UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC  20549


___________________________




FORM
10-K




(mark
one)




[X]         
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the fiscal year ended December 31, 2008




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




For
      the transition period from _______ to
_______




Commission
File No. 000-29735




PNG
VENTURES, INC.





(Exact
Name of registrant as specified in its charter


Nevada
              
              88-0350286(State
      or Other Jurisdiction of Incorporationor
      Organization)
              
              (I.R.S.
      Employer Identification No.)5310
      Harvest Hill Road, Suite 229, Dallas, Texas
              
              75230(Address
      of principal executive offices)
              
              (Zip
      Code)214-666-6250(Registrant’s
      Telephone Number, Including Area
Code)




Securities
registered pursuant to Section 12(b) of the Exchange Act: None


Securities
registered pursuant to Section 12(g) of the Exchange Act:


Common
Stock, Par Value $0.001





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
[_]     No [X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.    Yes
[_]    No [X]





Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes[X]    No
[  ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in the definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or amendment to Form
10-K.    [X]





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





Large
Accelerated
Filer  [_]                                                                Accelerated
Filer  [_]


Non-accelerated
Filer     [_]                                                                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]





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity of the registrant
as of December 31, 2008:  $5,468,250


At June
30, 2008, the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant:  $836,618





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: as of March 12, 2009 there were 10,013,019
shares of common stock outstanding.


i


PNG
VENTURES, INC.


Table
of Contents





PART IItem
      1.
            Business.
            
            
            1Item
      1A.
            Risk
      Factors.
            
            
            5Item
      1B.
            Unresolved
      Staff Comments.
            
            
            15Item
      2.
            Properties.
            
            
            15Item
      3.
            Legal
      Proceedings.
            
            
            15Item
      4.
            Submission
      of Matters to a Vote of Security Holders.
            
            
            16PART IIItem
      5.
            Market
      For Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
            
            
            16Item
      6.
            Selected
      Financial Data.
            
            
            17Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
            
            
            17Item
      8.
            Financial
      Statements and Supplementary Data.
            
            
            29Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
            
            
            29Item
      9A.
            Controls
      and Procedures.
            
            
            29Item
      9B.
            Other
      Information.
            
            
            31PART IIIItem
      10.
            Directors,
      Executive Officers, and Corporate Governance.
            
            
            32Item
      11.
            Executive
      Compensation.
            
            
            35Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
            
            
            36Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.
            
            
            38Item
      14.
            Principal
      Accountant Fees and Services.
            
            
            38PART IVItem
      15.
            Exhibits
      and Financial Statement Schedules.
            
            
            39SIGNATURES
            
            
            42Index
      to the Financial Statements
            
            
            F-1Exhibit
      31.1
              Exhibit
      31.2
              Exhibit
      32.1
              Exhibit
      32.2








ii


FORWARD-LOOKING
STATEMENTS





Some of
the statements contained in this Annual Report on Form 10-K (the “Report”) of
PNG Ventures, Inc. that are not historical facts are “forward-looking
statements” which can be identified by the use of terminology such as
“estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,”
“intends,” or the negative or other variations, or by discussions of strategy
that involve risks and uncertainties. We urge you to be cautious of the
forward-looking statements, that such statements, which are contained in this
Report, reflect our current beliefs with respect to future events and involve
known and unknown risks, uncertainties, and other factors affecting our
operations, market growth, services, products, and licenses. No assurances
can be given regarding the achievement of future results, as actual results may
differ materially as a result of the risks we face, and actual events may differ
from the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance
or achievements, or industry results, to differ materially from those
contemplated by such forward-looking statements are included in our “Risk
Factors” section and other risks provided herein. Additionally, all readers
are urged to review the “Cautionary Note regarding Forward Looking Statements”
in our “Management Discussion and Analysis of Financial Condition and Results of
Operation” section below.




PART
I




Item
      1.
            Description
      of Business.




Overview





Organizational
History





PNG
Ventures, Inc., (“PNG” or the “Registrant” which is sometime referred to as the
“Company” whenever practical) was first incorporated in the State of Nevada on
June 23, 1995, as Telecommunications Technologies, Ltd. (“TTL”).





On
December 31, 1995, PNG formalized a plan of reorganization and tender to and for
the shareholders of Temple Summit Management Corporation (“Temple Summit”)
whereby PNG acquired all the assets of Temple Summit, and by which all the
former shareholders of Temple Summit became PNG’s
shareholders. Accordingly, PNG made the initial issuance of 47,506,240
shares to the shareholders of Temple Summit. Thereafter, Temple Summit became a
private company with no further relationship with PNG.





In August
of 1991, Temple Summit was incorporated in Texas, and reincorporated in Texas in
September 1993, without change in equitable ownership, management, or
control. Temple Summit was engaged, without success, in creating and
managing financial participation in special marketing projects. During
1992, Temple Summit made its initial issuance of 285,714 shares of its common
stock, in 1992. These 285,714 shares were acquired by or for Kirt W. James
and William Stocker and five other founding shareholders.





On or
about May 5, 1995, Temple Summit completed a limited public offering of
additional shares of its common stock, pursuant to Rule 504 of Regulation D,
promulgated by the Securities and Exchange Commission, under the Securities Act
of 1933. 11,200 additional common shares were placed pursuant to the May 5,
1995, Regulation D Rule 504 offering, at $1.00 per share, resulting in a total
of 296,914 shares issued and outstanding. The Temple Summit marketing plan
failed and Temple Summit became inactive at the end of 1995. Immediately
preceding the transaction by which PNG reorganized and acquired its initial
capitalization from Temple Summit,  the previously discussed 296,914
Temple Summit common shares were forward split 160 for 1, with the result that
47,506,240 shares of Temple Summit were issued and outstanding.





On
December 31, 1995, the Company, then called Telecommunications Technologies,
Ltd., formalized a plan of reorganization (the “Reorganization”) and tender to
acquire from Temple Summit, $5,000 in cash and to issue 1 of PNG’s shares for
every Temple Summit share PNG received. PNG received all of the 47,506,240
Temple Summit shares and $5,000 in cash. Following this transaction, Temple
Summit ceased to be a public company and became an inactive wholly-owned
subsidiary of its principal shareholder, Temple Summit Equity Group,
Ltd.





At the
time of the Reorganization, Temple Summit had no business or business plan, and
owned no assets other than its cash. Moreover, at the time of the
Reorganization, Temple Summit had no material liabilities, other than to its
principal shareholder, and all such incidental liabilities were assumed by the
principal shareholder and not acquired by PNG. Pursuant to the
Reorganization, PNG issued 47,506,240 shares of common stock to the shareholders
of Temple Summit. At that time, PNG intended to take maximum advantage of
the growth in telecommunications technology using the backgrounds and strengths
of Temple Summit’s management, by specifically doing the following: making
patent filings for new technology,


1


financing
of new technology, selling or granting of rights for the utilization of new
technologies, and retaining royalties based on the utilization or exploitation
of the new technologies.





