UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q/A







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2010

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File Number: 0-24836





PetroAlgae Inc.

(Exact name of registrant as specified in its charter)







|                                               |  |                                  
|---------------------------------------------- |  | ---------------------------------
|Delaware                                       |  | 33-0301060                       
|(State or other jurisdiction
of incorporation) |  | (IRS Employer
Identification No.)



|                                                   |  |           
|-------------------------------------------------- |  | ----------
|1901 S. Harbor City Blvd., Suite 300
Melbourne, FL |  | 32901     
|(Address of principal executive offices)           |  | (Zip Code)

Registrants telephone number, including area code: 321-409-7500





Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90
days.    YES  x    NO   ̈

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 that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company
(as defined in Exchange Act Rule 12b-2).



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈ |  | Accelerated Filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | 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

The number of shares outstanding of the registrants common stock as of July 30, 2010 was 106,910,730 shares of common stock, all of one class.









---

Explanatory Note

We originally filed our Quarterly Report on Form 10-Q for the year ended March 31, 2010 with the Securities and Exchange Commission (SEC) on
May 17, 2010.

We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q (Amendment No. 1) to restate
our financial statements as of March 31, 2010 and 2009, and the results of operations and cash flows for the three month periods then ended and the period from inception (September 22, 2006) to March 31, 2010 (collectively, the
Company Financial Statements) and to report the identification of a material weakness in our accounting controls.

The Company
Financial Statements included in this Amendment No. 1 have been restated to adjust the amounts or accounting treatment of certain transactions and to record a non-cash transaction. These adjustments can be summarized as follows:



| |  |  | In 2008 and 2007, the Board of Directors of PA LLC, granted 106 employees restricted ownership units in PA LLC. These ownership units generally vest
over a period of four years. At each grant date, the restricted ownership unit awards were accounted for based upon an incorrect fair value calculation. Revised grant values determined using corrected Company fair value estimates resulted in
additional compensation expense of approximately $0.5 million and $0.6 million for the three months ended March 31, 2010 and March 31, 2009, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The nature and amount of the Companys expenditures have changed and increased from inception (September 22, 2006) through March 31, 2010.
Consequently, it has been determined that a new category, Selling, General and Administrative (SG&A) expense, should be presented through this period. This category includes senior management and overhead costs, business development
expenditures, system infrastructure costs, accounting and legal costs and intellectual property management costs. Other costs, which are related to experimentation and development of the Companys technology, are presented as Research and
Development expense. The effect of this reclassification was to decrease Research and Development expense by $1.2 million for each of the three month periods ended March 31, 2010 and March 31, 2009 and to increase SG&A expense by the
same amounts with no net increase to expenses.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2008, an option to purchase ownership units in PA LLC was issued to XL Tech Group, LLC, a related party (XL), in connection with
continued borrowings under a Company debt facility outstanding with XL. This option, which remains outstanding, had a fair value of approximately $1.5 million and was not recorded at issuance. This transaction has now been accounted for as a
discount from the carrying amount of the related debt and the amortization of the discount added $140,500 to interest expense for each of the three month periods ended March 31, 2010 and March 31, 2009.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2009, the Company issued common stock and warrants, with a fair value of $3.0 million, to an unrelated party that provided it with equity funding
and certain business development services. Cash proceeds from this equity issuance were received partially in December 31, 2009 ($0.8 million) and partially in January 2010 ($1.2 million). The $1.0 million balance of the fair value of the
securities issued was expensed as a business development cost within selling, general and administrative expense in 2009. The Company originally recorded the $3.0 million fair value of the securities issued as a 2009 research and development
expense. In addition, the Company received $2.0 million of additional cash in connection with this transaction, which is subject to repayment to the unrelated party at that partys option. This amount has been deposited in escrow and reported
in restricted cash and other liabilities at March 31, 2010. This adjustment resulted in the reversal of $500,000 of revenue previously reported for the three months ended March 31, 2010. Also, previously reported deferred revenue of $1.5
million at March 31, 2010 has been reversed.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In January 2009, the Company entered into a series of agreements with a third party for the design, engineering, and construction of a facility for the
growth, harvesting and processing of micro-crops. This facility was to be used to demonstrate our technology to potential customers. Company shares were issued in partial payment, in advance, for these services. The Company expensed $1.0 million
related to this transaction and reported the full amount at the inception of the transaction rather than as services were performed. The cost of the shares issued has been adjusted to estimated fair value in the first quarter of 2009. The effect on
the three months ended
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



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| | March 31, 2009, was a reduction of $0.5 million to both paid in capital and research and development expense. The shares not earned by the third party were returned and cancelled by the
Company in the first quarter of 2010, resulting in an approximately $342,000 reduction in paid in capital and other current assets. Originally, this entry was not recorded during the quarter.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following items in this report have been amended to give effect to the restatement of the Company Financial Statements:

Item 1. Financial Statements and Supplementary Data;

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

Item 4. Controls and Procedures.



3



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|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

PetroAlgae Inc.

(A Development Stage Company)

Consolidated Balance Sheets



|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----------- | - | ----------------------------- | - | ----------- | -
|                                                                                                                                       |  | March 31,2010(Unauditedand
restated) |             |   | December 31,2009(as
restated) |  
|ASSETS                                                                                                                                 |  |                                      |             |   |                               |   |             |  
|Current assets:                                                                                                                        |  |                                      |             |   |                               |   |             |  
|Cash and cash equivalents                                                                                                              |  | $                                    | 190,677     |   |                               | $ | 2,679,302   |  
|Restricted cash                                                                                                                        |  |                                      | 2,000,000   |   |                               |   | 2,000,000   |  
|Prepaid expenses                                                                                                                       |  |                                      | 96,900      |   |                               |   | 129,333     |  
|Other current assets                                                                                                                   |  |                                      |            |   |                               |   | 1,541,726   |  
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|Total current assets                                                                                                                   |  |                                      | 2,287,577   |   |                               |   | 6,350,361   |  
|                                                                                                                                       |  |                                     
|Property and equipment                                                                                                                 |  |                                      | 4,034,088   |   |                               |   | 3,653,225   |  
|Accumulated depreciation                                                                                                               |  |                                      | (1,675,055  | ) |                               |   | (1,416,350  | )
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|Net property and equipment                                                                                                             |  |                                      | 2,359,033   |   |                               |   | 2,236,875   |  
|Deposits                                                                                                                               |  |                                      | 5,200       |   |                               |   | 5,200       |  
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|Total assets                                                                                                                           |  | $                                    | 4,651,810   |   |                               | $ | 8,592,436   |  
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|                                                                                                                                       |  |                                     
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                  |  |                                      |             |   |                               |   |             |  
|Current liabilities:                                                                                                                   |  |                                      |             |   |                               |   |             |  
|Accounts payable                                                                                                                       |  | $                                    | 727,738     |   |                               | $ | 536,328     |  
|Accrued expenses                                                                                                                       |  |                                      | 1,769,318   |   |                               |   | 1,617,191   |  
|Accrued expenses - related party                                                                                                       |  |                                      | 2,677,175   |   |                               |   | 2,144,840   |  
|Liability related to equity issuance                                                                                                   |  |                                      | 7,500,000   |   |                               |   | 7,500,000   |  
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|                                                                                                                                       |  |                                     
|Total current liabilities                                                                                                              |  |                                      | 12,674,231  |   |                               |   | 11,798,359  |  
|                                                                                                                                       |  |                                     
|Notes payable - related party                                                                                                          |  |                                      | 35,489,896  |   |                               |   | 35,114,096  |  
|Other liabilities                                                                                                                      |  |                                      | 2,000,000   |   |                               |   | 2,000,000   |  
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|Total liabilities                                                                                                                      |  |                                      | 50,164,127  |   |                               |   | 48,912,455  |  
|                                                                                                                                       |  |                                     
|Commitments and Contingencies                                                                                                          |  |                                      |             |   |                               |   |             |  
|Stockholders deficit:                                                                                                                 |  |                                      |             |   |                               |   |             |  
|Common stock - $.001 par value, 300,000,000 shares authorized, 106,454,480 and 106,229,356 shares issued and outstanding,
respectively |  |                                      | 106,454     |   |                               |   | 106,229     |  
|Paid in capital                                                                                                                        |  |                                      | 27,200,441  |   |                               |   | 24,115,788  |  
|Deficit accumulated during the development stage                                                                                       |  |                                      | (67,219,715 | ) |                               |   | (60,012,830 | )
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|Total PetroAlgae Inc. stockholders deficit                                                                                            |  |                                      | (39,912,820 | ) |                               |   | (35,790,813 | )
|Non-controlling interest                                                                                                               |  |                                      | (5,599,497  | ) |                               |   | (4,529,206  | )
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|Total stockholders deficit                                                                                                            |  |                                      | (45,512,317 | ) |                               |   | (40,320,019 | )
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  
|Total liabilities and stockholders deficit                                                                                            |  | $                                    | 4,651,810   |   |                               | $ | 8,592,436   |  
|                                                                                                                                       |  |                                      |             |   |                               |   |             |  

See the accompanying notes to the consolidated financial statements.



4



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PetroAlgae Inc.

