date of inception)June 30, 2009
                            
                            
                            June 30, 2008
                            
                            
                            to June 30, 2009(unaudited)
                            
                            
                            (unaudited)
                            
                            
                            (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                            
                            $
                            (1,831,854
                            )
                            
                            $
                            (5,545,459
                            )
                            
                            $
                            (13,379,133
                            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Amortization
      of debt discounts and debt issuance costs
                            
                            
                            2,373,572
                            
                            
                            
                            708,258
                            
                            
                            
                            6,153,938Depreciation
                            
                            
                            28,730
                            
                            
                            
                            11,872
                            
                            
                            
                            67,537Change
      in fair value of accrued derivative liabilities
                            
                            
                            (4,073,818
                            )
                            
                            
                            (760,573
                            )
                            
                            
                            (8,672,115
                            )Amortization
      of prepaid consulting
                            
                            
                            194,419
                            
                            
                            
                            171,583
                            
                            
                            
                            613,783Common
      stock and warrants issued for services
                            
                            
                            336,223
                            
                            
                            
                            -
                            
                            
                            
                            336,223Common
      stock issued for interest
                            
                            
                            110,792
                            
                            
                            
                            -
                            
                            
                            
                            110,792Changes
      in operating assets and liabilities:Prepaid
      expenses and other assets
                            
                            
                            22,261
                            
                            
                            
                            (80,921
                            )
                            
                            
                            (268,649
                            )Accounts
      payable
                            
                            
                            1,033,587
                            
                            
                            
                            1,358,937
                            
                            
                            
                            2,105,956Accrued
      interest
                            
                            
                            555,044
                            
                            
                            
                            132,644
                            
                            
                            
                            1,047,823Other
      payables
                            
                            
                            177,385
                            
                            
                            
                            231,192
                            
                            
                            
                            808,796Accrued
      redemption premium
                            
                            
                            24,636
                            
                            
                            
                            417,604
                            
                            
                            
                            820,425Net
      cash used in operating activities
                            
                            
                            (1,049,023
                            )
                            
                            
                            (3,354,863
                            )
                            
                            
                            (10,254,624
                            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of plant and equipment
                            
                            
                            -
                            
                            
                            
                            (630,875
                            )
                            
                            
                            (5,529,145
                            )Deposit
      for land acquisition
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (323,313
                            )Increase
      in VAT credits
                            
                            
                            (34,842
                            )
                            
                            
                            (229,570
                            )
                            
                            
                            (1,291,657
                            )Change
      in funds held in trust for the Company
                            
                            
                            93,967
                            
                            
                            
                            -
                            
                            
                            
                            1,315Cash
      acquired with acquisition
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            211Net
      cash provided by (used in) investing activities
                            
                            
                            59,125
                            
                            
                            
                            (860,445
                            )
                            
                            
                            (7,142,589
                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from sale of common stock
                            
                            
                            -
                            
                            
                            
                            1,685,794
                            
                            
                            
                            3,554,537Proceeds
      from sale of preferred stock
                            
                            
                            -
                            
                            
                            
                            1,000,000
                            
                            
                            
                            6,000,000Proceeds
      from short-term note payable
                            
                            
                            275,000
                            
                            
                            
                            -
                            
                            
                            
                            275,000Payment
      of offering costs associated with the sale common and preferred
      stock
                            
                            
                            -
                            
                            
                            
                            (145,000
                            )
                            
                            
                            (521,246
                            )Proceeds
      from issuance of convertible debenture
                            
                            
                            -
                            
                            
                            
                            1,350,000
                            
                            
                            
                            12,248,000Payment
      of offering costs associated with issuance of convertible
      debenture
                            
                            
                            -
                            
                            
                            
                            (17,500
                            )
                            
                            
                            (1,365,499
                            )Principal
      payment of convertible debt
                            
                            
                            -
                            
                            
                            
                            (2,723,000
                            )
                            
                            
                            (2,798,000
                            )Net
      cash provided by financing activities
                            
                            
                            275,000
                            
                            
                            
                            1,150,294
                            
                            
                            
                            17,392,792Effect
      of exchange rate changes on cash and cash equivalents
                            
                            
                            1,564
                            
                            
                            
                            14,353
                            
                            
                            
                            52,344NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                            
                            
                            (713,334
                            )
                            
                            
                            (3,050,661
                            )
                            
                            
                            47,923CASH
      AND CASH EQUIVALENTS, beginning of period
                            
                            
                            761,257
                            
                            
                            
                            3,357,417
                            
                            
                            
                            -CASH
      AND CASH EQUIVALENTS, end of period
                            
                            $
                            47,923
                            
                            
                            $
                            306,756
                            
                            
                            $
                            47,923SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid for interest
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            620,135Cash
      paid for income taxes
                            
                            $
                            850
                            
                            
                            $
                            850
                            
                            
                            $
                            1,700SUPPLEMENTAL
      NON-CASH INVESTING AND FINANCING ACTIVITIES:Costs
      associated with acquisition:Beneficial
      conversion feature associated with convertible debenture
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            874,990Issuance
      of warrants in acquisition
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            229,748Acquisition
      of shell company
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            211Issuance
      of common stock for conversion of principal and interest
                            
                            $
                            -
                            
                            
                            $
                            816,624
                            
                            
                            $
                            816,624Issuance
      of warrants as debt issuance costs
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            186,747Beneficial
      conversion feature associated with convertible debenture
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            3,947,040Conversion
      of preferred stock into common stock
                            
                            $
                            12
                            
                            
                            $
                            -
                            
                            
                            $
                            12Warrant
      liability associated with convertible debenture
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            1,862,173Issuance
      of warrants with preferred stock
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            142,166Cashless
      exercise of warrants
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            1,362Issuance
      of warrants as prepaid consulting fees
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            216,106Issuance
      of common stock for accounts payable
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            167,642Reclassify
      beneficial conversion feature liability to equity
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            3,686,051Issuance
      of common stock and convertible notes for consulting fees
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            550,000





The
accompanying notes are an integral part of these consolidated financial
statements.


6


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)




Note
1 - Organization and Basis of Presentation





The
unaudited consolidated financial statements have been prepared by Stratos
Renewables Corporation and its subsidiaries, pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2008. The results for the six months ended June 30, 2009 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2009.





Organization and line of
business




Stratos
Renewables Corporation (formerly New Design Cabinets, Inc. and hereinafter the
“Company”) was incorporated in the State of Nevada on September 29, 2004. The
Company’s subsidiary, Stratos del Peru S.A.C., was incorporated in Lima, Peru on
February 27, 2007 under the name of Estratosfera del Perú S.A.C. (“Stratos
Peru”). On July 11, 2007, the shareholders at a general meeting agreed to change
Stratos Peru’s name to its current one, Stratos del Peru S.A.C., which was
officially registered with the Tax Administration of Peru on October 11,
2007.





On
November 14, 2007, Stratos Peru entered into a share exchange agreement, or the
Share Exchange, with the Company. Pursuant to the agreement, the Company issued
45,000,000 shares of its common stock to the former security holders of Stratos
Peru in exchange for 999, or 99.9%, of the issued and outstanding shares of
common stock of Stratos Peru. Upon closing the Share Exchange, the Company had
55,000,000 shares of common stock issued and outstanding as a result of the
issuance of 45,000,000 shares of common stock to the former security holders of
Stratos Peru. Effective November 20, 2007, the Company amended its articles of
incorporation to change the Company’s name from “New Design Cabinets, Inc.” to
“Stratos Renewables Corporation.”




The Share
Exchange is deemed to be a reverse acquisition under the purchase method of
accounting. As the acquired entity, Stratos Peru is regarded as the predecessor
entity as of November 14, 2007. Accordingly, the merger of the Company and
Stratos Peru was recorded as a recapitalization of Stratos Peru, with Stratos
Peru being treated as the continuing entity, and the management and board of
directors of Stratos Peru were appointed as officers and directors of the
Company. The accompanying consolidated statements of operations present the
amounts as if the acquisition occurred on February 27, 2007 (date of inception
for Stratos Peru).




Additionally,
in connection with the reverse merger transaction, the Company conducted a
private placement of common stock, preferred stock, and convertible promissory
notes totaling approximately $10 million during 2007.





The
Company’s business objectives are the purchase, sale, production, distribution,
marketing, transport, warehousing, mixture, export, and import of all kinds of
products derived from hydrocarbons and bio-fuels, being solids, liquids, or
gases. The Company is currently a development stage company under the provisions
of Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and
Reporting by Development Stage Enterprises,” as it has not commenced generating
revenue. The Company’s principal executive office is located in California in
the United States, and it also has offices and administrative headquarters in
Lima, Peru.


7


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)




Development Stage Company
and Going-Concern





The
Company is a development stage company and is subject to risks and uncertainties
that include the following: new product development, actions of competitors,
reliance on the knowledge and skills of its employees to be able to service
customers, availability of sufficient capital, and a limited operating history.
Accordingly, the Company presents its consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America that apply in establishing new operating enterprises. As a development
stage enterprise, the Company discloses the deficit accumulated during the
development stage on the consolidated statements of operations and other
comprehensive loss and consolidated statements of cash flows from inception of
the development stage to the date on the current consolidated balance sheets.
Contingencies exist with respect to this matter, the ultimate resolution of
which cannot presently be determined.




The
Company has not generated any operating revenues and has working capital
deficits, which raises substantial doubt about its ability to continue as a
going concern.  During the six months ended June 30, 2009, the Company
recorded a net loss of $1,831,854, and as of June 30, 2009, the Company has a
deficit accumulated during the development stage of $13,379,133.