On March
7, 1996, PNG completed a Private Placement/Limited Offering of an additional
500,000 shares of common stock, with the result that the previous total shares
issued and outstanding (47,506,240) was increased to 48,006,240.





On May 9,
1996, PNG privately placed an additional 410,400 shares, resulting in PNG’s
total issued and outstanding common shares equaling 48,416,640
shares.





On or
about February 20, 1998, PNG effected a 1 for 40 reverse split of PNG’s common
stock, from 48,416,640 to 1,210,417, and so that PNG could engage in a
technology-related acquisition, pursuant to Rule 504 of Regulation D, PNG
authorized the placement of up to an additional 10,000,000 common shares at
$0.01 per share. This technology-related acquisition did not take place,
and for no shares were issued.





On March
5, 1998, PNG changed the corporate name to PNG Ventures, Inc. in connection with
the intention to acquire a controlling interest in San Kung Trading Limited
(“SKTL”). SKTL was a private company based in Guernsey, Channel Islands,
organized in 1996, to pursue joint-venture resource development projects in
Papua, New Guinea. Thereafter that plan was abandoned, primarily due to the
extraordinary difficulty in auditing the assets PNG intended to
acquire.





Subsequent
to the failure of the SKTL transaction, PNG became a company whose business plan
was to simply engage in a profitable business combination.





In April
of 2000, PNG attempted to engage in a transaction with Paper Computer
Corporation, a private company.  As PNG reported in a Form 8-K filed
with the SEC, the Paper Computer Corporation transaction failed and resulted in
no change to PNG’s financial statements. However, prior to the failure of
the Paper Computer Corporation transaction, PNG’s board of directors, at that
time, changed the corporate name twice: (i) the first time, on April 25, 2000,
to “Paper Computer.com, Inc.”; and (ii) the second time on the following day,
April 26, 2000, to “Paper Computer Corporation.”





Following
all of the aforementioned failed transactions, on June 21, 2001, PNG’s Articles
of Incorporation were amended again, changing the corporate name back to PNG
Ventures, Inc.





On
February 15, 2002 all of PNG’s directors resigned except for John
Spicer. On August 28, 2002, Alan Brown was appointed as the sole officer
and director, and Mr. Spicer resigned. On January 17, 2003, Mr. Brown entered
into a joint venture (the “Joint Venture”) with a company called Anhydride
Petroleum (Canada), Inc., a wholly owned subsidiary of Uranium Power Corporation
(“Uranium Power”). The Joint Venture provided PNG with 9.5% of the gross of
an overriding royalty from a well located beneath the Athabasca Tar Sands in
Northeast Alberta, Canada which ultimately resulted in another Joint Venture
failure.





Uranium
Power Corporation is now CanWest Petroleum Company (“CanWest”) and is listed on
the over-the-counter bulletin board under the ticker symbol “CWPC.” The
Joint Venture properties were written off by PNG as well as CanWest as is more
fully described on page 30 of an Amended Form SB-2 Registration Statement filed
with the SEC on December 23, 2004.





Subsequent
to the Joint Venture, on June 23, 2004, Mr. Brown resigned from the board of
directors, and Mark L. Baum, Esq. was appointed as PNG’s only director. Mr.
Baum served as PNG’s Chairman, Chief Executive Officer, and principal accounting
officer. Additionally, Mr. Baum is an attorney and assisted PNG with
corporate legal work.





On June
30, 2008, the Company entered into and completed an acquisition
pursuant  to, a Share Exchange Agreement (the “Exchange Agreement”)
with Earth Biofuels, Inc., a Delaware corporation (“EBOF”) and its wholly-owned
subsidiary, Earth LNG, Inc, a Texas corporation (“ELNG”), as sellers, and its
wholly owned subsidiary, New Earth LNG, LLC, a Delaware limited liability
company (“New ELNG”), pursuant to which PNG acquired 100% ownership of New ELNG
from ELNG, in exchange for the issuance of 7,000,000 shares of the common stock
of the Company (“Exchange Shares”) to ELNG, and certain other consideration and
share issuances (said transaction being referred to herein as the “Share
Exchange”).   The assets and business which were acquired by the
Company as a result of the Share Exchange include a Topock, Arizona liquefied
natural gas production facility, and its related distribution and sales
businesses, all of which are held and operated by New ELNG’s subsidiaries as
described below.





Prior to
the completion of the Share Exchange, ELNG has transferred to New ELNG all right
and marketable title to the member interests of Applied LNG Technologies USA,
LLC and Arizona LNG, L.L.C. and all their other assets (other
than


2


receivables
from EBOF and other subsidiaries of EBOF) that, together, comprise the west
coast liquefied natural gas (“LNG”) business of PNG effective after the closing
of the Share Exchange, resulting in the characterization of the transfer as
an asset sale of EBOF’s subsidiary, for taxes purposes, enabling PNG and EBOF to
take advantage of certain tax benefits, including a step up in basis to
PNG.





In all,
the subsidiaries of New ELNG, which are now indirectly owned by us as a result
of the Share Exchange, include Arizona LNG, L.L.C., a Nevada limited liability
company (“Arizona LNG”), which owns the Topock, Arizona plant, Applied LNG
Technologies USA, L.L.C., a Delaware limited liability company (“Applied LNG”)
and, the subsidiaries of Applied LNG, Fleet Star, Inc., a Delaware corporation
(“Fleet Star”) and Earth Leasing, Inc., a Texas corporation f/k/a Alternative
Dual Fuels, Inc. (“Earth Leasing”). Arizona LNG, Applied LNG, Fleet Star, and
Earth Leasing are sometimes collectively referred to herein as the “New ELNG
Subsidiaries.”





As a
result of the Share Exchange, the Company succeeded to the business of New ELNG
as its sole business (hereinafter sometimes referred to as the “LNG
Business”).





Our
common shares are currently traded on the OTC Bulletin Board under the symbol
“PNGX.”





Current
Business




Our
business strategy is to capitalize on the anticipated growth in the consumption
of natural gas, and in particular LNG, as a vehicle fuel and to enhance our
leadership position as that market expands.




We sell
substantially all of our LNG to fleet customers, who typically own and operate
their fueling stations. We also sell a small volume of LNG to customers for
non-vehicle use. We also own one public LNG fueling station from which we sell
LNG to numerous parties. We produce LNG at our liquefaction plant in Arizona,
but also purchase approximately 10% of our LNG supplies from third-parties,
typically on spot contracts. We sell LNG principally through supply contracts
that are normally on an index-plus basis, although we also occasionally enter
into fixed-price contracts.