(A Development Stage Company)

Consolidated Statements of Operations

(Unaudited and restated)



|                                                  |  |                    |             |   |                                                                    |   |             |   |  |   |             |  
|------------------------------------------------- |  | ------------------ | ----------- | - | ------------------------------------------------------------------ | - | ----------- | - |  | - | ----------- | -
|                                                  |  | Three Months Ended |             |   | For
thePeriod FromSeptember 22,2006(Inception)ThroughMarch 31,2010 |  
|                                                  |  | March 31,2010      |             |   | March 31,2009                                                      |   |            
|Revenue                                           |  | $                  |            |   |                                                                    | $ |            |   |  | $ |            |  
|                                                  |  |                    |            
|Costs and expenses:                               |  |                    |             |   |                                                                    |   |             |   |  |   |             |  
|Selling, general and administrative               |  |                    | 3,549,530   |   |                                                                    |   | 4,403,307   |   |  |   | 32,366,044  |  
|Research and development                          |  |                    | 4,049,374   |   |                                                                    |   | 2,639,006   |   |  |   | 35,094,055  |  
|Interest expense - related party                  |  |                    | 909,889     |   |                                                                    |   | 592,826     |   |  |   | 6,316,042   |  
|Depreciation                                      |  |                    | 258,706     |   |                                                                    |   | 162,921     |   |  |   | 1,720,946   |  
|                                                  |  |                    |             |   |                                                                    |   |             |   |  |   |             |  
|Total costs and expenses                          |  |                    | 8,767,499   |   |                                                                    |   | 7,798,060   |   |  |   | 75,497,087  |  
|                                                  |  |                    |             |   |                                                                    |   |             |   |  |   |             |  
|                                                  |  |                    |            
|Net loss before non-controlling interest          |  |                    | (8,767,499  | ) |                                                                    |   | (7,798,060  | ) |  |   | (75,497,087 | )
|                                                  |  |                    |            
|Net loss attributable to non-controlling interest |  |                    | 1,560,614   |   |                                                                    |   | 1,450,439   |   |  |   | 8,277,372   |  
|                                                  |  |                    |             |   |                                                                    |   |             |   |  |   |             |  
|                                                  |  |                    |            
|Net loss attributable to PetroAlgae Inc.          |  | $                  | (7,206,885  | ) |                                                                    | $ | (6,347,621  | ) |  | $ | (67,219,715 | )
|                                                  |  |                    |             |   |                                                                    |   |             |   |  |   |             |  
|                                                  |  |                    |            
|Basic and diluted common shares outstanding       |  |                    | 106,275,826 |   |                                                                    |   | 104,400,070 |   |  |   |             |  
|                                                  |  |                    |             |   |                                                                    |   |             |   |  |   |             |  
|                                                  |  |                    |            
|Basic and diluted loss per share                  |  | $                  | (0.07       | ) |                                                                    | $ | (0.06       | ) |  |   |             |  
|                                                  |  |                    |             |   |                                                                    |   |             |   |  |   |             |  

See the accompanying notes to the consolidated financial statements.



5



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PetroAlgae Inc.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Unaudited and restated)



|                                                                                                            |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | -------------------------------------------------------------------- | - | ---------- | - |  | - | ----------- | -
|                                                                                                            |  | Three Months Ended |            |   | For thePeriod
FromSeptember 
22,2006(Inception)ThroughMarch 
31,2010 |  
|                                                                                                            |  | March 31,2010      |            |   | March 31,2009                                                        |   |           
|Cash flows from operating activities:                                                                       |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Net loss                                                                                                    |  | $                  | (8,767,499 | ) |                                                                      | $ | (7,798,060 | ) |  | $ | (75,497,087 | )
|Adjustments to reconcile net loss before non-controlling interest to net cash used in operating activities: |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Amortization of original issue discount                                                                     |  |                    | 140,500    |   |                                                                      |   | 140,500    |   |  |   | 1,218,500   |  
|Amortization of company options                                                                             |  |                    | 382,854    |   |                                                                      |   |           |   |  |   | 971,507     |  
|Amortization of unearned services                                                                           |  |                    | 393,750    |   |                                                                      |   | 393,750    |   |  |   | 2,012,500   |  
|Employee compensation by grant of PA LLC units                                                              |  |                    | 490,323    |   |                                                                      |   | 559,496    |   |  |   | 5,194,902   |  
|Expenses paid and interest added to notes payable - related party                                           |  |                    | 235,300    |   |                                                                      |   | 227,423    |   |  |   | 9,674,636   |  
|Expenses paid by issuance of common stock                                                                   |  |                    |           |   |                                                                      |   | 144,680    |   |  |   | 1,214,230   |  
|Depreciation                                                                                                |  |                    | 258,706    |   |                                                                      |   | 162,921    |   |  |   | 1,720,946   |  
|Loss on disposition of equipment                                                                            |  |                    |           |   |                                                                      |   | 808        |   |  |   | 126,830     |  
|Decrease (increase) in prepaid expenses                                                                     |  |                    | 32,433     |   |                                                                      |   | (32,377    | ) |  |   | (96,900     | )
|Increase in deposits                                                                                        |  |                    |           |   |                                                                      |   |           |   |  |   | (5,200      | )
|Increase in accounts payable                                                                                |  |                    | 191,410    |   |                                                                      |   | 760,487    |   |  |   | 781,391     |  
|Increase (decrease) in accrued expenses                                                                     |  |                    | 684,462    |   |                                                                      |   | (372,182   | ) |  |   | 2,247,999   |  
|                                                                                                            |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Net cash used in operating activities                                                                       |  | $                  | (5,957,761 | ) |                                                                      | $ | (5,812,554 | ) |  | $ | (50,435,746 | )
|                                                                                                            |  |                    |           
|Cash flows from investing activities:                                                                       |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Proceeds from sale of asset                                                                                 |  |                    |           |   |                                                                      |   |           |   |  |   | 36,000      |  
|Acquisition of property and equipment                                                                       |  |                    | (380,864   | ) |                                                                      |   | (1,012,562 | ) |  |   | (4,242,809  | )
|                                                                                                            |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Net cash used in investing activities                                                                       |  | $                  | (380,864   | ) |                                                                      | $ | (1,012,562 | ) |  | $ | (4,206,809  | )
|                                                                                                            |  |                    |           
|Cash flows from financing activities:                                                                       |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Member contributions                                                                                        |  |                    |           |   |                                                                      |   |           |   |  |   | 488,532     |  
|Reverse merger                                                                                              |  |                    |           |   |                                                                      |   |           |   |  |   | 99          |  
|Common stock and warrants issued for cash                                                                   |  |                    | 2,650,000  |   |                                                                      |   |           |   |  |   | 24,150,000  |  
|Borrowings under notes payable - related party                                                              |  |                    |           |   |                                                                      |   |           |   |  |   | 28,194,601  |  
|Issuance of common stock and warrants for cash                                                              |  |                    | 1,200,000  |   |                                                                      |   |           |   |  |   | 2,000,000   |  
|                                                                                                            |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Net cash provided by financing activities                                                                   |  | $                  | 3,850,000  |   |                                                                      | $ |           |   |  | $ | 54,833,232  |  
|                                                                                                            |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Net (decrease) increase in cash                                                                             |  |                    | (2,488,625 | ) |                                                                      |   | (6,825,116 | ) |  |   | 190,677     |  
|                                                                                                            |  |                    |           
|Cash and cash equivalents - beginning of period                                                             |  |                    | 2,679,302  |   |                                                                      |   | 10,416,823 |   |  |   |            |  
|                                                                                                            |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Cash and cash equivalents - end of period                                                                   |  | $                  | 190,677    |   |                                                                      | $ | 3,591,707  |   |  | $ | 190,677     |  
|                                                                                                            |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Non-cash investing and financing activities:                                                                |  |                    |            |   |                                                                      |   |            |   |  |   |             |  
|Stock and warrants issued for other liability                                                               |  | $                  | 2,500,000  |   |                                                                      | $ |           |   |  | $ | 10,000,000  |  
|Common stock issued for other current asset                                                                 |  | $                  | (342,000   | ) |                                                                      | $ | 342,000    |   |  | $ |            |  
|Common stock issued for unearned services                                                                   |  | $                  |           |   |                                                                      | $ |           |   |  | $ | 3,150,000   |  
|Long term liability incurred for restricted cash                                                            |  | $                  |           |   |                                                                      | $ |           |   |  | $ | 2,000,000   |  

See accompanying notes
to the consolidated financial statements.



6



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PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

March 31, 2010

(Unaudited and restated)

Note 1 Organization

PetroAlgae
Inc. (the Company) began its operations through its controlled subsidiary, PetroAlgae LLC (PA LLC), on December 19, 2008, as the outcome of the reverse acquisition described below. PA LLC was formed by XL TechGroup, Inc.
(XL, a related party and its sponsor and parent until December 19, 2008) on September 22, 2006 as a Delaware limited liability company to develop technologies to commercially grow, harvest and process micro-crops. PA LLCs
primary business model is to license this technology to large customers who will commercially produce this biomass, which in turn is processed into two co-products: (1) renewable fuel feedstock, and (2) protein for supplementation of
animal feed and potentially human food ingredients.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP) for interim financial information and Rule 8.03 of Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
For further information, refer to the financial statements of the Company as of December 31, 2009 and 2008, and for the years then ended and the period from inception to December 31, 2009, included in the Companys Form 10-K/A.

The accompanying financial statements are prepared in accordance with U.S. GAAP, which require management to make estimates and assumptions.
These estimates and assumptions 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 revenue and expense. Actual results may
differ from these estimates.