Given
that the Company is a development stage company and has not generated any
revenues to date, its cash flow projections are subject to numerous
contingencies beyond its control, including the ability to manage its expected
growth, complete construction of the proposed plant, and commence
operations.   The Company’s existing capital resources are not
sufficient to fund its operations for the next twelve months, and therefore, the
Company will need additional financing to fund future operations through
offerings of equity or debt securities.   The Company can offer
no assurances that it will be able to obtain additional funds on acceptable
terms, if at all.  If the Company is not able to obtain additional
financing on a timely basis, it will not be able to meet its other obligations
as they become due and will be forced to scale down or perhaps even cease
business operations.





As part
of the management’s business plan, the Company has raised approximately $20
million, net of offering costs, in order to fund operations, secure land rights,
and begin construction of the proposed plant.  Management will
continue to seek additional capital through debt and equity
securities.





Basis of
Presentation




The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and have been consistently applied.





The
Company’s subsidiaries use their local currency, Peruvian Nuevos Soles (“PEN”);
however the accompanying consolidated financial statements have been translated
and presented in United States Dollars (“$”).


8


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)




Note
2 - Summary of Significant Accounting Policies





Principles of
Consolidation





The
accompanying consolidated financial statements include the accounts of Stratos
Renewables Corporation and its subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.




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 of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. The significant estimates made in the
preparation of the Company’s consolidated financial statements relate to the
determination of depreciation rates for equipment, impairment of long-lived
assets, future tax rates used to determine future income taxes, and the carrying
value of warrant and conversion option liabilities. Actual results could differ
materially from these estimates upon which the carrying values were
based.





Cash and Cash
Equivalents




The
Company considers all highly liquid investments that are readily convertible
into cash, with original maturities of three months or less when purchased, to
be cash and cash equivalents.




Funds Held in Trust for the
Company





On
December 31, 2008, the Company withdrew funds from its operating account that
were held in trust by an officer of the Company.  These funds were
deposited back to the operating account in January 2009.





Concentration of
Risk




Cash
includes cash on hand and demand deposits in accounts maintained within Peru and
the United States. The Company maintains balances at financial institution that,
from time to time, may exceed Federal Deposit Insurance Corporation insured
limits for the banks located in the United States. Balances at financial
institutions within Peru are not covered by insurance. As of June 30, 2009, the
Company did not have any deposits in excess of federally insured limits. As of
December 31, 2008, the Company had deposits in excess of federally insured
limits totaling $612,559. The Company has not experienced any losses on cash and
cash equivalents.





The
Company’s operations are in Peru, and virtually all of the assets and
liabilities give rise to market risks from changes in foreign currency rates.
The financial risk is the risk to the Company’s operations that arise from
fluctuations in foreign exchange rates and the degree of volatility of these
rates. Currently, the Company does not use derivative instruments to reduce the
exposure to foreign currency risk.





VAT
Credits




As of
June 30, 2009 and December 31, 2008, the Company recognized a VAT (value added
tax) credit of $1,314,292 and $1,225,130, respectively, in Peru. VAT is charged
at a standard rate of 19%, and the Company obtains income tax credits for VAT
paid in connection with the purchase of capital equipment and other goods and
services employed in its operations. The Company is entitled to use the credits
against its Peruvian income tax liability or to receive a refund credit against
VAT payable or sales. As the Company does not anticipate incurring either a
Peruvian tax or a VAT liability during the next fiscal year, the credits have
been classified as non-current.


9


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)




Plant and
Equipment




Plant and
equipment are stated at cost and are depreciated using the straight-line method
over their estimated useful lives ranging from 4 to 10 years. The useful life
and depreciation method are reviewed periodically to ensure that the
depreciation method and period are consistent with the anticipated pattern of
future economic benefits. Expenditures for maintenance and repairs are charged
to operations as incurred while renewals and betterments are capitalized. Gains
and losses on disposals are included in the results of operations as
incurred.




Impairment of Long-Lived
Assets




The
Company follows the guidance of SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indications of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Loss on long-lived assets to be
disposed of is determined in a similar manner, except that fair market values
are reduced for the cost of disposal. The Company believes that as of June 30,
2009 and December 31, 2008, there were no significant impairments of its
long-lived assets.





Foreign Currency
Translation




The
reporting currency of the Company is the U.S. dollar. The Company uses Stratos
Peru’s local currency, PEN, as its functional currency. The accompanying
consolidated financial statements were translated into U.S. Dollars (“USD”) in
accordance with SFAS No. 52, “Foreign Currency Translation,” with the PEN as the
functional currency. Assets and liabilities are translated using the exchange
rates prevailing at the balance sheet dates. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in the
consolidated statement of stockholders’ equity (deficit). Transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the functional currency are included in the results of
operations as incurred.




Asset and
liability amounts at June 30, 2009 and December 31, 2008 were translated at
3.011 PEN and 3.142 PEN to $1.00 USD, respectively. Equity accounts were stated
at their historical rates. The average translation rate applied to the
consolidated statements of operations for the six months ended June 30, 2009 and
2008 was 3.098 PEN and 2.982 PEN to $1.00 USD, respectively.


10


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)




Foreign Currency Transaction
Gains and Losses





Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.  For the three and six months ended
June 30, 2009 and for the period from February 27, 2007 (date of inception) to
June 30, 2009, the Company recorded net transaction losses of $18,353, $14,306,
and $115,128, respectively.  For the three months ended June 30, 2008,
the Company recorded a net transaction gain of $19,312, and for the six months
ended June 30, 2008, the Company recorded a net transaction loss of
$143,624.  The above amounts are included in other income on the
consolidated statements of operations.  Historically, the Company has
not entered into any currency trading or hedging transactions, although there is
no assurance that the Company will not enter into such transactions in the
future.





Income
Taxes




The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes” (“SFAS 109”) and Financial Accounting Standards Board (“FASB”)
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income
Taxes.”  SFAS 109 requires a company to use the asset and liability
method of accounting for income taxes, whereby deferred tax assets are
recognized for deductible temporary differences, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion, or all of,
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. The income tax rate applicable to Peruvian companies is 30%.
If the Company distributes its earnings fully or partially, it shall apply an
additional rate of 4.1% on the distributed amount, which will be borne by the
shareholders, as long as they are individuals or companies non-domiciled in
Peru. The 4.1% tax will be borne by the Company and will apply on any amount or
payment in kind subject to income tax that may represent an indirect disposition
not subject to subsequent tax control, including amounts charged to expenses and
undeclared revenues. From January 1, 2007, the taxpayer must liquidate and pay
the 4.1% tax directly together with its monthly obligations without the
requirement of a previous tax audit by the Tax Administration of
Peru.




Under FIN
48, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded.




Basic and Diluted Earnings
Per Share




Earnings
per share is calculated in accordance with SFAS No. 128, “Earnings Per Share”
(“SFAS 128”). Net earnings per share for all periods presented have been
restated to reflect the adoption of SFAS 128. Basic earnings per share is based
upon the weighted average number of common shares outstanding. Diluted earnings
per share is based on the assumption that all dilutive convertible shares and
stock warrants were converted or exercised. Dilution is computed by applying the
treasury stock method. Under this method, warrants are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average market
price during the period. All warrants and convertible notes were excluded from
the diluted loss per share calculation due to the anti-dilutive
effect.


11


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)




Accrued Derivative
Liabilities





Effective
January 1, 2009, the Company adopted the provisions of FASB’s Emerging Issues
Task Force Issue 07-5 (“EITF 07-5”), “Determining whether an Instrument (or
Embedded Feature) is indexed to an Entity’s Own Stock.”  EITF 07-5
provides a two-step model to determine whether a financial instrument or an
embedded feature is indexed to an issuer’s own stock and thus able to qualify
for the SFAS 133 paragraph 11(a) scope exception. This standard triggers
liability accounting on all instruments and embedded features exercisable at
strike prices denominated in any currency other than the functional currency of
the operating entity in Peru.  Using the criteria in EITF 07-5, the
Company determines which instruments or embedded features require liability
accounting and records the fair values as an accrued derivative liability. The
changes in the values of the accrued derivative liabilities are shown in the
accompanying consolidated statements of operations as “change in fair value of
accrued derivative liabilities.”





Fair Value of Financial
Instruments





SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires
disclosure of the fair value of financial instruments held by the Company. SFAS
No. 157, “Fair Value Measurements” (“SFAS 157”), adopted in January 1, 2008,
defines fair value and establishes a three-level valuation hierarchy for
disclosures of fair value measurement that enhances disclosure requirements for
fair value measures.  The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:





·
            Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.





·
            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.





·
            Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.




The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”




The
Company used Level 2 inputs for its valuation methodology for the conversion
option liability and warrant liability, and their fair values were determined by
using the Black-Scholes option pricing model based on various
assumptions.




Carrying Value
                    at
                    June 30, 2009
                  
                  Fair Value Measurements at
                    June 30, 2009
                    Using Fair Value HierarchyLiabilities
                  
                  
                  
                  Level 1
                  
                  Level 2
                  
                  Level 3Conversion
      option liability
                  
                  $
                  6,803
                  
                  
                  
                  $
                  6,803Warrant
      liability
                  
                  $
                  355,274
                  
                  
                  
                  $
                  355,274




12


Stratos
Renewables Corporation and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (Unaudited)
  The
Company recognized gains of $256,115 and $1,771,539 on the conversion option
liability for the three and six months ended June 30, 2009, respectively, and
$279,833 and $273,656 for the three and six months ended June 30, 2008,
respectively, and $4,863,065 for the period from February 27, 2007 (date of
inception) to June 30, 2009.





The
Company recognized gains of $649,769 and $2,302,279 on the warrant liability for
the three and six months ended June 30, 2009, respectively, $277,657 and
$486,917 for the three and six months ended June 30, 2008 and $3,809,050 for the
period from February 27, 2007 (date of inception) to June 30, 2009.