We are
headquartered in Dallas, Texas. The LNG Business, generally known externally as
“Applied LNG” or “ALT”, conducts its operations principally in Arizona and
California.




Management
believes that Applied LNG’s processing facility in Topock, AZ, which has
been acquired as a result of the Share Exchange, is capable of
producing approximately 86,000 gallons of vehicle-grade LNG per
day. LNG produced by this plant is sold primarily to municipal and
commercial fleet customers located along the west coast of
California.




Applied
LNG offers turnkey fuel solutions, including clean LNG fuel (99% methane gas)
and delivery, equipment storage, fuel dispensing equipment and fuel loading
facilities.





We
produce LNG at our Topock, AZ plant by processing pipeline quality natural gas
through various purification applications, and then refrigerating such gas to a
temperature of approximately -260 degrees F. Once liquefied, the LNG is stored
at our plant site in above ground, cryogenic storage tanks and ultimately
shipped via tractor trailers to customer sites. We sell LNG to approximately 50
customers located in Arizona, California, and Nevada, who utilize the LNG
principally as transportation fuel for heavy-duty vehicle fleets. Typical
customer fleet applications include city and regional busses, garbage hauling
trucks, heavy-duty tractors, port drayage trucks, and various other similar
applications.




The
Topock, AZ production facility is located approximately one mile east of
Arizona’s border with California. The facility serves metropolitan markets in
Arizona, California, and Nevada. The plant’s natural gas feedstock is supplied
by an El Paso natural gas pipeline located immediately adjacent to our
plant.




One of
the largest markets in the U.S. for clean, vehicle-grade LNG today is
Southern California and surrounding areas. This market has been the focus of
Applied LNG’s efforts for over ten years.  In recent years, various
governmental agencies in California, Arizona and surrounding areas have enacted
environmental and clean air regulations that have served to encourage fleet
operators to convert portions of their vehicle fleets to cleaner fuel
alternatives such a LNG.





Special
cryogenic tank trailers are used to transport LNG from our plant site to
customer sites.  We own several of these specialty trailers, but also
lease sufficient additional trailers from third parties to accommodate the
logistics of our shipment needs.




3


Our
principal executive offices are located at 5310 Harvest Hill Road, Suite 229,
Dallas, Texas 75230.





Competition





The
market for vehicular fuels is highly competitive. The biggest competition for
LNG and other alternative fuels is gasoline and diesel, the production,
distribution, and sale of which are dominated by large integrated oil companies.
The vast majority of vehicles in the United States and Canada are powered by
gasoline or diesel. There is no assurance that Applied LNG can compete
effectively against other fuels, or current competitors or other significant
competitors that enter markets currently served by the Company.




Presently,
the Company’s primary competitor in its current markets is Clean Energy Fuels
Corp. (Nasdaq: CLNE).  Potential entrants to the market for natural
gas vehicle fuels include large integrated oil companies, other retail gasoline
marketers and natural gas utility companies. The integrated oil companies
produce and sell crude oil and natural gas, and they refine crude oil into
gasoline and diesel. They and other retail gasoline marketers own and franchise
retail stations which sell gasoline and diesel fuel.





It is
possible that any of these competitors, and other competitors who may enter the
market in the future, may create product and service offerings that compete
directly with us. Many of these companies have far greater financial and other
resources and name recognition than we have. Entry by these companies into the
market for natural gas vehicle fuels may reduce our profit margins, limit our
customer base and restrict our expansion opportunities.





Other
alternative fuels compete with natural gas in the retail market and may compete
in the fleet market in the future. Suppliers of ethanol, biodiesel, and
hydrogen, as well as providers of hybrid vehicles, may compete with us for fleet
customers in our target markets. Many of these companies benefit, as we do, from
U.S. state and federal government incentives that allow them to provide fuel
more inexpensively than gasoline or diesel.





LNG
currently is supplied to the California, Arizona, Nevada, and Northern Mexico
markets primarily by two LNG plants—Applied LNG’s Topock plant, with a maximum
capacity of 86,000 gpd, and a plant owned by Clean Energy Fuels Corp. located in
Boron, California, with a current maximum capacity believed to be approximately
160,000 gpd. In addition to these plants, demand in our market area is also
supplied on occasion by LNG plants located in Texas, Kansas, Wyoming, and
Colorado. The capacity available from these plants varies but is estimated to be
in the range of 200,000 gpd.  However, the trucking costs associated
with transporting LNG from these plants is substantial, and generally
deteriorates the supply economics such that these sources are used only when
absolutely necessary to meet customer demands.





Regulation





Our
business and operations are affected by various federal, state, and local laws,
rules, regulations, and authorities. While to date, our compliance with those
requirements has not materially adversely affected our business, financial
condition, or results of operations, we cannot provide any assurance that new
laws and regulations will not materially and/or adversely affect us in the
future.





While
various federal, state, and local laws and regulations covering the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, may affect our business, our financial condition and results of
operations have not been materially adversely affected by environmental laws and
regulations. We believe we are in material compliance with those environmental
laws and regulations to which we are subject. We do not anticipate that we will
be required in the near future to make material capital expenditures due to
these environmental laws and regulations. However, because environmental laws
and regulations are frequently changed and expanded, we are unable to provide
any assurance that the cost of compliance in the future will not be material to
us.





Raw
Materials





The raw
material (baseload supply) for our Topock plant is pipeline quality natural gas,
which generally is widely available and easily obtained. We purchase natural gas
from various suppliers; however, the only means of transporting purchased gas to
our plant is via a trunkline adjacent to our plant that is operated by El Paso
Natural Gas.Any
extended disruption in the operations of this trunkline, or our relationship
with the operator, could have a material adverse effect upon our
business.





Major
Customers


4


The
number of companies and actual or potential customers that own and operate LNG
fueled vehicles is relatively small. As a consequence, the Company has sales
concentrations with certain major customers. During 2007, the predecessor entity
had three customers that comprised approximately 20%, 19%, and 14% of total
sales, respectively. During 2008, these same customers comprised 20%, 14% and
7%, respectively, of the Company and its predecessor entity’s total sales during
the year. In addition, in 2008, the Company added one new customer that
comprised 21% of total 2008 sales.




Employees




As of
December 31, 2008, we had 17 full-time employees. None of our employees are
represented by a labor union, and the Company considers its employee relations
to be good.





Available
Information





Our
internet address is www.altlng.com.
Currently, reports on Forms 10-K, 10-Q, and 8-K are not available through our
website; however, we will email free electronic copies of such reports upon
request.




Item
      1A.
            Risk
      Factors




The
Company’s business is subject to numerous risks, including the
following:




We
have experienced net losses, and we may not be profitable in the future.