Principles of Consolidation

The consolidated financial statements presented herein include the accounts of the Company and its consolidated subsidiary PA, LLC. Non-controlling
interests are accounted for based upon the value or cost attributed to their investment adjusted for the share of income or loss that relates to their percentage ownership of the entire Company. All intercompany transactions and balances have been
eliminated in consolidation.

Use of Estimates

The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which
require management to make estimates and assumptions. These estimates and assumptions 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 revenue and expense. Actual results may differ from these estimates.

Fair Value of Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of March 31, 2010. The respective carrying values of certain on-balance-sheet financial instruments approximate their fair values. These financial instruments include cash, accounts



7



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PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited and restated)



payable, accrued expenses, notes payable and due to affiliates. Fair values are assumed to approximate carrying values for these financial instruments because they are short term in nature and
their carrying amounts approximate the amounts expected to be received or paid.

The carrying value of the Companys notes payable
approximated their fair value based on the current market conditions for similar debt instruments.

Loss Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs
losses common stock equivalents, if any, are not considered, as their effect would be anti-dilutive.

Stock-Based
Compensation

The Company accounts for stock-based compensation in accordance with ASC 718 Stock Compensation. This Statement requires
that the cost resulting from all stock-based transactions be recorded in the financial statements. The Statement establishes fair value as the measurement objective in accounting for stock-based payment arrangements and requires all entities to
apply a fair-value-based measurement in accounting for stock-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from
non-employees in stock-based payment transactions.

Reverse Acquisition

On December 19, 2008, a reverse acquisition was completed under which, for accounting purposes, PA LLC is deemed to be the acquirer and PetroAlgae
Inc., the legal acquirer, is deemed to be the acquired entity. No goodwill was recognized as PetroAlgae Inc. was a shell company before the acquisition. The former shareholders of PetroAlgae Inc. retained an aggregate of 99,586 shares of
common stock, which were recorded at par value of $99.

Note 2 Going Concern

The Company is currently in the development stage at March 31, 2010 as it is continuing the development of its product and has not yet recognized any
revenues. The Companys external auditors issued a going concern opinion as of December 31, 2009. The Companys consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business.

The Company has never been profitable and has incurred significant losses and
cash flow deficits. For the three months ended March 31, 2010 and 2009 and the period from September 22, 2006 (inception) to March 31, 2010, the Company reported net losses of $7.2 million, $6.3 million, and $67.2 million,
respectively, and negative cash flow from operating activities of $6.0 million, $5.8 million, and $50.4 million, respectively. As of March 31, 2010, the Company has an aggregate accumulated deficit of $67.2 million. The Company anticipates that
operations will continue to report losses and negative cash flow during the remainder of 2010. As a result of these net losses and cash flow deficits and other factors, there is a substantial doubt about the Companys ability to continue as a
going concern. The Company is currently seeking additional funding from its principal shareholder and unrelated third parties. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



8



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited and restated)



Note 3 Correction of Errors

The Company recently identified certain errors in its previously issued quarterly financial statements for the three months ended March 31, 2010 and 2009.
These errors, which have been corrected in this financial statement, include the following items:



| |  |  | In 2008 and 2007, the Board of Directors of PA LLC, granted 106 employees restricted ownership units in PA LLC. These ownership units generally vest
over a period of four years. At each grant date, the restricted ownership unit awards were accounted for based upon an incorrect fair value calculation. Revised grant values determined using corrected Company fair value estimates resulted in
additional compensation expense of approximately $0.5 million and $0.6 million for the three months ended March 31, 2010 and March 31, 2009, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The nature and amount of the Companys expenditures have changed and increased from inception (September 22, 2006) through December 31, 2009.
Consequently, it has been determined that a new category, Selling, General and Administrative (SG&A) expense, should be presented through this period. This category includes senior management and overhead costs, business development
expenditures, system infrastructure costs, accounting and legal costs and intellectual property management costs. Other costs, which are related to experimentation and development of the Companys technology, are presented as Research and
Development expense. The effect of this reclassification was to decrease Research and Development expense by $1.2 million for each of the three month periods ended March 31, 2010 and March 31, 2009 and to increase SG&A expense by the
same amounts with no net increase to expenses.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2008, an option to purchase ownership units in PA LLC was issued in connection with the issuance of a Company debt instrument. This option, which
remains outstanding, had a fair value of approximately $1.5 million and was not recorded at issuance. This transaction has now been accounted for as a discount from the carrying amount of the related debt and the amortization of the discount added
$140,500 to interest expense for each of the three month periods ended March 31, 2010 and March 31, 2009.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2009, the Company issued common stock and warrants, with a fair value of $3.0 million, to an unrelated party that provided it with equity funding
and certain business development services. Cash proceeds from this equity issuance were received partially in December 31, 2009 ($0.8 million) and partially in January 2010 ($1.2 million). The $1.0 million balance of the fair value of the
securities issued was expensed as a business development cost within selling, general and administrative expense in 2009. The Company originally recorded the $3.0 million fair value of the securities issued as a 2009 research and development
expense. In addition, the Company received $2.0 million of additional cash in connection with this transaction, which is subject to repayment to the unrelated party at that partys option. This amount has been deposited in escrow and reported
in restricted cash and other liabilities at March 31, 2010. This adjustment resulted in the reversal of $500,000 of revenue previously reported for the three months ended March 31, 2010. Also, previously reported deferred revenue of $1.5
million at March 31, 2010 has been reversed.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In January 2009, the Company entered into a series of agreements with a third party for the design, engineering, and construction of a facility for the
growth, harvesting and processing of micro-crops. This facility was to be used to demonstrate our technology to potential customers. Company shares were issued in partial payment, in advance, for these services. The Company expensed $1.0 million
related to this transaction and reported the full amount at the inception of the transaction rather than as services were performed. The cost of the shares issued has been adjusted to estimated fair value in the first quarter of 2009. The shares not
earned by the third party were returned and cancelled by the Company in the first quarter of 2010, resulting in an approximately $342,000 reduction in paid in capital. Originally, this entry was not recorded during the quarter.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited and restated)



The effect of the correction of these errors on the financial statements is as follows:

Selected Condensed Financial Data

Balance sheet as of March 31, 2010



|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|----------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | - | ---------- | -------- |  | - | ----------- | -
|                                                                  |  | PreviouslyReported |             |   | Increase(Decrease) |   |            | Restated | 
|Current assets                                                    |  | $                  | 2,287,577   |   |                    | $ |           |          |  | $ | 2,287,577   |  
|Other assets                                                      |  |                    | 2,364,233   |   |                    |   |           |          |  |   | 2,364,233   |  
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|Total assets                                                      |  | $                  | 4,651,810   |   |                    | $ |           |          |  | $ | 4,651,810   |  
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|                                                                  |  |                    |            
|Current liabilities                                               |  | $                  | 16,174,231  |   |                    | $ | (3,500,000 | )        |  | $ | 12,674,231  |  
|Long-term liabilities                                             |  |                    | 36,483,313  |   |                    |   | 1,006,583  |          |  |   | 37,489,896  |  
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|Total liabilities                                                 |  |                    | 52,657,544  |   |                    |   | (2,493,417 | )        |  |   | 50,164,127  |  
|                                                                  |  |                    |            
|Par stock and paid in capital                                     |  |                    | 24,132,226  |   |                    |   | 3,174,669  |          |  |   | 27,306,895  |  
|Development stage deficit                                         |  |                    | (65,260,814 | ) |                    |   | (1,958,901 | )        |  |   | (67,219,715 | )
|Non-controlling interest                                          |  |                    | (6,877,146  | ) |                    |   | 1,277,649  |          |  |   | (5,599,497  | )
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|Total liabilities and deficit                                     |  | $                  | 4,651,810   |   |                    | $ |           |          |  | $ | 4,651,810   |  
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|                                                                  |  |                    |            
|Statement of operations for the three months ended March 31, 2010 |  |                    |             |   |                    |   |            |          |  |   |             |  
|                                                                  |  |                    |            
|                                                                  |  | PreviouslyReported |             |   | Increase(Decrease) |   |            | Restated | 
|                                                                  |  |                    |            
|Revenue                                                           |  | $                  | 500,000     |   |                    | $ | (500,000   | )        |  | $ |            |  
|                                                                  |  |                    |            
|Selling, general and administrative expense (1)                   |  |                    | 2,300,203   |   |                    |   | 1,249,327  |          |  |   | 3,549,530   |  
|                                                                  |  |                    |            
|Research and development expense                                  |  |                    | 5,064,230   |   |                    |   | (1,014,856 | )        |  |   | 4,049,374   |  
|                                                                  |  |                    |            
|Total expenses                                                    |  |                    | 8,133,822   |   |                    |   | 633,677    |          |  |   | 8,767,499   |  
|                                                                  |  |                    |            
|Non-controlling interest                                          |  |                    | (1,233,277  | ) |                    |   | (327,337   | )        |  |   | (1,560,614  | )
|                                                                  |  |                    |            
|Net loss                                                          |  | $                  | (6,400,545  | ) |                    | $ | (806,340   | )        |  | $ | (7,206,885  | )
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|                                                                  |  |                    |            
|Basic and diluted loss per share                                  |  | $                  | (0.06       | ) |                    | $ | (0.01      | )        |  | $ | (0.07       | )
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  



|(1) | - previously General and administrative expense
|--- | -----------------------------------------------



10



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited and restated)