The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the consolidated balance sheets at fair value in
accordance with SFAS 157.




Statements of Cash
Flows





In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rate. As a result, amounts related to assets and liabilities
reported on the consolidated statements of cash flows will not necessarily agree
with changes in the corresponding balances on the consolidated balance
sheets.





Reclassification





Certain
reclassifications have been made to the 2008 consolidated financial statements
to conform to the 2009 consolidated financial statement presentation. These
reclassifications had no effect on net loss or cash flows as previously
reported.





Recent
Pronouncements





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It is intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling interests by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160 also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation, requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated, and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others.  The Company adopted SFAS 160 effective January 1,
2009.  The Company has determined the adoption of SFAS 160 did not
have a material impact to the Company’s consolidated financial position or
consolidated results of operations.


13


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)




In April
2009, the FASB issued three related FASB Staff Positions: (i) FSP FAS No. 115-2
and FAS No. 124-2, “Recognition of Presentation of Other-Than-Temporary
Impairments” (“FSP FAS 115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and APB No.
28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS
107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4, “Determining the Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”), which are effective for interim and annual reporting periods ending
after June 15, 2009. FSP FAS 115-2 and FAS 124-2 modifies the requirement for
recognizing other-than-temporary impairments, changes the existing impairment
model, and modifies the presentation and frequency of related disclosures. FSP
FAS 107-1 and APB 28-1 requires disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. FSP FAS 157-4 provides additional guidance for estimating fair value
in accordance with SFAS 157. The adoption of these FASB Staff Positions did not
have a material impact on the Company’s consolidated financial
statements.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) [ASC
855-10-05], which provides guidance to establish general standards of accounting
for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS 165 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. SFAS 165 is
effective for interim and annual periods ending after June 15, 2009, and
accordingly, the Company adopted this Standard during the second quarter of
2009. SFAS 165 requires that public entities evaluate subsequent events through
the date that the financial statements are issued. The Company has evaluated
subsequent events through the time of filing these financial statements with the
SEC.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140” (“SFAS 166”) [ASC 860],
which requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets, and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. The Company has not completed its assessment
of the impact SFAS 166 will have on its consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”) [ASC 810-10], which modifies how a company determines
when an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. SFAS 167 clarifies that
the determination of whether a company is required to consolidate an entity is
based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a
variable interest entity. SFAS 167 also requires additional disclosures
about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS 167 is
effective for fiscal years beginning after November 15, 2009. The Company has
not completed its assessment of the impact FAS 167 will have on its
consolidated financial statements.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM
and the Hierarchy of Generally Accepted Accounting Principles a Replacement
of FASB Statement No. 162” (“SFAS 168”). This Standard establishes the FASB
Accounting Standards CodificationTM (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, the
Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all
subsequent public filings will reference the Codification as the sole
source of authoritative literature.


14


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)




Note
3 - Plant and Equipment




Plant and
equipment consist of the following:




Description
                    
                    June 30, 2009
                    
                    
                    December 31, 2008(unaudited)Sugar
      plant
                    
                    $
                    5,147,292
                    
                    
                    $
                    4,936,771Leasehold
      improvements
                    
                    
                    64,311
                    
                    
                    
                    61,629Computer
      equipment and software
                    
                    
                    174,497
                    
                    
                    
                    169,835Other
                    
                    
                    81,088
                    
                    
                    
                    91,8385,467,188
                    
                    
                    
                    5,260,073Less:
      accumulated depreciation
                    
                    
                    (67,409
                    )
                    
                    
                    (36,777
                    )Plant
      and equipment, net
                    
                    $
                    5,399,779
                    
                    
                    $
                    5,223,296




Depreciation
expense amounted to $14,112 and $28,730 for the three and six months ended June
30, 2009, respectively, $7,945 and $11,872 for the three and six months ended
June 30, 2008, respectively, and $67,537 for the period from February 27, 2007
(date of inception) to June 30, 2009. Due to significant modifications to
the sugar plant in Chepen, Peru, the plant is currently not in service and is
not being depreciated.





Note
4 - Stockholders’ Equity





Under the
Company’s Amended and Restated Articles of Incorporation dated November 14,
2007, the Company is authorized to issue 300,000,000 shares of capital stock,
consisting of 250,000,000 shares of common stock, par value $.001 per share, and
50,000,000 shares of preferred stock, par value $.001 per share (“Preferred
Stock”).





Each
share of common stock issued and outstanding entitles the holder thereof to one
vote on all matters submitted to the vote of the stockholders. Dividends may be
declared and paid on the common stock only out of legally available
funds.





On April
17, 2008, the Company created a series of the Preferred Stock consisting of
15,000,000 authorized shares that was designated as Series A Convertible
Preferred Stock (“Series A Preferred Stock”) with a par value of $0.001 per
share and a conversion price of $0.70.





Each
share of Series A Preferred Stock will automatically convert into shares of the
Company’s common stock if the common stock has been trading above $2.00 per
share for a period of 120 consecutive days.  The Series A Preferred
Stock entitles the holder to a 10% per annum cumulative dividends and a 150%
liquidation preference.  The Series A Preferred Stock contains
anti-dilution provisions, and the holder is entitled to a number of votes equal
to the number of shares of common stock issuable upon conversion of the holder’s
Series A Preferred Stock.


15


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)





Conversion of Series A
Preferred Stock for Common Stock





On
January 8, 2009, certain holders of Series A Preferred Stock converted 171,420
shares into 183,864 shares of the Company’s common stock.  The
principal and the 10% per annum cumulative dividends related to the conversion
were $119,994 and $8,711, respectively, with a conversion price of
$0.70.





Consulting
Agreements





On
February 18, 2009, the Company entered into consulting agreements with two
unaffiliated third parties to provide investor relations services for the
Company.  As part of the consulting agreements, the Company issued two
separate unsecured convertible promissory notes with an aggregate principal
balance of $60,000.  The interest rate for each note was 5% per annum
with the total principal and unpaid interest due on February 18,
2010.  The notes were convertible into shares of common stock at a
conversion price calculated as the average of the closing bid price for the
shares for ten business days prior to the conversion date.  On March
20, 2009, the holders of the notes converted the $60,000 principal and accrued
interest at a conversion price of $0.27 into 220,682 shares of the Company’s
common stock.





Common Stock Issued for
Interest





Per the
unsecured promissory note agreements with certain holders, the Company issued
326,463 shares of common stock representing additional interest of $110,792
during the six months ended June 30, 2009 (see “Convertible Note Financing” in
Note 5).





Common Stock Issued for
Advisory Services





During
the six months ended June 30, 2009, the Company issued 750,000 shares of common
stock valued at $187,500 as payment for advisory services.





Common Stock Issued to
Director





During
the six months ended June 30, 2009, the Company issued 384,090 shares of common
stock valued at $83,614 pursuant to a director’s agreement for
services.





Note
5 - Convertible Promissory Notes




Issuance of $350,000
Unsecured Convertible Promissory Note





On
October 18, 2007, Stratos Peru entered into an asset purchase agreement, or the
Asset Purchase Agreement, and an escrow agreement, or the Escrow Agreement, with
Gabinete Técnico de Cobranzas S.A.C., a Peruvian corporation, or Gabinete,
pursuant to which Stratos Peru acquired certain assets and rights from Gabinete
relating to the Estrella del Norte sugar mill located in the province of Chepen,
Peru. Stratos Peru paid approximately $4.5 million plus a value added tax of 19%
to acquire the sugar mill. Of the purchase price, Stratos Peru held back
$350,000, or the Holdback, representing approximately 7.74% of the purchase
price, which was placed into an escrow contingencies account with Banco
Continental in Lima, Peru, or the Escrow Account.


16


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)





On July
1, 2008, Stratos Peru and the Company agreed to release the Holdback to the
Company, subsequent to which the Company issued Gabinete an unsecured
convertible promissory note in the principal amount of $350,000, for the Company
to use as working capital. The parties also terminated the Escrow Agreement in
order to transfer the funds from the Escrow Account to the Company as
consideration for the note. If any liability issues arise with respect to the
sugar mill, the amount will be offset from or against amounts payable by the
Company to Gabinete under the note.





The note
matures on October 30, 2009 and bears interest at the rate of 8% per annum,
payable at the maturity date. Gabinete has the option to convert 110% of the
repayment amount into units of the Company at $0.70 per unit, with each unit
consisting of (i) one share of common stock and (ii) one half of a warrant to
purchase a share of the Company’s common stock at an exercise price of $0.75 per
share, with a five-year term and a cashless exercise provision.





Convertible Note
Financing





During
the year ended December 31, 2008, the Company issued unsecured convertible
promissory notes in the principal amount of $1,850,000, and warrants to purchase
up to 435,292 shares of common stock of the Company, to unaffiliated third party
investors. The Company received gross proceeds of $1,850,000, less fees of
$47,500 of the purchase price paid and other expenses. The notes were scheduled
to mature at various times between November 23, 2008 and January 1, 2009 and had
interest at the rate of 12% per annum, payable in full at maturity.





If at
least $25 million was not raised by the Company on or before the applicable
maturity date, the Company would have an additional 3 months (extending the
maturity date) to repay the note holders in full before the notes were in
default. If the notes were not paid on or before the applicable maturity date,
the Company would pay the interest rate plus 2% per annum and increasing by 2%
per annum each 30 days thereafter until the extended maturity date, provided
that in no event will the annual interest rate exceed 18%. The note holders
would be entitled to receive 115% of the sum of the original principal and
accumulated interest if the note holders chose to be repaid in cash on the
maturity date. The note holders would have the option to convert 110% of the
repayment amount into shares of common stock at $0.70 per share. The note
holders would also be paid a monitoring fee of 5% of the original principal
amount of the note. If the notes were not paid on or before the maturity date
(as extended), the Company would issue to the note holders shares of the common
stock equal to 5% of the then unpaid portion of the original principal amount
divided by $0.85, on each of the dates that are 7, 8, and 9 months from the date
of issuance. The warrants expire 5 years from their various dates of issuance,
and have an exercise price of $0.85 per share. They also contain a cashless
exercise provision.