We
experienced a net loss of $3.4 million for the six month period ended December
31, 2008 and do not expect to generate profits in the near future on a
consistent basis, or at all. As of December 31, 2008, we had a net working
capital deficit of $3.4 million and a shareholders’ deficit of $3.4
million.




The
revenue and operating results of our business may vary significantly from
quarter-to-quarter due to a number of factors. In future quarters, operating
results may be below the expectations of public market analysis or investors,
and the price of its common stock may decline.





Factors
that could cause quarterly fluctuations include:


·
            the
      ability to quickly bring new production capacity on
  stream;·
            the
      fluctuating prices of natural gas;





There
is no assurance that we can continue to operate as a going concern.





The
Company’s predecessor EBOF’s audited consolidated financial statements as of and
for the year ended December 31, 2007 included the unaudited footnote with
respect to the going concern status of the predecessor entity and the plans of
the predecessor entity to address going concern issues.





As a
result of the Share Exchange that was consummated effective June 30, 2008, we
succeeded to all of the assets of the predecessor entity, as well as a
substantial amount of its liabilities, including all of its trade debts, and all
of its secured and unsecured structured debts and loans, and certain other
liabilities of EBOF and its affiliates were assumed by us, including substantial
additional debt owed to its major secured creditor, and now are direct
liabilities of the Company.





Since the
Share Exchange, the Company’s management has initiated a number of actions
designed to stabilize the LNG Business and address multiple issue and problems
inherited from the Predecessor Entity and expects to continue to implement
changes to the business designed to improve operating cash flow and the
Company’s financial condition. Based upon its current 2009 business plan,
management anticipates that the Company will have sufficient liquidity, cash
flow and other resources to meet its obligations in the ordinary course of
business as such obligations arise, and expects to continue as a going concern.
However, there is no assurance that management will be successful in improving
operating cash flow or the Company’s financial condition, so there can be no
assurance that the Company can continue as a going concern.




We
will need additional capital in the future and it may not be available on
acceptable terms, or at all, which will impair our ability to continue as a
going concern.




5




Our
ability to continue as a going concern long term, until the LNG Business is
profitable, will be dependent on our ability to obtain additional funds through
debt and equity funding as well as from expanded sales of our products. Our
failure to raise such capital as needed could result in our inability to
continue operations.




Our
business is highly leveraged and, accordingly, is highly sensitive to
fluctuations in interest rates. Any significant increase in interest rates could
have a material adverse affect on our financial condition and ability to
continue as a going concern. See Part II, Item 7, “Current Debt Obligations” and
“Line of Credit.”





Our
profitability is dependent upon our ability to purchase natural gas supply at
prices that are low enough to allow us to convert and sell the liquefied natural
gas to our customers for a price in excess of our total costs of production and
sale. Natural gas is a commodity subject to significant volatility and
uncertainty.





Our business is highly dependent on commodity prices, which are
subject to significant volatility and uncertainty, and on the availability of
raw materials supplies, so our results of operations, financial condition and
business outlook may fluctuate substantially. Our results of operations depend
substantially on the prices of natural gas. The prices of these commodities are
volatile and beyond our control. As a result of the volatility of the prices for
these items, our results may fluctuate substantially. We may experience periods
during which the prices of our products decline and the costs of our raw
materials increase, which in turn may result in operating losses and adversely
affect our financial condition. We may attempt to offset a portion of the
effects of such fluctuations by entering into forward contracts to supply
natural gas or other items or by engaging in transactions involving
exchange-traded futures contracts, but these activities involve substantial
costs, substantial risks and may be ineffective to mitigate these fluctuations.
If a substantial imbalance occurs, our results of operations, financial
conditions and business outlook could be negatively impacted. Our ability to
operate at a profit is largely dependent on market prices for LNG, and the value
of your investment in us may be directly affected by these market
prices.




Decreases
in the price of oil, gasoline and diesel fuel may slow the growth of our
business and negatively impact our financial results. If the price of LNG does
not remain sufficiently below the prices of gasoline and diesel, potential fleet
customers will have less incentive to purchase natural gas vehicles or convert
their fleets to LNG, which would decrease demand for LNG and limit our
growth.




Market
interest in utilizing LNG as a vehicle fuel is driven, in part, by relative
prices for oil, gasoline and diesel fuel. As the prices for oil, gasoline and
diesel fuel increase, the market interest in utilizing LNG as a vehicle fuel
increases. However, the prices for such fuels have declined rapidly since the
summer of 2008. The price for a barrel of crude oil has declined from a high of
$148.35 per barrel reached on July 11, 2008 to a price of $38.00 per barrel
on December 31, 2008. Average retail prices for ultra low sulfur diesel
fuel in California have declined from a high of $5.03 in May and June of 2008 to
$2.24 per gallon at December 31, 2008 and average retail prices for
gasoline in California have declined from a high of $4.59 per gallon in June of
2008 to $1.81 per gallon at December 31, 2008. The decrease in the price of
diesel and gasoline, in particular, has resulted in reduced interest in
alternative fuels such as LNG. Decreased interest in alternative fuels will slow
the growth of our business. In addition, to the extent that we price
our  LNG fuel at a discount to these reduced diesel or gasoline prices
in an effort to attract new and retain existing customers, our profit margin on
fuel sales may be harmed and our financial results negatively
impacted.




Natural
gas vehicles cost more than comparable gasoline or diesel powered vehicles
because converting a vehicle to use natural gas adds to its base cost. If the
prices of LNG does not remain sufficiently below the prices of gasoline or
diesel, fleet operators may be unable to recover the additional costs of
acquiring or converting to natural gas vehicles in a timely manner, and they may
choose not to use natural gas vehicles. Recent and extreme volatility in oil and
gasoline prices demonstrate that it is difficult to predict future
transportation fuel costs. The decline in the price of oil, diesel fuel and
gasoline has reduced the economic advantages that our existing or potential
customers may realize by using less expensive LNG fuel as an alternative to
gasoline or diesel. The reduced prices for gasoline and diesel fuel and
continuing uncertainty about fuel prices, combined with higher costs for natural
gas vehicles, may cause potential customers to delay or reject converting their
fleets to run on natural gas. In that event, our growth would be slowed and our
business would suffer.




The
volatility of natural gas prices could adversely impact the adoption of LNG
vehicle fuel and our business.