Selected Condensed Financial Data

Balance sheet as of December 31, 2009



|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|----------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | - | ---------- | -------- |  | - | ----------- | -
|                                                                  |  | PreviouslyReported |             |   | Increase(Decrease) |   |            | Restated | 
|Current assets                                                    |  | $                  | 4,808,635   |   |                    | $ | 1,541,726  |          |  | $ | 6,350,361   |  
|Other assets                                                      |  |                    | 2,242,075   |   |                    |   |           |          |  |   | 2,242,075   |  
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|Total assets                                                      |  | $                  | 7,050,710   |   |                    | $ | 1,541,726  |          |  | $ | 8,592,436   |  
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|Current liabilities                                               |  | $                  | 14,598,359  |   |                    | $ | (2,800,000 | )        |  | $ | 11,798,359  |  
|Long-term liabilities                                             |  |                    | 36,248,013  |   |                    |   | 866,083    |          |  |   | 37,114,096  |  
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|Total liabilities                                                 |  |                    | 50,846,372  |   |                    |   | (1,933,917 | )        |  |   | 48,912,455  |  
|                                                                  |  |                    |            
|Par stock and paid in capital                                     |  |                    | 20,708,476  |   |                    |   | 3,513,541  |          |  |   | 24,222,017  |  
|Development stage deficit                                         |  |                    | (58,860,269 | ) |                    |   | (1,152,561 | )        |  |   | (60,012,830 | )
|Non-controlling interest                                          |  |                    | (5,643,869  | ) |                    |   | 1,114,663  |          |  |   | (4,529,206  | )
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|Total liabilities and deficit                                     |  | $                  | 7,050,710   |   |                    | $ | 1,541,726  |          |  | $ | 8,592,436   |  
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|                                                                  |  |                   
|Statement of operations for the three months ended March 31, 2009 |  |                    |             |   |                    |   |            |          | 
|                                                                  |  |                    |            
|                                                                  |  | PreviouslyReported |             |   | Increase(Decrease) |   |            | Restated | 
|                                                                  |  |                    |            
|Revenue                                                           |  | $                  |            |   |                    | $ |           |          |  | $ |            |  
|                                                                  |  |                    |            
|Selling, general and administrative expense (1)                   |  |                    | 2,952,100   |   |                    |   | 1,451,207  |          |  |   | 4,403,307   |  
|                                                                  |  |                    |            
|Research and development expense                                  |  |                    | 4,548,958   |   |                    |   | (1,909,952 | )        |  |   | 2,639,006   |  
|                                                                  |  |                    |            
|Total expenses                                                    |  |                    | 7,953,384   |   |                    |   | (155,324   | )        |  |   | 7,798,060   |  
|                                                                  |  |                    |            
|Non-controlling interest                                          |  |                    | (1,162,805  | ) |                    |   | (287,634   | )        |  |   | (1,450,439  | )
|                                                                  |  |                    |            
|Net loss                                                          |  | $                  | (6,790,579  | ) |                    | $ | 442,958    |          |  | $ | (6,347,621  | )
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  
|                                                                  |  |                    |            
|Basic and diluted loss per share                                  |  | $                  | (0.07       | ) |                    | $ | 0.01       |          |  | $ | (0.06       | )
|                                                                  |  |                    |             |   |                    |   |            |          |  |   |             |  



|(1) | - previously General and administrative expense
|--- | -----------------------------------------------

Note 4 Property and Equipment

Property
and equipment and related accumulated depreciation and amortization consist of:



|                                               |  |                    |            |   |                       |   |            |  
|---------------------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | -
|                                               |  | As ofMarch 31,2010 |            |   | As ofDecember 31,2009 |  
|Leasehold improvements                         |  | $                  | 586,853    |   |                       | $ | 613,863    |  
|Furniture and fixtures                         |  |                    | 81,716     |   |                       |   | 81,716     |  
|Automobiles                                    |  |                    | 62,641     |   |                       |   | 62,641     |  
|Computer and office equipment                  |  |                    | 225,520    |   |                       |   | 230,068    |  
|Demonstration system and engineering equipment |  |                    | 2,675,988  |   |                       |   | 2,276,908  |  
|Software and networking                        |  |                    | 401,370    |   |                       |   | 388,029    |  
|                                               |  |                    |            |   |                       |   |            |  
|Total cost basis                               |  |                    | 4,034,088  |   |                       |   | 3,653,225  |  
|Less accumulated depreciation and amortization |  |                    | (1,675,055 | ) |                       |   | (1,416,350 | )
|                                               |  |                    |            |   |                       |   |            |  
|Total Property and Equipment                   |  | $                  | 2,359,033  |   |                       | $ | 2,236,875  |  
|                                               |  |                    |            |   |                       |   |            |  



11



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited and restated)



Note 5 Accrued Expenses

Accrued expenses are comprised of the following components:



|                           |  |                    |           |                       |   |          
|-------------------------- |  | ------------------ | --------- | --------------------- | - | ---------
|                           |  | As ofMarch 31,2010 |           | As ofDecember 31,2009
|Accrued payroll and bonus  |  | $                  | 495,332   |                       | $ | 606,454  
|Accrued vacation liability |  |                    | 672,257   |                       |   | 651,839  
|Other accrued expenses     |  |                    | 601,729   |                       |   | 358,898  
|                           |  |                    |           |                       |   |          
|Total Accrued Expenses     |  | $                  | 1,769,318 |                       | $ | 1,617,191
|                           |  |                    |           |                       |   |          

Note 6 Notes Payable  Related Party

On July 24, 2009, the Company entered into agreements with Valens US and PetroTech Holdings Corp. to extend the maturity of all of the Companys
loans to June 30, 2012.

Notes payable-related party consists of the following:



|                                                                                                                                                                                                                                                 |  |                    |            |   |                       |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ---------- | - | --------------------- | - | ---------- | -
|                                                                                                                                                                                                                                                 |  | As ofMarch 31,2010 |            |   | As ofDecember 31,2009 |  
|Note Payable to Valens US                                                                                                                                                                                                                        |  | $                  | 417,512    |   |                       | $ | 417,512    |  
|     Interest accrues monthly, at 12% per annum                                                                                                                                                                                                 |  |                    |            |   |                       |   |            |  
|     Note is due on June 30, 2012                                                                                                                                                                                                               |  |                    |            |   |                       |   |            |  
|                                                                                                                                                                                                                                                 |  |                   
|Note Payable to PetroTech Holdings Corp.                                                                                                                                                                                                         |  |                    |            |   |                       |   |            |  
|     Interest accrues monthly, at 12% per annum                                                                                                                                                                                                 |  |                    | 7,222,089  |   |                       |   | 7,222,089  |  
|     Note is due on June 30, 2012                                                                                                                                                                                                               |  |                    |            |   |                       |   |            |  
|                                                                                                                                                                                                                                                 |  |                   
|Convertible Note Payable to PetroTech Holdings Corp.                                                                                                                                                                                             |  |                    |            |   |                       |   |            |  
|     Interest accrues monthly, at 12% per annum                                                                                                                                                                                                 |  |                    | 10,000,000 |   |                       |   | 10,000,000 |  
|     Note is due on June 30, 2012                                                                                                                                                                                                               |  |                    |            |   |                       |   |            |  
|                                                                                                                                                                                                                                                 |  |                   
|Up to $25,000,000 Note Payable to PetroTech Holdings Corp.                                                                                                                                                                                       |  |                    |            |   |                       |   |            |  
|     Interest payable monthly, and is drawn into note on a monthly basis at Prime
+ 2% (5.25% at March 31, 2010 and December 31, 2009) 
     Permits additional draws to fund interest. Maximum balance of this note is
limited to $25,000,000 |  |                    |            |   |                       |   |            |  
|     Note is due on June 30, 2012                                                                                                                                                                                                               |  |                    | 18,084,795 |   |                       |   | 17,849,495 |  
|                                                                                                                                                                                                                                                 |  |                    |            |   |                       |   |            |  
|Subtotal                                                                                                                                                                                                                                         |  |                    | 35,724,396 |   |                       |   | 35,489,096 |  
|Original Issue Discount                                                                                                                                                                                                                          |  |                    | (234,500   | ) |                       |   | (375,000   | )
|                                                                                                                                                                                                                                                 |  |                    |            |   |                       |   |            |  
|Notes Payable - Related Party                                                                                                                                                                                                                    |  | $                  | 35,489,896 |   |                       | $ | 35,114,096 |  
|                                                                                                                                                                                                                                                 |  |                    |            |   |                       |   |            |  



12



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited and restated)



The notes are collectively secured by all of the Companys assets.

The $18,084,795 note payable permits additional draws by the Company only to fund interest that accrued in the prior month up to a maximum balance of
$25,000,000. As of March 31, 2010, interest in the amount of $2.6 million was accrued related to the notes payable.

Interest charged to
operations on these notes was $0.9 million, $0.6 million and $6.3 million during the periods ended March 31, 2010 and 2009, and the period from September 22, 2006 (inception) to March 31, 2010, respectively.

Note 7 Stockholders Deficit

Authorized Capital. The Companys equity consists of 300,000,000 shares of $.001 par value common stock, of which 106,454,480 shares have been issued
and are outstanding at March 31, 2010. In addition, the Company may issue up to 25,000,000 shares of preferred stock. No preferred stock is outstanding.

Issuance of Common Stock and Warrants

Shortly after the reverse acquisition in December 2008, the trading of our common stock on the Over The Counter Bulletin Board ceased to follow a rational
pattern, likely due to the very limited number of shares held by non-affiliates and the resulting low trading volume in our common stock, which made our shares susceptible to unusual swings in price based on very few trades. Consequently, the
Company determined that the trading price of the common stock was no longer a reasonable indicator of the fair value of shares when not issued for cash. Instead, the fair value of the Companys common stock was estimated based upon applying
discounted cash flow valuation techniques to the Companys then-current estimate of future cash flows from its business.