The
Company received extensions on these convertible promissory notes that extended
the maturity dates between February 23, 2009 and April 18, 2009.  To
date, the Company has not made the necessary re-payments to meet the extended
maturity dates on certain of these convertible promissory notes that total
$1,850,000; however, the Company is currently in negotiations with the
convertible promissory note holders to further extend these maturity
dates.





Pursuant
to the loan provisions, the Company issued 326,643 shares of common stock valued
at $110,792 for the six months ended June 30, 2009, which is recorded as
interest and financing expense in the accompanying consolidated statements of
operations.


17


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)





Issuance of $2,000,000
Secured Convertible Promissory Note





On July
25, 2008, the Company completed a financing pursuant to which the Company issued
a secured convertible promissory note in the principal amount of $2,000,000 and
warrants to purchase up to 714,286 shares of common stock of the Company, to
Whitebox Hedged High Yield Partners, LP, a British Virgin Islands limited
partnership (“Whitebox”). The Company received gross proceeds of $2,000,000,
less fees of 10% of the purchase price paid and other expenses. The note matures
on December 31, 2009, or on July 23, 2009 if the note holder elects to
accelerate the maturity date. The note bears interest at the rate of 12% per
annum, payable in full at the maturity date.





So long
as any principal or interest remains outstanding under the note, the note holder
will have the right to participate in debt or equity financings undertaken by
the Company, up to a maximum of 25% of the amounts raised by the Company in any
such financing, on the same terms as the other participants of such
financing.





The note
may be prepaid by the Company in whole, but not in part, from time to time. If
the note is prepaid by the Company more than 30 days prior to the maturity date,
the Company has agreed to pay the note holder a prepayment fee equal to 25% of
the sum of the principal amount of the note and all accrued and unpaid interest.
The note holder will have the option to convert all of the unpaid principal and
accrued and unpaid interest on the note plus any prepayment fee, if applicable,
into shares of common stock of the Company at a conversion price of $0.70 per
share. Under certain circumstances, such as in the event of the sale of
securities of the Company at a price less than $0.70 per share, the conversion
price will be subject to adjustment. Upon the occurrence of any event of
default, in addition to all amounts owing to the note holder under the note
becoming due and payable in full, the Company will pay to the note holder an
additional sum of $100,000.




The note
is secured by 100% of the shares owned by the Company in its wholly owned U.S.
subsidiary and its two Peruvian subsidiaries.  The note was paid in
full on July 15, 2009.  (See Note 10 - Subsequent
Events).





Issuance of $5,000,000
Unsecured Convertible Promissory Note





On August
27, 2008, the Company completed a financing pursuant to which the Company issued
an unsecured convertible promissory note in the principal amount of $5,000,000
and warrants to purchase up to 2,500,000 shares of common stock of the Company
to an unaffiliated accredited investor. The Company received gross proceeds of
$5,000,000, less placement fees of 10% of the principal amount of the note and
other expenses.  In connection with this financing, the Company also
issued warrants to purchase 357,143 shares of common stock of the Company to a
finder.  The note matures on December 31, 2009, or on July 23, 2009 if
the note holder elects to accelerate the maturity date. The note bears interest
at the rate of 10% per annum, payable in full at the maturity date.




The note
may be prepaid by the Company in whole, but not in part, from time to time. If
the note is prepaid by the Company more than 30 days prior to the maturity date,
the Company has agreed to pay the note holder a prepayment fee equal to 15% of
the sum of the principal amount of the note and all accrued and unpaid interest.
Upon the occurrence of any event of default, all amounts owing to the note
holder under the note become due and payable in full.


18


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)





At any
time prior to payment in full of the note, the note holder has the option to
convert any, or all of, the unpaid principal and accrued and unpaid interest on
the note plus any prepayment fee, if applicable, into shares of common stock of
the Company at a conversion price of $0.70 per share. Under certain
circumstances, such as in the event of the sale of securities of the Company at
a price less than $0.70 per share, the conversion price will be subject to
adjustment.




So long
as the note is outstanding, the Company and its subsidiaries are restricted from
incurring certain items of debt without the prior written consent of the holders
of a majority of the then outstanding aggregate unpaid principal amount of the
note (plus any other additional notes of the same series that may be issued in
the future, if at all, in the aggregate amount of up to
$10,000,000).





The
Company has also agreed to provide piggyback registration rights with respect to
the shares to be issued upon conversion, pursuant to which the Company will use
its best efforts to register such shares in the event that it proposes to
register any of its securities under the Securities Act.





Consulting
Agreements





In
November 2008, the Company entered into consulting agreements with five
unaffiliated third parties.  As part of the consulting agreements, the
Company issued five separate convertible notes with an aggregate principal
amount of $95,000.  The convertible notes mature on various dates
between November 17, 2009 and November 24, 2009.  Each note bears an
interest rate of 5% per annum and is convertible into shares of common stock at
$0.70 per share.





A summary
of the convertible promissory notes and related discounts is below:





Description
                        
                        AmountUnsecured
      convertible note - Gabinete
                        
                        $
                        350,000Unsecured
      convertible note - various investors
                        
                        
                        1,850,000Secured
      convertible note - Whitebox
                        
                        
                        2,000,000Unsecured
      convertible note - I2BF
                        
                        
                        5,000,000Unsecured
      convertible note - consultants
                        
                        
                        95,000Gross
      principal balance, June 30, 2009
                        
                        
                        9,295,000Unamortized
      debt discount
                        
                        
                        (1,851,008
                        )Balance,
      June 30, 2009, net
                        
                        $
                        7,443,992




The
Company incurred interest expense of $298,722, $662,782, and $2,691,675 for the
three and six months ended June 30, 2009 and for the period from February 27,
2007 (date of inception) to June 30, 2009, respectively.  During 2008,
the Company had been accruing interest at 12% on its $3,048,000 convertible
note, which was the interest rate if the convertible notes were to be paid in
shares.  However, the majority of the convertible notes was paid in
cash with an interest rate of 10% per annum; therefore, the Company reduced the
accrual, which resulted in a net credit balance of $189,763 for the three months
ended June 30, 2008, and the Company recorded interest expense of $541,757 for
the six months ended June 30, 2008.


19


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)





The
Company amortized debt discounts and debt issuance costs of $1,184,888 and
$2,373572 for the three and six months ended June 30, 2009, respectively,
$98,941 and $708,258, for the three and six months ended June 30,2008,
respectively, and $6,153,938 for the period from February 27, 2007 (date of
inception) to June 30, 2009.





Note
6 – Short-term Notes Payable





On June
1, 2009, the Company received $275,000 as a short-term note
payable.  The note bears interest of 15% per annum and is due four to
six weeks from the date of issuance.  This note was paid in full on
July 15, 2009.  (See Note 10- Subsequent Events)





Note
7 – Accrued Derivative Liabilities





Accrued Warrant
Liability





The
Company has issued warrants as part of debt issuances, stock issuances, and
consulting services.  The warrants qualify as a derivative instrument
in accordance with SFAS 133 and EITF 00-19, and as such, the warrants were
initially recorded as accrued warrant liabilities.  Therefore, the
adoption of EITF 07-5 effective January 1, 2009, had no impact on the Company’s
accounting of warrant liability.  The fair value of all warrants at
June 30, 2009 is $355,274.  The fair value was determined using the
Black-Scholes option pricing model under the following
assumptions:  expected life between 1.38 and 4.97 years, risk free
interest rate between 0.56% and 2.54%, dividend yield of 0%, and volatility
of 110%.





Accrued Conversion Option
Liability





The
conversion option embedded in the Company’s convertible debt, as described in
Note 5,  previously met the criteria of being “conventional
convertible” debt and, accordingly, it was not separately accounted for as a
derivative instrument liability.  However, the conversion option does
not meet the criteria of EITF 07-5 because it requires that the conversion price
be adjusted in certain circumstances that do not meet the “fixed-for-fixed”
criterion in that Issue.  As a result, the Company is now required to
separately account for the embedded conversion option as a derivative instrument
liability, carried at fair value and marked-to-market each period, with changes
in the fair value each period charged to operations.





In
accordance with the transition provisions of EITF 07-5, the new guidance has
been applied to the $9,295,000 of the Company’s convertible notes that were
outstanding as of January 1, 2009.  The cumulative effect of this
change in accounting principle of $1,955,548 has been recognized as a reduction
of the opening balance of accumulated deficit as of that date.  That
cumulative effect adjustment is the difference between the amounts previously
recognized in the Company’s balance sheet as of December 31, 2008 and the
amounts that would have been recognized if the guidance in EITF 07-5 had been
applied from the issuance date of the outstanding convertible
notes.  The fair value of all conversion options at June 30, 2009 is
$6,803.  The fair value was determined using the Black-Scholes option
pricing model under the following assumptions:  expected life between
0.17 and .50 years, risk free interest rate between 0.19% to 0.35%, dividend
yield of 0%, and volatility of 110%.


20


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)





Note
8 – Intercompany Promissory Note





In
connection with the Share Exchange, the Company agreed to lend Stratos Peru $5.5
million pursuant to the terms of a Promissory Note, dated as of November 14,
2007 (the “Promissory Note”). The Promissory Note is unsecured, bears interest
at a rate of 4.39% per annum, and must be repaid in full on or before November
14, 2014.  The agreement was amended, which ceased the accrual of
interest as of January 1, 2008.  As of June 30, 2009 and December 31,
2008, $30,181 in interest, has been accrued for, and eliminated in
consolidation.