In the
recent past, the price of natural gas has been volatile, and this volatility may
continue. From the end of 1999 through the end of 2008, the price for natural
gas, based on the New York Mercantile Exchange (NYMEX) daily futures data,
ranged from a low of $1.65 per Mcf to a high of $19.38 per Mcf. As of
March 1, 2009, the NYMEX index price for natural gas was




6




$4.07 per
Mcf. Increased natural gas prices affect the cost to us of natural gas and will
adversely impact our operating margins in cases where we have committed to sell
natural gas at a fixed price without a futures contract or with an ineffective
futures contract that does not fully mitigate the price risk or where we
otherwise cannot pass on the increased costs to our
customers. In addition, higher natural gas prices may cause LNG to cost as much
as or more than gasoline and diesel generally, which would adversely impact the
adoption of LNG as a vehicle fuel. Conversely, lower natural gas prices reduce
our revenues. Among the factors that can cause price fluctuations in natural gas
prices are changes in domestic and foreign supplies of natural gas, domestic
storage levels, crude oil prices, the price difference between crude oil and
natural gas, price and availability of alternative fuels, weather conditions,
level of consumer demand, economic conditions, price of foreign natural gas
imports, and domestic and foreign governmental regulations and political
conditions. The recent economic recession has resulted in significant and rapid
declines in the price of natural gas.




We
depend upon one primary source for transportation of our natural gas feedstock
supply to our plant.





Pipeline
quality, natural gas feedstock for our plant is taken directly from an adjacent,
natural gas trunkline operated by El Paso Natural Gas. Any extended disruption
in the operations of this trunkline, or our relationship with the operator,
could have a material adverse effect on our business. Likewise, our plant site
is leased from El Paso through December 14, 2020. Failure to maintain this lease
agreement in good standing could have a material adverse effect on our
business.





Our
business is dependent upon the operation of a single natural gas liquefaction
plant.





Our
ability to supply our customers with LNG pursuant to our obligations under
existing supply agreements is dependent primarily upon the continuing
availability of supply of LNG produced by our Topock, AZ facility. Any material
interruption in that supply could have a material adverse affect on our business
and our ability to continue as a going concern.





Concentration
of risk related to sales.





Our sales
are derived principally from various governmental agencies and authorities. Our
three largest customers, each of which are governmental authorities, comprised
55.0% of our sales during the six month period ended December 31, 2008,
including one customer that comprised 37% of our business during such period,
and is subject to a contract scheduled to expire on June 30, 2009. There is no
assurance that any of these customers will continue to do business with the
Company, and the loss of any of such customers could have a material adverse
affect on our business and ability to continue as a going concern. In addition,
changes in general economic conditions may affect the ability of various
governmental agencies to continue to pursue LNG programs, which could also have
a material adverse effect on our business.





We
face numerous risks that are inherent in energy operations.





Our
operations are subject to the hazards and risks inherent in the handling,
transporting and processing of natural gas, as well as the more unique risks
associated with LNG. Such risk include the encountering of unexpected pressures,
explosions, fires, natural disasters, blowouts, cratering and pipeline ruptures,
as well as more specific risks related to the handling of extremely frigid
liquids such as LNG. Energy related operations, such as ours, involve numerous
financial, business, regulatory, environmental, operating and legal risks, the
hazards of which could result in personal injuries, loss of life, business
interruption environmental damage, and damage to our property and the property
of others. To the extent that such risks result in incidents that are
uninsurable, or exceed our insurance coverages, such incidents could have a
material adverse effect upon our business.





We
are subject to lawsuits, claims and proceedings from time to time, and in the
future we could become subject to new proceedings, and if any such proceedings
are material and are successfully prosecuted against us, our business, financial
conditions and results of operations could be materially and adversely
affected.





From time
to time, we are involved in a variety of claims, suits, investigations,
proceedings and legal actions arising in the ordinary course of our
business   We intend to vigorously defend all claims against us.
Although the ultimate outcome of these matters cannot be accurately predicted
due to the inherent uncertainty of litigation, in the opinion of management,
based upon current information, no currently pending or overtly threatened claim
is expected to have a material adverse effect on our business, financial
condition or results of operations. However, even if we are successful on the
merits, any pending or future lawsuits, claims or proceedings could be
time-consuming and expensive to defend or settle and could result in the
diversion of significant management time and operational resources, which could
materially and adversely affect us. In addition, it is possible that an
unfavorable resolution of one or more such proceedings could in the future
materially and adversely affect our financial position, results of operations or
cash flows.


7





Downturns
in general economic and market conditions could materially and adversely affect
our business.





The U. S.
economy is in a significant downturn in general economic and market conditions,
and may ultimately affect our specific customers and markets. As an example, we
have recently notice a trend with some of our transit customers of curtailment
of routes and reductions of schedules, that may adversely impact our future
business as the requirements for LNG fuel are reduced. Moreover, there is
increasing uncertainty in the energy and technology markets attributed to many
factors, including international terrorism and strife, global economic
conditions and strong competitive forces. Our future results of operations may
experience substantial fluctuations from period to period as a consequence of
these factors, and such conditions and other factors affecting capital spending
may affect the decision of major customers or potential customers regarding
procurement of new vehicles designed to use LNG. An economic downturn coupled
with a decline in our revenues could adversely affect our ability meet our
capital requirements, support our working capital requirements and growth
objectives, maintain our existing financing arrangements, or otherwise adversely
affect our business, financial condition, and results of operations. As a
result, any economic downturns generally or in our markets specifically, would
have a material adverse effect on our business, cash flows, financial condition,
and results of operations.




Our
Plant is comprised of numerous, expensive capital components that may fail,
require replacement, or substantial and/or extraordinary
maintenance.




Such
occurrences could result in the requirement to spend substantial capital or
could also remove the plant from service for lengthy periods, either of which
could have a material adverse effect on our business.




In
several cases, we are committed to sell LNG to customers pursuant to long-term
supply contracts that contain substantial penalties for failure to
perform.




Circumstances
that which preclude us from meeting our commitments under these contracts could
arise, and could result significant unforeseen expenses that could have a
material adverse effect on our business.




One
major long-term supply contract, that comprises approximately 20% of our
production volume, may not expire until May 2013 and obligates us to sell LNG at
a substantial discount to the market price for LNG.




The
losses that we suffer under this contract, and losses of other, more profitable
contracts, could result in a material adverse affect on our business
operations.




If we are unsuccessful in
implementing our business strategy, we may enter into a financing, merger or
acquisition transaction in which our shareholders incur substantial dilution of
ownership interests.




If we are
not successful in implementing our business strategy, we may consider a merger
or other acquisition transaction under which our company would be acquired by or
merged with another business entity, and we would subsequently be controlled by
different management and shareholders of the other entity would likely hold a
majority interest. Under such circumstances, it is unlikely that our director or
any of our shareholders would have any significant input in managing the
resulting business or successor corporation. It is unlikely that approval of our
shareholders would be required to effect such a transaction. We are unable to
predict whether or when such a transaction might be effected.