During December
2009, the Company issued 357,143 units consisting of one share of common stock and a warrant to purchase a share of common stock at $15.00 for a period of 5 years in exchange for a 30% interest in Green Sciences Energy, LLC, a subsidiary of Congoo,
LLC. The units were valued at $8.00 per unit or $2,857,144. The value of the units issued was allocated between the fair values of the common stock and warrants of $2,021,429 ($5.66 per share) and $835,714 ($2.34 per warrant), respectively. The fair
value of the warrants was estimated using the Black-Scholes valuation model, based on the estimated fair value of the common stock on the valuation date, an expected dividend yield of 0%, a risk-free interest rate based on constant maturity rates
published by the U.S. Federal Reserve applicable to the remaining term of the instruments, an expected life equal to the remaining term of the instruments and an estimated volatility of 75%. In addition, the Company issued an additional 250,000
warrants exercisable at $8.00 per share for a period of 6 months and 250,000 warrants exercisable at $15.00 per share for a period of 6 months. These additional warrants expired unexercised on June 30, 2010. The Company estimated the fair value
of the 500,000 additional warrants using the Black-Scholes option pricing model and the same assumptions stated above, resulting in an estimated fair value of the options of $161,000. The excess of the fair value of all securities issued to Green
Sciences Energy, LLC of $3,018,144 over the $2.0 million of cash received in 2009 ($0.8 million) and 2010 ($1.2 million) has been recognized as a business development cost included in SG&A expense in 2009. The Company simultaneously entered into
a license of its technology with these entities.

From February 12, 2010 to March 1, 2010, the Company sold 331,250 units, each
consisting of one share of common stock and a warrant to purchase a share of common stock at $15.00 for a period of 5 years, for $8.00 per unit ($5.60 per common share and $2.40 per warrant) or $2,650,000 as follows:



| |  |  | 312,500 units to an affiliate
| | - |  | -----------------------------



| |  |  | 18,750 units to third parties
| | - |  | -----------------------------



13



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited and restated)



The 312,500 units sold to the affiliate contained share price and warrant exercise price guarantees. The
purchase price of the common stock and the exercise price of the warrants will be adjusted in the event that the Company issues common stock or warrants at a price below $8.00 for common shares or a $15.00 exercise price for warrants for a period of
six months from the purchase date. Because of these potential adjustments, the shares issued and the warrants will be accounted for as derivative instrument liabilities in accordance with ASC guidance. The cash proceeds received of $2,650,000 will
be allocated between the common stock and the warrants and the fair values of the common stock and warrants of $1.9 million ($5.60 per share) and $0.8 million ($2.40 per warrant), respectively, were recorded as a liability. For the warrants the
Company estimated the fair value using the Black-Scholes valuation model, based on the estimated fair value of the common stock on the valuation date, an expected dividend yield of 0%, a risk-free interest rate based on constant maturity rates
published by the U.S. Federal Reserve applicable to the remaining term of the instruments, an expected life equal to the remaining term of the instruments and an estimated volatility of 75%. If at the expiration of the six month share price guaranty
period the guaranty provisions are not required to be fulfilled by the Company, it is expected that the common stock and warrants will no longer be required to be accounted for as liabilities and will be reclassified to equity.

Non-controlling Interest and PA LLC Equity Incentive Plan

During 2006 the Company issued 5% of the Class A voting units (1,000,000 units) of PA LLC as partial consideration for a license to certain
technology from AzTE. AzTE has been granted anti-dilution rights and is entitled to 5% of the fully diluted capitalization of PA LLC. Pursuant to the anti-dilution clause, the Company would be required to issue AzTE an additional 156,017 units as of
March 31, 2010.

PA LLC has an equity compensation plan which allows it to grant employees and consultants awards of profits interests in
restricted Class B ownership units (the Interests) and is limited to 14% of the total outstanding units.

The Company granted
674,500 and 2,816,471 Interests during 2007 and 2008, respectively, to the majority of its employees these Interests as of the date that they began employment with the Company. As of March 31, 2010, the granted Interests, net of Interests
forfeited, totaled approximately 2.9 million or 12.6% of total outstanding units. These Interests give the recipient the right to participate in the income of PA LLC and any distribution that may arise from a liquidity event to the extent that
such realized amounts exceed the ownership unit fair value at the date of grant. The Company determined the fair value of these grants using a probability-weighted present value calculation that models the cash impact of possible future Company
liquidity event scenarios in relation to the economics of the agreements.

The grants of Interests contain restrictions that allow the Company
to repurchase the units for nominal consideration until a service period or other condition is met. This restriction is removed over a service period (generally four years) with regard to approximately 2.15 million Interests. For the three
months ended March 31, 2010 and 2009 and the period from September 22, 2006 (inception) to March 31, 2010, compensation expense related to these Interests was $0.5 million, $0.6 million and $5.2 million, respectively. The related
compensation expense is recognized as a SG&A or research and development expense, depending upon the recipients role in the Company. Unrecognized compensation cost related to these Interests which are still restricted totaled approximately
$2.5 million as of March 31, 2010 and is expected to be expensed over the next three years; 542,481 of these Interests remained restricted at March 31, 2010. An aggregate of 20,000, 26,800 and 561,000 of these Interests were forfeited
and repurchased during the three months ended March 31, 2010 and 2009 and the period from September 22, 2006 (inception) to March 31, 2010, respectively.

Five senior officers were granted an aggregate 1.34 million Interests that are subject to repurchase for nominal consideration until a significant
liquidity event is accomplished. Because that condition has not yet been met, these grants are considered contingent and are not currently amortized. This amount will be recognized as compensation expense during the period when the liquidity event
is fully accomplished. The amount and nature of the liquidity event was changed in July 2009 from a requirement to obtain $150 million of distributions and/or debt repayments to the Companys controlling shareholder to a requirement to obtain
$25 million of new liquidity for the Company. This change resulted in a $4.6 million increase in the unrecognized compensation expense to $6.0 million as of March 31, 2010. All of these Interests remain restricted and outstanding as of
March 31, 2010.

As of March 31, 2010, non-controlling interest parties collectively owned approximately 18% of PA LLC, and have
absorbed their respective portion of the loss of PA LLC. The amount of loss absorbed was $1.6 million, $1.5 million and $8.3 million, for the three months ended March 31, 2010 and 2009 and the period from September 22, 2006 (inception) to
March 31, 2010, respectively.

Stock Options

On June 17, 2009, the Company adopted the 2009 Equity Compensation Plan. The plan is intended to provide employees, consultants and others the
opportunity to receive incentive stock options and is limited



14



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited and restated)



to 4,000,000 shares of the Companys common stock. The exercise price shall be equal to or greater than the fair value of the underlying common stock on the date the option is granted and
its term shall not exceed ten years. Awards shall not vest in full prior to the third anniversary of the award date.

During January 2010, the
Company granted 322,000 options, in the aggregate, to purchase common shares at an exercise price of $8.00 per share. The options vest over a period of 4 years from the employees date of hire and expire 10 years from the grant date. The fair
value of the options aggregated $1.1 million and was calculated using the following assumptions expected term of 6 1/4 years, risk free interest rate of approximately 2.8%, an estimated volatility of 75%, and a dividend yield 0%. The expected term
of options granted to employees was based upon the simplified method allowed for plain vanilla options as described by SEC SAB No. 107. The fair value will be charged to operations over the remaining vesting periods commencing on
the grant date. The weighted average period over which options not vested through March 31, 2010 are expected to vest is 30 months. During the three months ended March 31, 2010, approximately $0.4 million was charged to operations related
to these all outstanding options.

To date, the Company has used a Level 3 valuation method to determine share fair value.
Specifically, the Company employed valuation experts to conduct valuations based primarily upon a discounted cash flow analysis using inputs which were not externally observable  in this case managements estimate of future cash flows
from the business  to determine fair value. The Company uses this methodology because the trading price of its common stock on the OTCBB is considered a less meaningful indication of fair value because a very small percentage (less than 1%) of
the issued and outstanding shares are available for active trading and since a large majority of shares are held by affiliates or are restricted securities. Due to the very limited number of shares held by non-affiliates and the resulting low
trading volume in its common stock, the Companys public shares are susceptible to unusual swings in price based on very few trades. Consequently, shortly after trading began, the Company concluded that the OTCBB trading price of the common
stock was no longer a reasonable indicator of the fair value of shares.