Note
9 - Commitments and Contingencies





Leases





In
January 2008, the Company entered into a four-year lease agreement for office
space in Lima, Peru, for monthly payments of $6,179.





In
September 2008, the Company entered into a one-year lease for office space in
Chiclayo, Peru for monthly payments of $1,140 for the first five months and
$1,055 for the next seven months.





On June
19, 2008, the Company entered into a 99-year land lease agreement, expiring in
2107, for approximately 24,000 hectares of land in Peru.  The annual
lease payment is approximately $192,000 ($8 per hectare) for the first year,
$240,000 ($10 per hectare) after the first year until the initial harvest, and
then $1,200,000 ($50 per hectare) thereafter.





Total
rent expense for the leases described above were approximately $71,000 and
$142,000 for the three and six months ended June 30, 2009, respectively, $18,537
and $37,074 for the three and six months ended June 30, 2008, respectively, and
$325,000 for the period from February 27, 2007 (date of inception) to June 30,
2009.





Litigation





The
Company is subject to various legal matters arising in the ordinary course of
business. After taking into consideration the Company’s legal counsels’
evaluation of these matters, the Company has determined that the resolution will
not have a material adverse effect on the Company’s consolidated financial
statements.





Note
10 – Subsequent Events





The
Company entered into a Secured Note and Common Stock Purchase Agreement (the
“Agreement”) with I2BF Biodiesel, Ltd. (“I2BF”) and Blue Day SC Ventures, (“Blue
Day”) (each, an “Investor” and collectively, the “Investors”). The Company
offered to the Investors: (a) a minimum of $3,000,000 in aggregate
principal of Secured Promissory Notes (“Notes”) issued for new cash investment
in the Company as of the date of the Agreement (the “Initial Investment”),
(b) $12,382,271 in aggregate principal amount of Notes issued concurrently
with the Initial Investment in exchange for the surrender and cancellation of
existing indebtedness and equity securities of the Company outstanding in favor
of the Investors, (c) up to an additional $1,725,000 principal amount of
Notes issued to I2BF in a subsequent closing, and (d) as consideration for
such new investment and the restructuring of the existing indebtedness and
equity securities, common stock representing an aggregate of forty-five percent
(45%) of the fully diluted equity of the Company and certain adjustment rights
relating to such common stock as are set forth in the
Agreement.


21


Stratos
Renewables Corporation and Subsidiaries


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)





The first
Closing on July 15, 2009 (the “Initial Closing”) was for the sale of Notes in
the aggregate principal amount of $15,382,271 and an aggregate of 55,586,157
shares of the Common Stock of the Company, evidencing not less than 39.895% of
the outstanding the common stock determined on a fully diluted basis, and was
consummated simultaneously with the execution of the Agreement (the “Closing
Date”).





I2BF is
required to make an additional investment in Notes with an aggregate principal
amount of $1,725,000 and shall be issued 10,238,381 additional shares of Common
Stock, and an additional Closing shall be held with respect to such investment
(the “Balance Closing”) if and as soon as practicable following the closing of
the credit facility currently under negotiation between the Company and Banco
Internacional del Perú S.A.A. (“Interbank”) and evidenced by that certain letter
of intent dated May 29, 2009 (the “Interbank Facility”), provided that the
Interbank Facility shall provide credit to the Company and its subsidiaries of
not less than $15,000,000.  The obligation (but not the right) of I2BF
to participate in the Balance Closing shall cease in the event that the
Interbank Facility is not closed by October 15,
2009.





Proceeds
from the financing also were directed to the repayment of $2,000,000 in
principal owed by the Company to Whitebox, and Whitebox forgave $238,635 of
accrued interest.  Effective as of the closing of the financing, all
of the Company’s obligations to Whitebox were finally and effectively satisfied
and extinguished, including warrants formerly held by Whitebox.





The
Company has performed an evaluation of subsequent events through August 13,
2009, which is the date the financial statements were
issued.


22


Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





Forward-looking
statements





The
following discussion of our financial condition and results of operations should
be read in conjunction with the financial statements and the related notes
thereto included elsewhere in this quarterly report on Form 10-Q. This quarterly
report on Form 10-Q contains certain forward-looking statements, and our future
operating results could differ materially from those discussed herein. Certain
statements contained in this discussion, including, without limitation,
statements containing the words "believes," "anticipates," "expects," and the
like, constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). However, as we issue
“penny stock,” as such term is defined in Rule 3a51-1 promulgated under the
Exchange Act, we are ineligible to rely on these safe harbor provisions. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, performance, or achievements to
be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. We disclaim any obligation to update any such
factors or to announce publicly the results of any revisions of the
forward-looking statements contained herein to reflect future events or
developments.





Overview





Currently,
we are a development stage company with no revenues from
operations.  We intend to engage in the business of producing and
processing sugarcane ethanol in Peru for sale internationally. Ethanol is a
renewable energy source that provides significant economic and environmental
benefits when mixed with gasoline and used as motor fuel.  We intend
to utilize low-cost, locally grown sugarcane feedstock and service international
markets, with a focus on the U.S., which allows for tariff-free exports, as well
as Europe, India, and Asia.  We intend to eventually produce more than
90% of the sugarcane we process and purchase the remaining 10% from local
unaffiliated third party suppliers.  We are executing on a vertically
integrated, disciplined, logistical strategy for production and expansion that
is designed to reduce commodity price volatility and lead to competitively high
yields.





Sugarcane
Ethanol





Sugarcane
ethanol is a clean burning, high-octane biofuel.  It is a renewable
energy source and can be grown year after year.  Pure ethanol, a grain
alcohol produced from sources such as corn and sugarcane, is not typically used
as a replacement for gasoline.  Rather, anywhere from 10 – 85% ethanol
can be integrated into a gasoline supply to reduce both oil consumption and fuel
burning emissions that contribute to global warming.  Sugarcane has
become a primary fuel source for Brazil, a country that has successfully weaned
itself from dependency on foreign oil.  We believe that Peru is
capable of growing up to twice the amount of sugarcane per hectare than an
equivalent operation in Brazil (1 hectare is approximately equal to 2.5
acres).  Further, sugarcane produces up to seven times more per land
mass than corn and sugarcane-based ethanol is currently the only biofuel that
creates no “net carbon dioxide emissions.”





Peru





We
believe that Peru is an attractive location for the cultivation, processing,
distribution, and use of alternative fuels.  Peru’s soil and
agro-climate conditions allow for year-round sugarcane harvesting and high
yields, and unlike uncontrolled climates in other countries where sugarcane is
being cultivated, water and nutrient content can be managed in Peru using modern
irrigation technology.




23





Land
prices in Peru have historically been significantly less than the prices in
developed countries currently producing other feedstock.  Reduced
transportation costs for exporting and distribution are also available due to
coastal access and proximity to the Pan-American Highway.





Peru is
consistently ranked as one of the highest yield sugarcane producers in the world
based on average yield per hectare.  We believe that Peru also has a
constructive tax, regulatory, and alternative energy-friendly legislative
environment.





Megatrends Driving the
Market Opportunity





Environmental,
geopolitical, and economic macro forces are driving the biofuel market. We
believe that these forces are generating an increasing interest in the biofuels
as an efficient and effective way to reduce carbon footprints.





Current
policy initiatives, if fully implemented, could result in biofuels (mainly
ethanol) displacing motor gasoline use. With regulatory directives requiring a
minimum level of ethanol content in gasoline, many countries have instituted
initiatives, including tax incentives and biofuel blending mandates to
accelerate the rate of biofuel production. Currently these mandates exist in 15
countries at national, regional, or state levels – including California. Peru
has mandated that gasoline include 7.8% ethanol by 2010.  The United
States Renewable Fuel Standard (“RFS”) mandates the use of 36 billion gallons of
renewable fuels per year by 2022, and we believe that production is currently
behind these mandated levels.





Sugarcane-based
ethanol production enables countries that have existing sugar industries, such
as Peru, to produce ethanol rather than sugar from sugarcane, reducing reliance
on what has historically been a volatile sugar commodity
market.  Brazil is currently the world’s largest producer of sugarcane
ethanol.  Because we are able to harvest year round, we believe that
we can produce at least 145 tons of sugarcane per hectare per year,
approximately twice the average hectare in Brazil.  Given Peru’s low
cost of production, free trade agreements with the U.S. and Canada, climatic
advantages, and available land, we believe ethanol production in Peru could
displace portions of Brazil’s ethanol export market.





Plan of
Operations





Our
business plan consists of two phases. Phase I will be primarily focused on
establishing, expanding, and operating our initial ethanol production facilities
and developing our infrastructure.  Phase II will be primarily focused
on developing and expanding our operations in strategic locations.




Phase I




Phase I
of our business plan is comprised of four components:





·
            Mill
      and distillery acquisition, expansion, and
  modification.





·
            Land
      sourcing.





·
            Field
      installment.





·
            Conducting
      feasibility studies and generating a business plan for Phase
      II.


24


Mill
and Distillery Acquisition, Expansion and Modification




On
October 18, 2007, Stratos Peru entered into an asset purchase agreement with
Gabinete Tecnico de Cobranzas S.A.C., or Gabinete, pursuant to which it acquired
certain assets and rights relating to the Estrella del Norte Sugar Mill (the
“Sugar Mill”)located in the province of Chepen, Peru.    Stratos
Peru paid approximately $4.5 million plus a value added tax (“VAT”) of 19% to
acquire the Sugar Mill. On July 1, 2008, we issued Gabinete an unsecured
convertible promissory note in the principal amount of $350,000 for the Company
to use as working capital. The note will mature on October 30, 2009 and bears
interest at the rate of 8% per annum, payable at the maturity
date.  Gabinete has the option to convert 110% of the repayment amount
into units of the Company at $0.70 per unit, with each unit consisting of (i)
one share of common stock and (ii) one half of a warrant to purchase a share of
the Company’s common stock at an exercise price of $0.75 per share, with a
five-year term and a cashless exercise provision.