The
market in which our business competes is intensely competitive and actions by
competitors could render our services less competitive, causing revenue and
income to decline.





Our
ability to compete depends on a number of factors outside of our control,
including:





·
            the
      prices at which others offer competitive services, including aggressive
      price competition and discounting;


·
            large
      swings in the price of oil which will affect the price at which the
      Company can purchase fuel supplies;


·
            the
      ability of competitors to undertake more extensive marketing
      campaigns;


·
            the
      extent, if any, to which competitors develop proprietary tools that
      improve their ability to compete;
and


·
            the
      extent of competitors’ responsiveness to customer
  needs.





Our
reliance on third party suppliers for natural gas may hinder our ability to be
profitable.


8





Our
business will be harmed if our major customers reduce their orders or
discontinue doing business with us.





We may
not be able to compete effectively on these or other factors. If we are unable
to compete effectively, market position, and therefore revenue and
profitability, would decline.





We must
continually enhance our services to meet the changing needs of our customers or
perspective customers, many of which are municipalities with strict bidding
guidelines, or face the possibility of losing future business to
competitors.





There is
no assurance that we will be profitable, and may not be able to successfully
develop, manage or market our products and services, we may not be able to
attract or retain qualified executives and technology personnel, our products
and services may become obsolete, government regulation may hinder our business,
and additional dilution in outstanding stock ownership may be incurred due to
the issuance of more shares, warrants and stock options, or the exercise of
warrants and stock options, and other risks inherent in our
businesses.





We
are dependent on a limited number of key personnel.




We are
dependent on a limited number of key personnel, and the loss of these
individuals could harm our competitive position and financial performance. Our
future success depends, to a significant extent, on the continued services of
our key personnel, including plant managers and other technical personnel.
Competition for personnel throughout the industry is intense and we may be
unable to retain our current management and staff or attract, integrate or
retain other highly qualified personnel in the future. If we do not succeed in
retaining our current management and our staff or in attracting and motivating
new personnel, plant managers, and technical personnel our business could be
materially adversely affected.





We may
encounter difficulties in implementing our business plan, due to the lower or a
lack of estimated market growth and demand.




We may be
at a competitive disadvantage with respect to our ability to purchase sufficient
supply of natural gas in comparison to our competition which could offer us
competition or better economic bargains than is available to us.




Our
growth depends in part on environmental regulations and programs mandating the
use of cleaner burning fuels, and modification or repeal of these regulations
may adversely impact our business.




Our
business depends in part on environmental regulations and programs in the United
States that promote or mandate the use of cleaner burning fuels, including
natural gas for vehicles. In particular, the Ports of Los Angeles and Long Beach
have adopted the San Pedro Bay Ports Clean Air Action Plan, which outlines a
Clean Trucks Program that calls for the replacement of 16,000 drayage trucks
with trucks that meet certain clean truck standards. The Federal Maritime
Commission has filed a lawsuit to block parts of the Clean Trucks Program as
anticompetitive and the American Trucking Association has also filed suit to
challenge specific concession requirements in the Clean Trucks Program, either
of which may delay the program's implementation. Furthermore, an economic
recession may result in the delay, amendment, or waiver of environmental
regulations or the Clean Trucks Program due to the perception that they impose
increased costs on the transportation industry that cannot be absorbed in a
contracting economy. The delay, repeal or modification of federal or state
regulations or programs that encourage the use of cleaner vehicles, and in
particular the Clean Trucks Program outlined in the
San Pedro Bay Ports Clean Air Action Plan, could have a detrimental effect on
the U.S. natural gas vehicle industry, which in turn, could slow our growth and
adversely affect our business.




Our
growth depends in part on tax and related government incentives for clean
burning fuels. A reduction in these incentives would increase the cost of
natural gas fuel and vehicles for our customers and could significantly reduce
our revenue.




Our
business depends in part on tax credits, rebates and similar federal, state and
local government incentives that promote the use of natural gas as a vehicle
fuel in the United States. The federal excise tax credit of $0.50 per liquid
gallon of LNG sold for vehicle fuel use, which began on October 1, 2006, is
scheduled to expire December 31, 2009. Based on the service relationship we
have with our customers, either we or our customers are able to claim the
credit  The failure to extend the federal excise tax credit for
natural gas, or the repeal of federal or state tax credits for the purchase of
natural gas vehicles or natural gas fueling equipment, could have a detrimental
effect on the natural gas vehicle industry, which, in turn, could adversely
affect our business and results of operations. In addition, if grant funds were
no longer available under existing government programs, the purchase of or
conversion to natural gas vehicles and station construction could slow and our
business and results of operations could be adversely affected. Any reduction in
tax revenues associated with an economic




9




recession
or slow-down could result in a significant reduction in funds available for
government grants that support vehicle conversion and station construction and
impair our ability to grow our business.




The
use of natural gas as a vehicle fuel may not become sufficiently accepted for us
to expand our business.




To expand
our business, we must develop new fleet customers and obtain and fulfill LNG
fueling contracts from these customers. We cannot guarantee that we will be able
to develop these customers or obtain these fueling contracts. Whether we will be
able to expand our customer base will depend on a number of factors, including:
the level of acceptance and availability of natural gas vehicles, the growth in
our target markets of infrastructure that supports LNG sales and our ability to
supply LNG at competitive prices. The recent and rapid decline in oil, diesel
and gasoline prices has resulted in decreased interest in alternative fuels like
LNG. In addition, recent disruption in the capital markets has severely reduced
the availability of debt financing to support the purchase of LNG vehicles and
investment in LNG infrastructure. If our potential customers are unable to
access credit to purchase natural gas vehicles it may make it difficult or
impossible for them to invest in natural gas vehicle fleets, which would impair
our ability to grow our business.




The
infrastructure to support gasoline and diesel consumption is vastly more
developed than the infrastructure for natural gas vehicle fuels.




Gasoline
and diesel fueling stations and service infrastructure are widely available in
the United States. For natural gas vehicle fuels to achieve more widespread use
in the United States and Canada, they will require the development and supply of
more natural gas vehicles and fueling stations. This will require significant
continued effort by us, and our industry, as well as government and clean air
groups, and we may face resistance from oil and other vehicle fuel companies. A
prolonged economic recession and continued disruption in the capital markets may
make it difficult or impossible to obtain financing to expand the natural gas
vehicle fuel infrastructure and impair our ability to grow our business. There
is no assurance natural gas will ever achieve the level of acceptance as a
vehicle fuel necessary for us to expand our business significantly.




A decline in the demand for vehicular natural gas would
reduce our revenue and negatively affect our ability to sustain our revenue
growth.