A summary of stock option activity is as follows:



|                             |  |                 |   |  |                              |       |   |                          |   |     
|---------------------------- |  | --------------- | - |  | ---------------------------- | ----- | - | ------------------------ | - | ----
|                             |  | Number ofShares |   |  | WeightedAverageExercisePrice |       |   | WeightedAverageFairValue
|Balance at December 31, 2008 |  |                |   |  |                              |      |   |                          |   |    
|Granted June 2009            |  | 1,072,500       |   |  | $                            | 8.50  |   |                          | $ | 2.36
|Granted July 2009            |  | 45,000          |   |  | $                            | 8.00  |   |                          | $ | 2.54
|Exercised/Forfeited          |  | (200,000        | ) |  | $                            | (8.50 | ) |                          | $ | 2.36
|                             |  |                 |   |  |                              |       |   |                          |   |     
|Balance at December 31, 2009 |  | 917,500         |   |  | $                            | 8.48  |   |                          | $ | 2.37
|Granted January 2010         |  | 322,000         |   |  | $                            | 8.00  |   |                          | $ | 3.53
|Exercised/Forfeited          |  |                |   |  | $                            |      |   |                          | $ |    
|                             |  |                 |   |  |                              |       |   |                          |   |     
|Balance March 31, 2010       |  | 1,239,500       |   |  | $                            | 8.36  |   |                          | $ | 2.67
|                             |  |                 |   |  |                              |       |   |                          |   |     

The following table summarizes information about fixed-price stock options at March 31, 2010:



|               |  |                                  |  |                                |  |                              |     
|-------------- |  | -------------------------------- |  | ------------------------------ |  | ---------------------------- | ----
|               |  | Outstanding                     
|ExercisePrices |  | WeightedAverageNumberOutstanding |  | WeightedAverageContractualLife |  | WeightedAverageExercisePrice
|$8-8.50        |  | 1,239,500                        |  | 9.4 years                      |  | $                            | 8.36

As of March 31, 2010, a total of
32,625 of the options granted were exercisable and the fair value of such options was $76,995.

Because the Company has very little history
from which to estimate forfeiture of options or grants, it accounts for such forfeitures prospectively, that is, in the period in which they actually occur.

The Company will continue to use judgment in evaluating the expected term, volatility and forfeiture rate related to its own stock-based compensation on
a prospective basis and incorporating these factors into the Black-Scholes option pricing model.

Inputs to both the profits interest fair
value calculation and the stock option Black-Scholes model are subjective and generally require significant judgment to determine. If, in the future, the Company determines that another method for calculating the fair value of its stock-based
compensation is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the fair value calculated for stock-based compensation could change significantly. Regarding stock options, higher
volatility and longer expected terms generally result in an increase to stock-based compensation expense determined at the date of grant.

As
of March 31, 2010, the aggregate intrinsic value of all stock options outstanding and expected to vest was $0.00 and the aggregate intrinsic value of currently exercisable stock options was $0.00. The intrinsic value of each option share is the
difference between the fair value of the Companys stock of and the exercise price of such option. The Company estimates that at the March 31, 2010, the fair value of its common stock is less than the exercise price of all outstanding
options.

No stock options were exercised during the three months ended March 31, 2010.



15



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PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited and restated)



Note 8 Related Party Transactions

The Company currently sub-leases office space from XL on a month to month basis at a rate of $41,321 per month.

The Company leases land where its bioreactor demonstration site is located from a related party on an annual basis for approximately $47,000. The Company
has four extension periods on this lease, subject to a one-time increase in annual rent of approximately 20% that would be effective in July 2011.

During December 2008, the Company issued 1,000,000 shares of common stock for business and financial consulting services to be performed by a company
owned by a board member through December 2010. The fair value of the shares issued was recorded as unearned compensation, shown on the balance sheet as a component of paid in capital. During the three months ended March 31, 2010 and 2009 and
the period from September 22, 2006 (inception) to March 31, 2010, $0.4 million, $0.4 million and $2.0 million was amortized as SG&A expense, respectively.

Note 9 Subsequent Events

On June 2,
2010, the Company entered into an agreement with AzTE that provides for recovery of the 1,000,000 class A voting units of PA LLC, which were issued to AzTE during 2006, and the cancellation of all existing and future obligations and agreements
between PetroAlgae and AzTE, in exchange for return of certain AzTE-licensed technology and a payment of $600,000. The Company remitted the payment to AzTE on June 3, 2010.

Equity Issuances

From April through June 2010, the Company sold an aggregate of 456,250 units consisting of one share of common stock and a warrant to purchase a share of
common stock at $15.00 for a period of 5 years for $8.00 per unit or $3.65 million as follows:

375,000 units
sold to affiliates for $3.0 million

81,250 units to sold third parties for $0.65 million

The 375,000 units sold to affiliates contained share price and warrant exercise price guarantees. The purchase price of the common stock and the exercise
price of the warrants will be adjusted in the event that the Company issues common stock or warrants at a price below $8.00 for common shares or a $15.00 exercise price for warrants for a period of six months from the purchase date. Because of these
potential adjustments, the full $3.0 million in proceeds will be recorded as a liability due to the uncertain number of shares that will be required to be issued due to the share price guarantee in accordance with ASC guidance. liability If at the
expiration of the six month share price guaranty period the guaranty provisions are not required to be fulfilled by the Company, it is expected that the common stock and warrants will no longer be required to be accounted for as liabilities and will
be reclassified to equity.

Debt Issuances

On May 27, 2010, June 23, 2010, and July 21, 2010 PetroTech Holdings Corp. funded $2,300,000, $1,100,000, and $1,000,000,
respectively, to PA LLC pursuant to the terms of separate secured term notes. Each of these notes provide for interest at 12%, which is accrued as a payment-in-kind (PIK) amount, and are due on June 30, 2012.



16



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion contains forward-looking statements that involve numerous risks and uncertainties, such as statements of our plans,
objectives, expectations, and intentions. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in this report under
Risk Factors, as well as those discussed elsewhere in this report. You should read the following discussion and analysis in conjunction with the Companys financial statements and related notes, each included elsewhere in this
report.

Business

The Company is a renewable energy company currently licensing and deploying the leading biomass production platform to address, with renewable sources,
the existing and growing unmet needs in the global energy and agriculture markets. The Companys proprietary technology, consisting of light and environmental management systems, allows its customers to consistently grow aquatic microorganisms
at a rate that exceeds four times their natural growth rates. This enables the commercial-scale production of two end-products: a fuel feedstock and a protein, which the Company refers to as its biocrude and protein products. The fuel feedstock is
intended to be used principally in existing refineries, resulting in renewable fuels which are identical to the petroleum-based fuels they would replace. The high productivity afforded by the Companys technology leads to low cost fuel
feedstock which should increase the profitability of the refineries without the requirement for any government subsidies.

The Companys
current and prospective customer licensees are comprised primarily of well-capitalized national oil companies, independent refiners, power companies and multinational agriculture companies that have the ability to rapidly deploy one or more of its
standard license units, each consisting of a 5,000 hectare micro-crop production facility.

The Company generates licensing fees and royalties
from customer licensees in the global energy and agriculture markets. The Companys licensing approach is designed to provide the Company with a steady, highly-profitable and reliable revenue stream, while requiring only minimal capital
expenditures as its customer licensees incur the costs associated with the development and construction of bioreactors and the associated processing facilities. On occasion, the Company may also enter into joint venture arrangements, where its
capital contribution would consist of a license for its technology. In such situations, the Company would generally reduce or eliminate its license fees in return for a share of the operations profits. Typically, the Company expects these
joint ventures to be more profitable versus the standard license agreement over the life of the contract.

The
End-Products Produced By the Companys Technology

The Companys biocrude is a renewable hydrocarbon feedstock that it has
demonstrated can be efficiently converted to diesel, jet fuel, and other fuel products in the existing refinery infrastructure. The Companys biocrude is also suitable as a feedstock for the production of py oil, as a combustible fuel for power
generation, and as a feedstock for fermentation into ethanol, butanol and other fuels. The resulting end-products are drop-in fuel products that are functionally compatible with petroleum-based fuels and can be used in the existing
petroleum distribution infrastructure. The Companys biocrude addresses the growing energy needs within the approximately $2.5 trillion fuels market.

The Companys protein product is a high quality protein source for animal feed and eventually human nutrition. Subject to the receipt of requisite
regulatory approvals, the Companys current protein product can be delivered directly into the existing supply chains for animal feed and the Company is developing a protein product for human consumption, which will allow its customer licensees
to access the $49 billion global protein market, which is estimated will grow to $126 billion by 2015.

The Companys processes
efficiently allow its customers to produce biocrude and protein end-products simultaneously. Because the Company believes each product can be sold into established and readily accessible markets, its technology and processes result in biocrude
produced at a low marginal cost. As a result, the Company believes that the biocrude produced by the licensees of its technology will be cost-competitive even with crude oil prices as low as $20/barrel.

Revenues

The
Company expects to generate revenues from license fees and royalties that it will earn from license agreements, pursuant to which customer licensees will license from the Company the right to build and operate the bioreactors and associated
processing facilities that make up the Companys technology platform. The Company expects these license agreements will provide for the payment of license fees generally over the three year construction period of its customer licensees
facility. As these facilities become operational, the Company would also expect to earn royalties on its customer licensees sales of the biocrude and protein end-products produced by its technology.



17



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Development

The Company has achieved a number of significant milestones since it was founded in September 2006. The Companys focus has been on the creation and
development of growth and harvesting technologies for the commercial-scale production of micro-organism biomass that could be processed for sale into existing energy and agriculture markets. To do this, the Company committed significant resources to
research and development efforts, including completing a working demonstration facility in June 2009 to test, refine and exhibit the Companys technology and processes. Since the completion of its working demonstration facility, the Company has
conducted extensive internal and third party testing of its technology and the biocrude and protein end-products to validate their commercial viability. Although the Company continues to test and refine its technology and processes, the Company is
now also focused on building its customer pipeline and entering into MOUs, and subsequently license agreements, with its prospective customer licensees.