We are in
the process of relocating the Sugar Mill to a better and more strategic location
near the Pan-American Highway, and we plan to acquire and install a distillery
unit to adjoin it for the production of Industrial Grade Alcohol also known as
ethanol. Additionally, we plan to upgrade the Sugar Mill’s crushing capacity of
sugarcane from 750 tons to 2,300 tons of sugarcane per day. After modifying,
expanding, and including the new distillery to the Sugar Mill, we plan to use
100% of its capacity to produce industrial grade ethanol to be exported to the
European markets with an estimated 16 million gallons of ethanol per year at its
maximum capacity.





Land
Sourcing




The
second component of Phase I will be to secure land for sugarcane production from
three potential sources:





·
            Small
      and medium private land lots.


·
            Peasant
      community land lots.


·
            State-owned
      land lots.





The most
important factors in locating land suitable for sugarcane production
are:





·
            Water
      supply.


·
            Soil
      composition.


·
            Climate.


·
            Distance
      from the Sugar Mill.


·
            Access
      to roads and other services.





We plan
to acquire land holdings of at least 48,000 hectares in order to fulfill the
needs of operations in Phase II.  On June 19, 2008, we entered into a
lease agreement with an unaffiliated third party in order to obtain the rights
to use 24,000 hectares of undeveloped land in Peru, of which 15,000 hectares are
plantable land.  On November 8, 2008, we entered into an addendum to
this lease agreement, which gives us the right to plant on all 24,000 hectares
rather than just 15,000.




Field
Installment




We
believe that the Peruvian coast is ideal for these modern farming techniques as
water and nutrient content can be managed due to the sandy soil and irrigation
equipment to be installed. As part of our “greenfield” strategy, we intend
to use the following crop management techniques to ensure maximum yield with
high sucrose and inverted sugar content:


25


·
            Channeling
      water to the sites from national irrigation
  projects.


·
            Field
      irrigation installation with back-up water
  supply.


·
            Land
      preparation to ensure the longevity and productivity of the fields,
      which includes grading, leveling, initial nutrient and organic
      material installation, and field
layout.


·
            Drawing
      water directly from underground aquifers, thereby avoiding difficult and
      often costly and labor-intensive efforts of using canals and/or
      pipelines.





With a
replenishing supply of water buildup underneath the proposed plantation fields,
our feasibility studies have shown that there is ample water supply to support
our planned operations.  Wells will be dug to test the water and
determine the best method for accessing to it.





Conducting
Feasibility Studies and Generating a Business Plan for Phase II




The final
component of Phase I will initially involve hiring consultants to conduct a
feasibility study based on the information provided by our land sourcing
efforts. The study will focus on generating cost estimates and designs based on
analyzing the climactic, water, soil, topography, and irrigation characteristics
of the properties identified by our land sourcing team. Following the completion
of the feasibility study, we will create a comprehensive business plan for Phase
II consisting of an overview of the industry, a market analysis, competitive
analysis, marketing plan, management plan, and financial plan.




Our goal
is to have all of the components of Phase I fully operative by the fourth
quarter of 2010 so that we can begin executing Phase II.  We
anticipate that we will need approximately $18.3 million ($15.4 million net of
19% Peruvian VAT) of additional funding to complete Phase I.





Phase II




Phase II
of our business plan will consist of our expansion in strategic locations along
the northern Peruvian coast and the cultivation of our own sugarcane supplies to
be used for production. In connection with Phase II, we need to secure over
an additional $755 million ($634 million net of 19% Peruvian VAT) in order to
plant sugarcane on 48,000 hectares of raw land and acquire and operate a total
of four mills with attached ethanol distilleries with expandable capacities and
distribution port infrastructure. By the fourth quarter of 2014, it is our goal
to be able to process a total of 25,000 tons of sugarcane per day and produce
approximately 180 million gallons of anhydrous ethanol annually.




We expect
to initiate Phase II in 2010.  The mill and distillers we plan to
establish in Phase II will be located in regions that we have selected based on
our extensive research of agro climatic conditions, hydrology, basic services,
logistic supplies, and social environment. We plan to establish the four
locations in two stages.





Stage
One




During
the first stage, which we anticipate will begin in the fourth quarter of 2010,
we plan to prepare and plant sugarcane on 24,000 hectares of land
located along the northern Peruvian coast and will conduct the required
feasibility studies for the additional 24,000 hectares of land from the
second stage.  We anticipate that the first 90 million gallons per year, or
MGY, Ethanol Facility (EDN2 and EDN3) will be fully operative by the fourth
quarter of 2011, provided the financing is in place by the end of the third
quarter of 2009. We estimate that the total cost for Stage One will be
approximately $400 million ($336 million net of 19% Peruvian
VAT).


26


Stage
Two




During
the second stage, which we anticipate will begin in the second quarter of 2012,
we plan to plant the second 24,000 hectares of land located along the
northern Peruvian coast. We anticipate that the second 90 MGY Ethanol Facility
(EDN4 and EDN5) will be fully operative by the third quarter of 2013. We
estimate that the total cost for this stage will be approximately $355 million
($298 million net of 19% Peruvian VAT).





Uncertainties and
Going-Concern




The
continuation of our business will be dependent upon us raising additional
financial support and on our ability to establish reliable sources of sugarcane
for the operation of the Sugar Mill, and going forward, on our ability to
develop our own supplies of sugarcane. Additionally, we must be successful in
establishing seedling and land sourcing programs in order to allow us to develop
a consistent, reliable, and cost-effective long-term supply of
sugarcane.




We will
require a significant amount of additional capital in the future to sufficiently
fund our operations. We estimate that Phase I of our business plan, which is
currently in effect, will cost a total of approximately $37 million ($31 million
net of 19% Peruvian VAT). We estimate that we will need an additional $755
million ($634 million net of 19% Peruvian VAT) to fund our expansion during the
course of Phase II of our operations, which is set to commence during 2010 and
continue for five years thereafter.  We are currently in negotiations
with investors to provide additional capital; however, we may not be able to
obtain this additional capital on terms favorable to us or at all.





Most of
our operations, including the Sugar Mill, the land we have obtained the rights
to and the land we propose to obtain the rights to on which to grow our
sugarcane supplies are located in Peru. Although we believe that conducting
operations in Peru will provide us with significant competitive advantages, we
will also be subject to risks not typically associated with ownership of a
company in the United States.





Due to
the uncertainty of our ability to meet our current operating expenses and the
capital expenses noted above, our independent auditors, in their report on the
annual consolidated financial statements for the year ended December 31, 2008,
included an explanatory paragraph regarding concerns about our ability to
continue as a going concern. Our consolidated financial statements contain
additional note disclosures describing the circumstances that lead to this
disclosure by our independent auditors.





Results of
Operations





Comparison of the three
months ended June 30, 2009 and the three months ended June 30,
2008





The
following table sets forth our expenses (income) for the periods
indicated:


27





Three
      Months
                
                
                Three
      MonthsEnded
                
                
                EndedJune
      30,
                
                
                June
      30,
                
                
                Increase
                
                
                Percentage2009
                
                
                2008
                
                
                (Decrease)
                
                
                ChangeConsulting
      fees
                
                $
                29,532
                
                
                $
                362,318
                
                
                $
                (332,786
                )
                
                
                -91.8
                %General
      and administrative
                
                $
                504,167
                
                
                $
                651,238
                
                
                $
                (147,071
                )
                
                
                -22.6
                %Professional
      fees
                
                $
                306,722
                
                
                $
                466,448
                
                
                $
                (159,726
                )
                
                
                -34.2
                %Salaries
      and wages
                
                $
                712,993
                
                
                $
                713,898
                
                
                $
                (905
                )
                
                
                -0.1
                %Amortization
      of debt discounts and debt issuance costs
                
                $
                1,184,888
                
                
                $
                98,941
                
                
                $
                1,085,947
                
                
                
                1097.6
                %Interest
      (expense) income
                
                $
                (298,722
                )
                
                $
                189,763
                
                
                $
                (488,485
                )
                
                
                -257.4
                %Change
      in fair value of derivative liabilities
                
                $
                905,884
                
                
                $
                557,490
                
                
                $
                348,394
                
                
                
                62.5
                %





Consulting
fees were $29,532 for the three months ended June 30, 2009 compared to $362,318
for the three months ended June 30, 2008.  During the three months
ended June 30, 2008, we incurred significant costs outsourcing certain functions
to third party consultants to assist in advising on agricultural landscapes,
other sugarcane development methods, and advising on dismantling and rebuilding
the Sugar Mill.  We expect the consulting fees to increase as we
receive additional funding.





General
and administrative costs were $504,167 for the three months ended June 30, 2009
compared to $651,238 for the three months ended June 30, 2008.  The
decrease of $147,071 was primarily due to a decrease in travel expenses of
$105,000 and other cost reduction efforts.  The travel expenses
incurred during the three months ended June 30, 2008 were related to our efforts
to secure financing.





Professional
fees were $306,722 for the three months ended June 30, 2009 compared to $466,448
for the three months ended June 30, 2008, primarily due to a decrease in legal
fees by approximately $285,000 offset by an increase in other professional fees.
The decrease in legal fees is because we had legal consultants assist in the
land acquisitions and structuring of financing arrangements during the three
months ended June 30, 2008.