We derive
our revenue primarily from sales of LNG as a fuel for fleet vehicles, and we
expect this trend will continue. A downturn in demand for LNG would adversely
affect our revenue and ability to sustain and grow our operations. Circumstances
that could cause a drop in demand for LNG vehicle fuel are described in other
risk factors and include a reduction in supply of natural gas, changes in
governmental incentives, the development of other alternative fuels and
technologies, continued economic contraction, prolonged disruption in the
capital markets, lower prices for competing fuels such as diesel and gasoline,
any sustained increase in the price of natural gas relative to gasoline and
diesel and consumption reductions by fleet operators.




Truck
and engine manufacturers produce very few originally manufactured natural gas
vehicles and engines for the U.S. markets, which may restrict our
sales.




Limited
availability of natural gas vehicles restricts their wide scale introduction and
narrows our potential customer base. Currently, original equipment manufacturers
produce a small number of natural gas engines and vehicles, and they may not
make adequate investments to expand their natural gas engine and vehicle product
lines. Manufacturers of medium and heavy-duty vehicles produce only a narrow
range and number of natural gas vehicles. The technology utilized in some of the
heavy-duty vehicles that run on LNG is also relatively new and has not been
previously deployed or used in large numbers of vehicles. As result these
vehicles may require servicing and further technology refinements to address
performance issues that may occur as vehicles are deployed in large numbers and
are operated under strenuous conditions. If potential heavy duty LNG truck
purchasers are not satisfied with truck performance, it may delay or impair the
growth of our LNG fueling business. Further, North American truck manufacturers
are facing significant economic challenges that may make it difficult or
impossible for them to introduce new natural gas vehicles in the North American
market or continue to manufacture and support the limited number of available
natural gas vehicles. Due to the limited supply of natural gas vehicles, our
ability to promote natural gas vehicles and our sales may be restricted, even if
there is demand.




There
are a small number of companies that convert vehicles to operate on natural gas,
which may restrict our sales.




10




Conversion
of vehicle engines from gasoline or diesel to natural gas is performed by only a
small number of vehicle conversion suppliers that must meet stringent safety and
engine emissions certification standards. The engine certification process is
time consuming and expensive and raises vehicle costs. In addition, conversion
of vehicle engines from gasoline or diesel to natural gas may result in vehicle
performance issues or increased maintenance costs which could discourage our
potential customers from purchasing converted vehicles that run on natural gas.
Without an increase in vehicle conversion options, vehicle choices for fleet use
will remain limited and our sales may be restricted, even if there is
demand.




If
there are advances in other alternative vehicle fuels or technologies, or if
there are improvements in gasoline, diesel or hybrid engines, demand for natural
gas vehicles may decline and our business may suffer.




Technological
advances in the production, delivery and use of alternative fuels that are, or
are perceived to be, cleaner, more cost-effective or more readily available than
LNG have the potential to slow adoption of natural gas vehicles. Advances in
gasoline and diesel engine technology, especially hybrids, may offer a cleaner,
more cost-effective option and make fleet customers less likely to convert their
fleets to natural gas. Technological advances related to ethanol or biodiesel,
which are increasingly used as an additive to, or
substitute for, gasoline and diesel fuel, may slow the need to diversify fuels
and affect the growth of the natural gas vehicle market. In addition, a
prototype heavy-duty electric truck model was recently introduced at the ports
of Los Angeles and Long Beach. Use of electric heavy-duty trucks or the
perception that electric heavy-duty trucks may soon be widely available and
provide satisfactory performance in heavy-duty applications may reduce demand
for heavy-duty LNG trucks. In addition, hydrogen and other alternative fuels in
experimental or developmental stages may eventually offer a cleaner, more
cost-effective alternative to gasoline and diesel than natural gas. Advances in
technology that slow the growth of or conversion to natural gas vehicles or
which otherwise reduce demand for natural gas as a vehicle fuel will have an
adverse effect on our business. Failure of natural gas vehicle technology to
advance at a sufficient pace may also limit its adoption and ability to compete
with other alternative fuels.




Our
ability to supply LNG to new and existing customers is restricted by limited
production of LNG and by our ability to source LNG without interruption and near
our target markets.




Production
of LNG in the United States is fragmented. LNG is produced at a variety of
smaller natural gas plants around the United States as well as at larger plants
where it is a byproduct of their primary natural gas production. It may become
difficult for us to obtain additional LNG without interruption and near our
current or target markets at competitive prices. If our LNG liquefaction plant,
or any of those from which we purchase LNG, are damaged by severe weather,
earthquake or other natural disaster, or otherwise experiences prolonged
downtime, our LNG supply will be restricted. If we are unable to supply enough
of our own LNG or purchase it from third parties to meet existing customer
demand, we may be liable to our customers for penalties. An LNG supply
interruption would also limit our ability to expand LNG sales to new customers,
which would hinder our growth. Furthermore, because transportation of LNG is
relatively expensive, if we are required to supply LNG to our customers from
distant locations, our operating margins will decrease on those
sales.




Oil
companies and natural gas utilities, which have far greater resources and brand
awareness than we have, may expand into the natural gas fuel market, which could
harm our business and prospects.




There are
numerous potential competitors who could enter the market for LNG as vehicle
fuel. Many of these potential entrants, such as integrated oil companies and
natural gas utilities, have far greater resources and brand awareness than we
have. If the use of natural gas vehicles increases, these companies may find it
more attractive to enter the market for natural gas vehicle fuels and we may
experience increased pricing pressure, reduced operating margins and fewer
expansion opportunities.




If
we do not have effective futures contracts in place, increases in natural gas
prices may result in sales of fuel at a loss.




During
the period ended December 31, 2008, we sold and delivered approximately 37% of
our total LNG under contracts that provided a fixed price or a price cap to our
customers. At any given time, however, the market price of natural gas may rise
and our obligations to sell fuel under fixed price contracts may be at prices
lower than our fuel purchase or production price if we do not have effective
futures contracts in place. This circumstance has in the past and may again in
the future compel us to sell fuel at a loss, which would adversely affect our
results of operations and financial condition.




Our plan
for 2009 is to selectively purchase futures contracts to hedge our exposure to
variability related to our fixed price contracts. However, such contracts may
not be available or we may not have sufficient financial resources to secure
such contacts. If we are not economically hedged with respect to our fixed price
contracts, we will lose money in connection with




11


those
contracts during periods in which natural gas prices increase above the prices
of natural gas included in our customers' contracts.




Compliance with potential greenhouse gas regulations
affecting our LNG plant may prove costly and negatively affect our financial
performance.