The Companys key milestones to date are as follows:



| |  |  | Over the past four years, the Company has spent $35.0 million on the research and development of its growth and harvesting technologies. The Company
spent these funds on experimentation and testing, developing processes and equipment, and building the infrastructure and databases necessary to support its technology.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2007 and 2008, the Company developed its proprietary growth algorithmsthe complex mathematical formulas it uses to determine the correct
harvesting density and sunlight exposure of the biomass.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2009, the Company developed its proprietary remote sensing system (consisting of multi-spectral cameras and imaging algorithms) that enables the
Company to measure micro-crop density. In addition, during that time the Company identified the approximately 150 micro-crop species that are most suitable for its processes from among over 5,000 species that could be used for the commercial
generation of biomass.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2009, the Company built its business development team and signed its first MOU with a prospective customer licensee.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | In June 2009, the Company completed its working demonstration facility consisting of two full-scale bioreactors (approximately one hectare each) that
display its technology and processes and demonstrate the micro-crop yield that each bioreactor can generate.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In November 2009, the Indonesian Ministry of Agriculture cleared the Companys protein product as an approved raw material for use in animal feed.
The Company is in the process of obtaining additional animal feed approvals in other jurisdictions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2009 and 2010, independent laboratories tested the following technology and processes with positive results:
| | - |  | -------------------------------------------------------------------------------------------------------------------



| | Ø |  | combustion test firing of the Companys biocrude;
| | - |  | -------------------------------------------------



| | Ø |  | coker testing of the Companys biocrude at a U.S.-based testing facility jointly owned and managed by over 30 large refiners and industry
participants;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | Ø |  | pyrolysis testing on a preliminary basis;
| | - |  | -----------------------------------------



| | Ø |  | initial fermentation testing conducted using tailored enzymes;
| | - |  | --------------------------------------------------------------



| | Ø |  | protein yield and composition testing; and
| | - |  | ------------------------------------------



| | Ø |  | protein testing for digestibility, palatability and efficacy.
| | - |  | -------------------------------------------------------------

Sales Cycle

In
order to be successful, the Company will need to demonstrate to prospective customer licensees that the economic returns from a standard license unit are sufficient to justify the significant capital required to construct its licensed facilities.
Because of the significant financial commitment required by its customer licensees, the Company expects that its sales cycle will often exceed 12 months and will generally include:



| |  |  | extensive due diligence by its prospective customer licensees; including site visits to the Companys working demonstration facility, a review of
the technical aspects of the Companys technology and processes, an economic analysis that provides an understanding of operational growth, harvest and processing, and customer specific deployment considerations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the entry into an MOU that sets forth the basic commercial terms of the Companys potential relationship;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the Companys participation and assistance with customer-specific site selection and the preparation of a tailored operational and economic model
that takes into account local environmental conditions, costs of labor and other material expenses; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the entry into a final license agreement that sets forth final terms to enable the Companys customer licensees to begin constructing its license
units.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

At least for the Companys early customer licensees, the Company may agree to the establishment of various
technical milestones validating the productivity of its technology and processes at commercial scale. In such instances, those initial customer licensees would generally only be obligated to pay the Company license fees if its technology and
processes meet contractually prescribed criteria, such as targeted growth rates, during an initial validation phase.

Management anticipates
that initial customer licenses will begin deployment in 2010. As the number of license units being deployed worldwide will accelerate, the company is able to hire and train additional deployment teams. Management believes that its capital light
approach will result in sufficient gross margins to the Company, enabling its expected rapid growth.

The Company expects to continue to incur
losses in 2010. The amount and timing of its future losses are highly uncertain. The Companys ability to achieve and thereafter sustain profitability will be dependent upon, among other things, entering into license agreements and receiving
milestone payments from customers.

Results of Operations

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenue. No revenue has been recognized in either of the three month periods ended March 2010 or 2009.



18



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Total costs and expenses. Total costs and expenses increased by $1.0 million, or 12%, to $8.8 million
in the three months ended March 31, 2010 as compared to the same period in 2009, due primarily to an increase in research and development expenses and interest expenses offset by reduced selling, general and administrative expenses.

Selling, general and administrative expenses. SG&A expenses decreased $0.85 million, or 19%, to $3.55 million for the three months ended
March 31, 2010 from $4.40 million for the same period in 2009. SG&A expenses include our senior management and overhead costs, business development expenditures, system infrastructure support costs, finance and accounting costs, and
intellectual property management costs. In the 2010 period, the relative decrease reflects selective personnel reductions and other steps taken to improve the efficiency of our operations.

Research and development expenses. Research and development expenses increased $1.4 million, or 53%, to $4.0 million in the three months ended
March 31, 2010 from $2.6 million for the same period in 2009. These costs include the research and experimentation of the various system components and the design and construction of the commercial-scale pilot system for customer demonstration.
The increase in the first quarter of 2010, as compared to the prior year period, was driven by increased activities in research and experimentation relating to various components of our system and costs associated with the design and construction of
our working demonstration facility.

Interest expense  related party. Interest expense on notes payable  related party
increased by $0.32 million, or 53%, to $0.91 million for the three months ended March 31, 2010 from $0.59 million for the same period in 2009. This increase was due to additional funding of our operations through notes payable from related
parties over the last year. The balance of these notes totaled $35.5 million at March 31, 2010 and $24.0 million at March 31, 2009.

Depreciation expense. Depreciation expense increased by $96,000, or 59%, to $259,000 for the three months ended March 31, 2010 from $163,000
in 2009. The increase was due to the purchase of more equipment for our technology demonstration site and our laboratories over the last year.

Non-controlling interest. As of March 31, 2010, non-controlling interest parties collectively owned approximately 18% of PA LLC and have been
attributed their respective portion of the loss of PA LLC. The amount of loss assigned to non-controlling interests was $1.6 million and $1.5 million for the three months ended March 31, 2010 and 2009, respectively.

Liquidity and Capital Resources

Overview

To date,
the Company has financed our business primarily through loans and investments from its principal shareholders. To a lesser extent, the Company also raises funds by issuing debt or equity securities to unrelated third parties. Since inception through
March 31, 2010, the Company has raised in aggregate $61.9 million in debt and equity investments, with $52.7 million of this total invested by its principal shareholders and $9.2 million raised from unrelated third parties.

Sources and Uses of Cash

At March 31, 2010, the Company had cash and cash equivalents of $191,000 (excluding $2.0 million of restricted cash), compared to cash and cash
equivalents of $2.7 million (excluding $2.0 million of restricted cash) at December 31, 2009.

Cash flows used in operating activities
totaled $6.0 million in the three months ended March 31, 2010 compared to $5.8 million in the same period last year. These outflows are primarily attributed to expenditures used to fund research and product development activities and
operational and business development efforts.



19



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Cash flows used in investing activities totaled $0.4 million in the three months ended March 31, 2010,
compared to $1.0 million in the same period last year. The decline in expenditures between the two periods reflects the fact that less equipment was purchased in the first quarter of 2010 than the first quarter of 2009 because our working
demonstration facility was completed in 2009.

Cash flows provided by financing activities totaled $3.85 million in the three months ended
March 31, 2010, compared to zero during the three months ended March 31, 2009. The $3.85 million was raised from private placements of common stock and warrants.

Senior Secured Credit Financings

All of our borrowings have been provided by affiliates under a senior secured structure, as described in more detail below as of March 31, 2010:



|                                                                                                                                                                                                                              |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- | -
|Note Payable to Valens US                                                                                                                                                                                                     |  | $ | 417,512    |  
|     Interest accrues monthly, at 12% per annum                                                                                                                                                                              |  |   |            |  
|     Note is due on June 30, 2012                                                                                                                                                                                            |  |   |            |  
|                                                                                                                                                                                                                              | 
|Note Payable to PetroTech Holdings Corp.                                                                                                                                                                                      |  |   |            |  
|     Interest accrues monthly, at 12% per annum                                                                                                                                                                              |  |   | 7,222,089  |  
|     Note is due on June 30, 2012                                                                                                                                                                                            |  |   |            |  
|                                                                                                                                                                                                                              | 
|Convertible Note Payable to PetroTech Holdings Corp.                                                                                                                                                                          |  |   |            |  
|     Interest accrues monthly, at 12% per annum                                                                                                                                                                              |  |   | 10,000,000 |  
|     Note is due on June 30, 2012                                                                                                                                                                                            |  |   |            |  
|                                                                                                                                                                                                                              | 
|Up to $25,000,000 Note Payable to PetroTech Holdings Corp.                                                                                                                                                                    |  |   |            |  
|     Interest payable monthly, and is drawn into note on a monthly basis at Prime
+ 2% (5.25% at December 31, 2009) 
     Permits additional draws to fund interest. Maximum balance of this note is
limited to $25,000,000 |  |   |            |  
|     Note is due on June 30, 2012                                                                                                                                                                                            |  |   | 18,084,795 |  
|                                                                                                                                                                                                                              |  |   |            |  
|Subtotal                                                                                                                                                                                                                      |  |   | 35,724,396 |  
|Original Issue Discount                                                                                                                                                                                                       |  |   | (234,500   | )
|                                                                                                                                                                                                                              |  |   |            |  
|Notes Payable - Related Party                                                                                                                                                                                                 |  | $ | 35,489,896 |  
|                                                                                                                                                                                                                              |  |   |            |  

The notes are collectively secured by all of the Companys assets.

The Convertible Note Payable allows the holder to convert all or any portion of the issued and outstanding principal amount and/or accrued interest and
fees then due into shares of common stock at a fixed conversion price of $5.43 per share.