Salaries
and wages were $712,993 for the three months ended June 30, 2009 compared to
$713,898 for the three months ended June 30, 2008.  We expect our
wages to remain consistent for each quarter during the year ending December 31,
2009.





Amortization
of debt discounts and debt issuance costs were $1,184,888 for the three months
ended June 30, 2009 compared to $98,941 for the three months ended June 30,
2008.  These costs represent the fair value of the warrants and
beneficial conversion features that are recorded as debt discounts and amortized
over the terms of the debt.  Included in this amount are costs
associated with issuing debt which is then amortized over the terms of the
debt.  These costs will continue to increase during 2009 as the
Company continues to issue debt in exchange for cash in order to complete Phase
I and Phase II.





Interest
expense was $298,722 for the three months ended June 30, 2009 compared to
interest income of $189,763 for the three months ended June 30,
2008.  During 2008, we had accrued interest at 12%, which was the rate
if the convertible note were to be paid back in shares.  The interest
rate if the convertible note were to be paid back in cash was
10%.  Since the majority of the convertible note was paid back in
cash, we had over accrued the interest expense.  We reduced the
accrual during the three months ended June 30, 2008 with the reversal being
recorded to operations.





The
change in the value of the derivative liabilities resulted in a gain of $905,884
and $557,490 for the three months ended June 30, 2009 and 2008,
respectively.  The gain is due to the decrease in the Company’s share
price, which causes the fair value of the derivative liabilities to decrease
thereby reducing the liabilities with a corresponding change (i.e., gain)
recorded in the consolidated statement of operations.


28


Comparison of the six months
ended June 30, 2009 and the six months ended June 30, 2008





The
following table sets forth our expenses (income) for the periods
indicated:





Six
      Months
                
                
                Six
      MonthsEnded
                
                
                EndedJune
      30,
                
                
                June
      30,
                
                
                Increase
                
                
                Percentage2009
                
                
                2008
                
                
                (Decrease)
                
                
                ChangeConsulting
      fees
                
                $
                61,552
                
                
                $
                1,107,788
                
                
                $
                (1,046,236
                )
                
                
                -94.4
                %General
      and administrative
                
                $
                975,594
                
                
                $
                1,533,202
                
                
                $
                (557,608
                )
                
                
                -36.4
                %Professional
      fees
                
                $
                499,616
                
                
                $
                1,138,391
                
                
                $
                (638,775
                )
                
                
                -56.1
                %Salaries
      and wages
                
                $
                1,316,939
                
                
                $
                1,145,274
                
                
                $
                171,665
                
                
                
                15.0
                %Amortization
      of debt discounts and debt issuance costs
                
                $
                2,373,572
                
                
                $
                708,258
                
                
                $
                1,665,314
                
                
                
                235.1
                %Interest
      expense
                
                $
                662,782
                
                
                $
                541,757
                
                
                $
                121,025
                
                
                
                22.3
                %Change
      in fair value of derivative liabilities
                
                $
                4,073,818
                
                
                $
                760,573
                
                
                $
                3,313,245
                
                
                
                435.6
                %





Consulting
fees were $61,552 for the six months ended June 30, 2009 compared to $1,107,788
for the six months ended June 30, 2008.  During the six months ended
June 30, 2008, we incurred significant costs outsourcing certain functions to
third party consultants to assist in advising on agricultural landscapes, other
sugarcane development methods, and advising on dismantling and rebuilding the
Sugar Mill.  We expect the consulting fees to increase as we receive
additional funding.





General
and administrative costs were $975,594 for the six months ended June 30, 2009
compared to $1,533,202 for the six months ended June 30, 2008.  The
decrease was due to the decrease in investor relations expenses of approximately
$292,000 and travel expenses of approximately $200,000.  The investor
relations and travel expenses incurred during the six months ended June 30, 2008
were related to our efforts to secure financing.  Due to cash
restrictions, we have scaled down our expenditures.





Professional
fees were $499,616 for the six months ended June 30, 2009 compared to $1,138,391
for the six months ended June 30, 2008 primarily due to a decrease in legal fees
of approximately $678,000. The decrease in legal fees is because we had legal
consultants assist in the land acquisitions and structuring of financing
arrangements during the six months ended June 30, 2008.





Salaries
and wages were $1,316,939 for the six months ended June 30, 2009 compared to
$1,145,274 for the six months ended June 30, 2008.  The increase is
due to the hiring of key executives throughout the last quarters of
2008.  We expect our wages to remain consistent for each quarter in
the year ending December 31, 2009.





Amortization
of debt discounts and debt issuance costs were $2,373,572 for the six months
ended June 30, 2009 compared to $708,258 for the six months ended June 30,
2008.  These costs represent the fair value of the warrants and
beneficial conversion features that are recorded as debt discounts and amortized
over the terms of the debt.  Included in this amount are costs
associated with issuing debt, which is then amortized over the terms of the
debt.  These costs will continue to increase during 2009 as the
Company continues to issue debt in exchange for cash in order to complete Phase
I and Phase II.





Interest
expense was $662,782 for the six months ended June 30, 2009 compared to $541,757
for the six months ended June 30, 2008.  These costs consist of the
interest expense and the interest premium associated with the convertible
notes.  The interest expense for the six months ended June 30, 2009
increased by $121,025 compared to the six months ended June 30,
2008.  The increase is due to the increase in principal offset by a
decrease in interest rates.


29


The
change in the value of the derivative liabilities resulted in a gain of
$4,073,818 and $760,573 for the six months ended June 30, 2009 and 2008,
respectively.  The gain is due to the decrease in the Company’s share
price which causes the fair value of the derivative liabilities to decrease
thereby reducing the liabilities with a corresponding gain recorded in the
consolidated statement of operations.  We also implemented EITF 07-5
and recorded on January 1, 2009 an accrued conversion option liability of
$1,778,343, which had a fair value of $6,803 at June 30, 2009 for a decrease of
$1,771,540 in the conversion option liability.





Liquidity and Capital
Resources




At June
30, 2009, our cash and cash equivalents totaled approximately $47,923, compared
to approximately $761,257 as of December 31, 2008.  Currently, our
operations are funded by financing activities.  Our existing capital
resources are not sufficient to fund our operations for the next twelve months,
and therefore, we will need additional financing to fund future operations
through offerings of equity or debt securities.  We can offer no
assurances that we will be able to obtain additional funds on acceptable terms,
if at all.





To date,
we have had negative cash flows from operations, and we have been dependent on
sales of our equity securities and debt financing to meet our cash requirements.
We expect this situation to continue for the foreseeable future as we currently
do not have any revenue streams. Therefore, we anticipate that we will have
negative cash flows from operations for our fiscal year ending December 31, 2009
and beyond until we are able to generate sufficient revenues to meet operating
expenses.




Given
that we are a development stage company and have not generated any revenues to
date, our cash flow projections are subject to numerous contingencies and risk
factors beyond our control, including our ability to manage our expected growth,
complete construction of our proposed plant, and commence operations. We can
offer no assurance that we will generate cash flows sufficient to meet our cash
flow projections or that our expenses will not exceed our projections. If our
expenses exceed estimates, we will require additional monies during the next
twelve months to execute our business plan.




There is
no assurance that we will be able to obtain funds required for our continued
operations. There can be no assurance that additional financing will be
available to us when needed or, if available, that it can be obtained on
commercially reasonable terms. If we are not able to obtain additional financing
on a timely basis, we will not be able to meet our other obligations as they
become due, and we will be forced to scale down or perhaps even cease business
operations.




Cash
Used in Operating Activities





Our net
cash used in operating activities for the six months ended June 30, 2009 was
$1,049,023.  During the six months ended June 30, 2009, the cash used
in operating activities was comprised primarily of our net loss of $1,831,854
decreased by the change in derivative liabilities value of $4,073,818, offset
primarily by the amortization of debt discounts and debt issuance costs of
$2,373,572 and the increase of our accounts payable, accrued interest, and other
payables of $1,766,016, collectively.





Cash
Used in Investing Activities





Due to
our lack of financing, we did not make any purchases of plant and equipment
during the six months ended June 30, 2009 compared to $630,875 for the six
months ended June 30, 2008.


30


Cash
Flows from Financing Activities




Historically,
we have met our immediate and long-term financial requirements primarily through
the sale of common stock and other convertible equity securities and through the
issuance of convertible promissory notes.  During the six months ended
June 30, 2009, we received $275,000 from short-term financing.  During
the six months ended June 30, 2008, we received net proceeds of $3,873,294 from
equity and debt financings and made payments of $2,723,000 on our convertible
notes.





Financings





We
entered into a Secured Note and Common Stock Purchase Agreement (the
“Agreement”) with I2BF Biodiesel, Ltd. (“I2BF”) and Blue Day SC Ventures, (“Blue
Day”) (each, an “Investor” and collectively, the “Investors”).





We
offered to the Investors: (a) a minimum of $3,000,000 in aggregate
principal of Secured Promissory Notes (“Notes”) issued for new cash investment
in our Company as of the date of the Agreement (the “Initial Investment”),
(b) $12,382,271 in aggregate principal amount of Notes issued concurrently
with the Initial Investment in exchange for the surrender and cancellation of
existing indebtedness and equity securities of our Company outstanding in favor
of Investors, (c) up to an additional $1,725,000 principal amount of Notes
issued to I2BF in a subsequent closing, and (d) as consideration for such
new investment and the restructuring of the existing indebtedness and equity
securities, common stock representing an aggregate of forty-five percent (45%)
of the fully diluted equity of our Company and certain adjustment rights
relating to such common stock as are set forth in the Agreement.





The first
Closing on July 15, 2009 (the “Initial Closing”) was for the sale of Notes in
the aggregate principal amount of $15,382,271 and an aggregate of 55,586,157
shares of the common stock of our Company, evidencing not less than 39.895% of
the outstanding the common stock determined on a fully diluted basis, and was
consummated simultaneously with the execution of the Agreement (the “Closing
Date”).





I2BF is
required to make an additional investment in Notes with an aggregate principal
amount of $1,725,000 and shall be issued 10,238,381 additional shares of common
stock, and an additional Closing shall be held with respect to such investment
(the “Balance Closing”) if and as soon as practicable following the closing of
the credit facility currently under negotiation between the Company and Banco
Internacional del Perú S.A.A. (“Interbank”) and evidenced by that certain letter
of intent dated May 29, 2009 (the “Interbank Facility”), provided that the
Interbank Facility shall provide credit to our Company and its subsidiaries of
not less than $15,000,000.  The obligation (but not the right) of I2BF
to participate in the Balance Closing shall cease in the event that the
Interbank Facility is not closed by October 15,
2009.





Proceeds
from the financing also were directed to the repayment of $2,000,000 in
principal owed by us to Whitebox.  Effective as of the closing of the
financing, all of our obligations to Whitebox were finally and effectively
satisfied and extinguished, including warrants formerly held by
Whitebox.





Contractual
Obligations





At June
30, 2009, our significant contractual obligations, except for the land lease
referred to below, were as follows:


31





PaymentsduebyPeriodLess than
                            
                            
                            One to
                            
                            
                            Three to
                            
                            
                            More ThanOneYear
                            
                            
                            ThreeYears
                            
                            
                            FiveYears
                            
                            
                            FiveYears
                            
                            
                            TotalPromissory
      notes
                            
                            $
                            9,570,000
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            9,570,000Operating
      lease obligations
                            
                            
                            84,897
                            
                            
                            
                            159,688
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            244,585Total
                            
                            $
                            9,654,897
                            
                            
                            $
                            159,688
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            9,814,585





On June
19, 2008, we entered into a 99-year land lease agreement, expiring in 2107 for
approximately 24,000 hectares of land in Peru.  The annual lease
payment is approximately $192,000 for the first year, $240,000 after the first
year until the initial harvest, and then $1,200,000 thereafter.





Off-Balance Sheet
Arrangements




Our
Company has no outstanding off-balance sheet guarantees, interest rate swap
transactions, or foreign currency contracts. Neither our Company nor our
operating subsidiaries engage in trading activities involving non-exchange
traded contracts.





Critical Accounting
Policies





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates, and judgments that affect the amounts reported,
including the notes thereto, and related disclosures of commitments and
contingencies, if any.  We have identified certain accounting policies that
are significant to the preparation of our consolidated financial statements.
 These accounting policies are important for an understanding of our
financial condition and results of operations.  Critical accounting
policies are those that are most important to the presentation of our financial
condition and results of operations and require management's subjective or
complex judgment, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods.  Certain accounting estimates are particularly sensitive because
of their significance to financial statements and because of the possibility
that future events affecting the estimate may differ significantly from
management's current judgments.  We believe the following accounting
policies are critical in the preparation of our consolidated financial
statements.





Use of
Estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant areas requiring the use of management estimates relate to the
determination of depreciation rates for equipment, impairment of long-lived
assets, future tax rates used to determine future income taxes, and the carrying
values of warrant and conversion option liabilities. Actual results could
materially differ from these estimates.


32


Impairment of Long-Lived
Assets




We follow
the guidance of SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. We periodically
evaluate the carrying value of long-lived assets to be held and used in
accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on
long-lived assets used in operations when indications of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets’ carrying amounts. In that event, a loss is recognized
based on the amount by which the carrying amount exceeds the fair market value
of the long-lived assets. Loss on long-lived assets to be disposed of is
determined in a similar manner, except that fair market values are reduced for
the cost of disposal. We believe that as of June 30, 2009 and December 31, 2008
there were no significant impairments of our long-lived assets.





Foreign Currency
Translation




Our
functional and reporting currency is the U.S. dollar. Monetary assets and
liabilities denominated in foreign currencies are translated using the exchange
rate prevailing at the balance sheet date. Gains and losses arising on
translation or settlement of foreign currency denominated transactions or
balances are included in the determination of income. Foreign currency
transactions are primarily undertaken in Peruvian Nuevos Soles. We have not, to
the date of these financials statements, entered into derivative instruments to
offset the impact of foreign currency fluctuations.





Accrued Derivative
Liabilities





The
Company applies FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.”  EITF 07-5 provides a two-step model to determine
whether a financial instrument or an embedded feature is indexed to an issuer’s
own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope
exception. This standard triggers liability accounting on all instruments and
embedded features exercisable at strike prices denominated in any currency other
than the functional currency of the operating entity in Peru.  Using
the criteria in EITF 07-5, the Company determines which instruments or embedded
features require liability accounting and records the fair values as an accrued
derivative liability. The changes in the values of the accrued derivative
liabilities are shown in the accompanying consolidated statements of operations
as “change in fair value of accrued derivative liabilities.”





Fair Value of Financial
Instruments





On
January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a three-level valuation
hierarchy for disclosure of fair value measurement, and enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:





·
            Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.





·
            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.





·
            Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value
measurement.


33


Recently Issued Accounting
Pronouncements




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It is intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling interests by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160 also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that does not result in deconsolidation, requires that
a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated, and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others.  We adopted SFAS 160 effective January 1,
2009.  We have determined the adoption of SFAS 160 did not have a
material impact to our consolidated financial position or consolidated results
of operations as of June 30, 2009.





In April
2009, the FASB issued three related FASB Staff Positions: (i) FSP FAS No. 115-2
and FAS No. 124-2, “Recognition of Presentation of Other-Than-Temporary
Impairments” (“FSP FAS 115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and APB No.
28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS
107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4, “Determining the Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”), which are effective for interim and annual reporting periods ending
after June 15, 2009. FSP FAS 115-2 and FAS 124-2 modifies the requirement for
recognizing other-than-temporary impairments, changes the existing impairment
model, and modifies the presentation and frequency of related disclosures. FSP
FAS 107-1 and APB 28-1 requires disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. FSP FAS 157-4 provides additional guidance for estimating fair value
in accordance with SFAS No. 157. The adoption of these FASB Staff Positions did
not have a material impact on our financial condition, results of operations or
cash flows.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM
and the Hierarchy of Generally Accepted Accounting Principles a Replacement
of FASB Statement No. 162” (“SFAS 168”). This Standard establishes the FASB
Accounting Standards CodificationTM (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, our
Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all
subsequent public filings will reference the Codification as the sole
source of authoritative literature.


34


Item
3.  Quantitative and Qualitative Disclosure about Market
Risk





Not
applicable.





Item
4. Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





The
Company’s Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June
30, 2009. Based upon such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of June 30, 2009, the Company’s
disclosure controls and procedures were ineffective. This conclusion by the
Company’s Chief Executive Officer and Chief Financial Officer do not
relate to reporting periods after June 30, 2009.





This
conclusion is based upon material weaknesses that relate to the
following:




1.  Accounting and Finance
Personnel Weaknesses – Our current accounting staff is relatively small,
and we do not have the required infrastructure of meeting the higher demands of
being a U.S. public company.





2.  Lack of Internal Audit
Function – We lack sufficient resources to perform the internal audit
function.




In order
to mitigate these material weaknesses to the fullest extent possible, all
financial reports are reviewed by an outside accounting firm that is not our
audit firm. All unexpected results are investigated. At any time, if it appears
that any control can be implemented to continue to mitigate such weaknesses, it
will be immediately implemented. The Company is in the process of complying
with SOX 404 during 2009 and will be implementing additional internal controls
over accounting and financial reporting.




Changes in Internal Control
Over Financial Reporting





No change
in the Company’s internal control over financial reporting occurred during the
quarter ended June 30, 2009 that materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.


35


PART
II - OTHER INFORMATION





Item
1.  Legal Proceedings





We know
of no material, existing or pending legal proceedings against us, nor are we
involved as a plaintiff in any material proceeding or pending litigation. There
are no proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial stockholder, is an adverse party or has a material
interest adverse to our company.





Item
1A.  Risk Factors





Not
applicable.




Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





There are
no unregistered sales of equity securities during the quarter ended June 30,
2009 to report that have not already been disclosed in a Current Report on Form
8-K.





Item
3.  Defaults upon Senior Securities





None.





Item
4.  Submission of Matters to a Vote of Security Holders





None.





Item 5. Other Information





None.





Item
6. Exhibits





Ex. No.
                  
                  Description3.1
                  
                  Amended
      and Restated Articles of Incorporation (1)3.2
                  
                  Amended
      and Restated Bylaws (1)3.3
                  
                  Certificate
      of Amendment (2)3.4
                  
                  Amended
      and Restated Certificate of Designation, Power, Preference and Rights of
      Series A Preferred Stock (3)3.5
                  
                  Certificate
      of Amendment of the Certificate of Designation, Powers, Preferences and
      Rights of Series A Preferred Stock (4)31.1
                  
                  Certification
      of the Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 *31.2
                  
                  Certification
      of the Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 *32.1
                  
                  Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *32.2
                  
                  Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *





* Filed
herewith





(1)
            Filed
      on November 20, 2007 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by
reference.


36


(2)
            Filed
      on November 26, 2007 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.


(3)
            Filed
      on April 23, 2008 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.


(4)
              Filed
      on July 21, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by
reference.




37




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





STRATOS
      RENEWABLES CORPORATIONDate:
      August 13, 2009
                By:
                /s/ Thomas SnyderThomas
      SnyderChief
      Executive Officer and President
                  (Principal
      Executive Officer)Date:
      August 13, 2009
                By:
                /s/ Julio Cesar AlonsoJulio
      Cesar AlonsoChief
      Financial Officer
                  (Principal
      Financial and Accounting
Officer)


38