Each note payable and the related master security
agreement and equity pledge and guaranty agreement contain provisions that specify events of default which could lead to acceleration of the maturity of the debt. These provisions prohibit the encumbrance or sale of the assets of the Company and
require maintenance and insurance of the assets of the Company. An event of default would also arise if the



20



---

Company became insolvent, filed bankruptcy, allowed a change in control or had unresolved judgments against the Companys assets. As of the balance sheet dates above, none of these events
had occurred.

Interest charged to operations on these notes, including amortization of original issue discount, was $0.9 million, $0.6
million and $6.3 million during the periods ended March 31, 2010 and 2009, and the period from September 22, 2006 (inception) to March 31, 2010, respectively.

The principal amount of debt obligations as of March 31, 2010 is $35.7 million, of which $18.1 million was outstanding at a floating rate of 2% over
the prime interest rate and $17.6 million was outstanding at a fixed rate of 12%. Floating rate borrowings will lead to additional interest expense if interest rates increase. We enter into loan arrangements when needed and our borrowings are
subject to interest rate risk because changes in the prime interest rate will have an effect on interest rate expense.

Respective payments
due by period, including increased principal obligations expect to result from ongoing funding of accrued interest into the note balance, along with other contractual obligations are contained within the following table.

The following table summarizes our anticipated contractual obligations as of March 31, 2010:



|                              |  |                 |            |                        |   |           |  |                  |            |  |   |   |  |   |  
|----------------------------- |  | --------------- | ---------- | ---------------------- | - | --------- |  | ---------------- | ---------- |  | - | - |  | - | -
|                              |  | Total           |            | Payments Due by Period
|                              |  | Less than1 year |            | 1-3 years              |   | 3-5 years |  | More than5 years
|Debt (1)(2)                   |  | $               | 45,470,012 |                        | $ |          |  | $                | 45,470,012 |  | $ |  |  | $ | 
|Operating lease obligations   |  |                 | 125,724    |                        |   | 125,724   |  |                  |           |  |   |  |  |   | 
|                              |  |                 |            |                        |   |           |  |                  |            |  |   |   |  |   |  
|Total contractual obligations |  | $               | 45,595,736 |                        | $ | 125,724   |  | $                | 45,470,012 |  | $ |  |  | $ | 
|                              |  |                 |            |                        |   |           |  |                  |            |  |   |   |  |   |  



|(1) | The obligation related to debt includes the outstanding principal balance of debt of $35.7 million plus additional amounts expected to be added to principal and accrued
interest on this debt through the maturity date of the debt, calculated assuming no change in interest rates.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | On July 24, 2009, we modified our debt agreements to extend the maturity of debt and related accrued interest to June 30, 2012.
|--- | -------------------------------------------------------------------------------------------------------------------------------

We expect to continue to incur losses in 2010. The amount and timing of our future losses are highly uncertain. Our ability to achieve and thereafter
sustain profitability will be dependent upon, among other things, entering into partner license agreements, and receiving milestone payments from such partner license agreements.

The Company is currently in the development stage at March 31, 2010 as it is continuing the development of its product and has not yet recognized
any revenues. The Companys financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

We have never been profitable and we have incurred significant losses and cash flow deficits. For the three months ended March 31, 2010 and 2009, we
reported net losses of $7.2 million and $6.3 million, respectively, and negative cash flow from operating activities of $6.0 million and $5.8 million, respectively. As of March 31, 2010, we have an aggregate accumulated deficit of $67.2
million. We anticipate that operations will continue to report losses and negative cash flow during the remainder of 2010. As a result of these net losses and cash flow deficits and other factors, there is a substantial doubt about our ability to
continue as a going concern.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our ability to continue as a going concern is dependent upon generating sufficient cash flow from operations and obtaining additional capital and financing. The Company is currently seeking



21



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additional funding from its principal shareholder and unrelated third parties. PetroAlgae Inc. has never paid or declared dividends on its capital stock.

Off Balance Sheet Arrangements

Other than annually renewable leases for office space and land associated with the Companys technology demonstration facility, the Company has no
off balance sheet obligations.

Recent Accounting Pronouncements

The following Accounting Standards Codification Updates have been issued, or became effective, since the beginning of the current period covered by these
financial statements:

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements. The new standard changes
the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable
is based on vendor-specific objective evidence (VSOE) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. ASU 2009-13 is effective for revenue
arrangements entered into in fiscal years beginning on or after June 15, 2010. The effect of this new guidance on the Companys revenues, which in turn depends upon the final structure of the Companys contracts with customers, is
still being analyzed.

In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements, (ASU
2010-6) which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases,
sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures
which are effective for annual periods beginning after December 15, 2010. The adoption of ASU 2010-6 did not have a material impact on our consolidated financial statements nor is it expected to have a material impact for the portion which is
effective in 2011.

Critical Accounting Policies

Revenue Recognition

The Company records revenue when persuasive evidence of a non-cancellable arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. To the extent cash is received in advance of the Companys performance or the availability of rights under a license agreement, such
amounts are reported as deferred revenue.

Fair Value of Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of the three months
ended March 31, 2010. The respective carrying values of certain on-balance-sheet financial instruments approximate their fair values. These financial instruments include cash, accounts payable, accrued expenses, notes payable and due to
affiliates. Fair values are assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate the amounts expected to be received or paid.

The carrying value of the Companys note payable approximated its fair value based on the current market conditions for similar debt instruments.

Stock-Based Compensation



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The Company accounts for stock-based compensation in accordance with ASC 718 Stock Compensation. This
Statement requires that the cost resulting from all stock-based transactions be recorded in the financial statements. The Statement establishes fair value as the measurement objective in accounting for stock-based payment arrangements with
employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in stock-based payment transactions.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, the Company
conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). In light of the adjustments
explained and presented in this Form 10-Q/A, the Company has determined that as of March 31, 2010, the Companys system of internal control over financial reporting was not effective.

Internal Control over Financial Reporting

Managements Annual Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal
control over financial reporting is a process designed under the supervision of the Companys principal executive officer and principal financial officer to provide reasonable assurance regarding the (i) effectiveness and efficiency of
operations, (ii) reliability of financial reporting and the preparation of the Companys financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles, and (iii) compliance with
applicable laws and regulations.

Due to the early stage of the Companys development and the limited funds available to it, the Company
has a small number of accounting personnel that process and report on certain financial transactions that present a relatively high degree of technical accounting complexity. The Company believes that the material errors that were identified and
corrected in its 2010 Form 10-Q/A occurred and were not detected until recently due to the following material weaknesses in internal controls, which are being remediated as indicated below:



| |  |  | The Companys accounting staff was small and did not include personnel with the requisite technical expertise to evaluate complex transactions
 the Company has added a senior manager to the department with 25 years experience in complex transactions and public reporting requirements. Other staffing changes will be made as deemed necessary.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Communication between management and the accounting staff regarding certain complex transactions and changes in the business appears to have been
lacking  the Company has established stronger lines of communication and documentation procedures to ensure that the substance of all transactions are fully understood and properly reported.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company did not have a rigorous policy or procedure for establishing the value of equity and equity-linked securities when issued to employees or
others for non-cash consideration  the Company has established a framework and detailed process of fair value estimation for such securities that is consistent with GAAP rules that will be followed in all future transactions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The remediation of material weaknesses and other deficiencies in internal controls is a continuing work in
progress due to the issuance of new accounting standards and changes in the Companys business. However, remediation of known weaknesses is among managements highest priorities. Management will periodically assess the progress and
sufficiency of the Companys ongoing initiatives and make adjustments as and when necessary. As of the date of this report, management believes that the ongoing increase in the Companys accounting resources will permit the Company to
remediate all material weaknesses and significant deficiencies in internal control over financial reporting.

Notwithstanding the
aforementioned material weakness, management performed additional analyses, reconciliations and other procedures to determine that, after giving effect to the adjustments made in this Form 10-Q/A, the Companys consolidated financial statements
for the periods covered by and included in this quarterly report are fairly stated in all material respects in accordance with generally accepted accounting principles in the U.S. for each of the periods presented herein.

This quarterly report does not include an attestation report of the Companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this quarterly report.

Changes in Internal Controls

During the most recent fiscal quarter, there has not occurred any change in the Companys internal control over financial reporting, other than as
noted above, (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II



|ITEM 6.        EXHIBITS | 
|----------------------- | 

These exhibits are available upon
request. Requests should be directed to the Investor Relations Department at PetroAlgae Inc., 1901 S. Harbor City Blvd., Suite 300, Melbourne, FL 32901, telephone: 321-409-7500,

email: investorrelations@petroalgae.com.



|     |  |                                                                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Rule 13a-14(a) Certification by the Principal Executive Officer                                                                                          
|     | 
|31.2 |  | Rule 13a-14(a) Certification by the Principal Financial Officer                                                                                          
|     | 
|32.1 |  | Certification by the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|     | 
|32.2 |  | Certification by the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002



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SIGNATURE

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.



|                     |  |  |  |                 |  |                                                              
|-------------------- |  |  |  | --------------- |  | -------------------------------------------------------------
|                     |  |  |  | PETROALGAE INC.
|                     |  |  | 
|Date: August 5, 2010 |  |  |  | By:             |  | /S/    DAVID SZOSTAK                                         
|                     |  |  |  | Name:           |  | David Szostak                                                
|                     |  |  |  | Title:          |  | President                                                    
|                     |  |  |  |                 |  | (Principal Executive Officer and
Principal Financial Officer)



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