Arizona
is part of the Western Climate Initiative to help combat climate change, that is
seeking legislation to regulate and reduce greenhouse gas emissions. Any of
these regulations, when and if implemented, may regulate the greenhouse gas
emissions produced by our LNG production plant in Arizona and require that we
obtain emissions credits or invest in costly emissions prevention technology. We
cannot currently estimate the potential costs associated with federal or state
regulation of greenhouse gas emissions from our LNG plant and these unknown
costs are not contemplated in the financial terms of our customer agreements.
These unanticipated costs may have a negative impact on our financial
performance and may impair our ability to fulfill customer contracts at an
operating profit.




Natural
gas operations entail inherent safety and environmental risks that may result in
substantial liability to us.




Natural
gas operations entail inherent risks, including equipment defects, malfunctions
and failures and natural disasters, which could result in uncontrollable flows
of natural gas, fires, explosions and other damages. For example, operation of
LNG pumps requires special training and protective equipment because of the
extreme low temperatures of LNG. LNG tanker trailers have also in the past been,
and may in the future be, involved in accidents that result in explosions, fires
and other damage. Improper refueling of LNG vehicles can result in venting of
methane gas. These risks may expose us to liability for personal injury,
wrongful death, property damage, pollution and other environmental damage. We
may incur substantial liability and cost if damages are not covered by insurance
or are in excess of policy limits.




Our business is heavily concentrated in the western
United States, particularly in California and Arizona. Continuing economic
downturns in these regions could adversely affect our business.




Our
operations to date have been concentrated in California and Arizona. A
continuing decline in the economy in these areas could slow the rate of adoption
of natural gas vehicles, reduce fuel consumption or reduce the availability of
government grants, any of which could negatively affect our growth.




Our
business is highly regulated.




We are
subject to various stringent federal, state, and local environmental laws and
regulations, including those relating to the discharge of materials into the
air, water and ground, the generation, storage, handling, use, transportation
and disposal of hazardous materials, and the health and safety of our employees.
In addition, some of these laws and regulations require our facilities to
operate under permits that are subject to renewal or modification. These laws,
regulations, and permits can often require expensive pollution control equipment
or operational changes to limit actual or potential impacts to the environment.
A violation of these laws and regulations or permit conditions can result in
substantial fines, natural resource damages, criminal sanctions, permit
revocations and/or facility shutdowns. We cannot assure you that we will be at
all times in complete compliance with these laws, regulations or permits. In
addition, we expect to make significant capital expenditures on an ongoing basis
to comply with these stringent environmental laws, regulations and
permits.





In
addition, the hazards and risks associated with producing and transporting our
products (such as fires, natural disasters, explosions, abnormal pressures and
spills) may result in personal injury claims or damage to property, natural
resources and third parties. As protection against operating hazards, we will
maintain insurance coverage against some, but not all, potential losses. The
occurrence of events which result in significant personal injury or damage to
our property, natural resources or third parties that is not fully covered by
insurance could have a material adverse impact on our results of operations and
financial condition.





We
may be required to issue up to an additional 1,100,000 shares to our senior
secured lender in the event that our stock price does not trade at over $10 per
share at certain given dates.





Pursuant
to agreements with our senior secured lender (“Fourth Third”), we are required
to issue shares to Fourth Third to make them “whole” in the event that the
assumed value of our shares does not trade at or above $10 per share, up to a
maximum of 1,100,000 shares. This share issuance is subject to factors
outside our control and, if we are required to issue shares, such issuances
would be highly dilutive.


12





The
conversion provisions of the promissory note with Black Forest International,
LLC may require issuances of significant amounts of additional shares, that may
be highly dilutive to shareholders.





The
balance of this note is currently convertible into 700,000 PNG shares at the
current conversion rate of $.09 per share. The note provides for future
adjustment to the conversion rate any time that PNG issues common shares or
derivatives of common shares at an effective price of less than $10 per share.
The conversion rate adjustment provisions provide for reduction in the
conversion price based upon a factor, the numerator of which is the effective
price of the issued shares/derivatives, and the denominator of which is $10.
Furthermore, the note has no stated maturity date, and does not provide for
prepayment in the absence of consent by the holder. The extent of the dilution
that may result from the application of the conversion provisions may limit our
ability to obtain additional capital investment. Although we plan to address the
punitive provisions of the Note either through negotiations and/or litigation,
we may not be able to succeed in eliminating their provisions.




A
majority of our stock is beneficially owned by a single stockholder whose
interests may differ from other shareholders and who will be able to exert
significant influence over our corporate decisions, including a change of
control.




As of
December 31, 2008, Sandell Asset Management and affiliates (collectively,
“Sandell”) beneficially owned in the aggregate 60% of our outstanding common
stock. As a result, Sandell will be able to influence or control matters
requiring approval by our stockholders, including the election of directors and
the approval of mergers, acquisitions or other extraordinary transactions.
Sandell may also have interests that differ from other shareholders and may vote
in a way with which other shareholders disagree and which may be adverse to your
interests. This concentration of ownership may have the effect of delaying,
preventing, or deterring a change of control of our company, could deprive our
stockholders of an opportunity to receive a premium for their stock as part of a
sale of our company, and might ultimately affect the market price of our stock.
Conversely, this concentration may facilitate a change in control at a time when
you and other investors may prefer not to sell.




Our
operating results may fluctuate significantly, and these fluctuations may cause
our stock price to decline.




Our
operating results will likely vary in the future primarily as a result of
fluctuations in our revenues and operating expenses, including the coming to
market of oil and natural gas reserves that we are able to develop, expenses
that we incur, the prices of oil and natural gas in the commodities markets and
other factors. If our results of operations do not meet the expectations of
current or potential investors, the price of our common stock may
decline.





We
have never paid cash dividends and are not likely to do so in the foreseeable
future.




We have
never paid cash dividends to our shareholders and we do not intend to declare
dividends for the foreseeable future, as we anticipate that we will reinvest any
future earnings in the development and growth of our business. Therefore,
investors will not receive any funds unless they sell their common stock, and
stockholders may be unable to sell their shares on favorable terms or at
all. Investors cannot be assured of a positive return on investment or that
they will not lose the entire amount of their investment in the common
stock.





There
has been a limited trading market for our common stock and no significant
trading market.





The
quotation of our common stock on the OTCBB does not assure that a meaningful,
consistent and liquid trading market currently exists. It is anticipated that
there will be a limited trading market for the Company's common stock. The
lack of an active market may impair your ability to sell your shares at the time
you wish to sell them or at a price that you consider reasonable. The lack
of an active market may also reduce the fair market value of your
shares. An inactive market may also impair our ability to raise capital by
selling shares of capital stock and may impair our ability to acquire other
companies or technologies by using common stock as consideration.




You
may have difficulty trading and obtaining quotations for our common
stock.





The
common stock may not be actively traded, and the bid and asked prices for our
common stock on the OTCBB may fluctuate widely. As a result, investors may
find it difficult to dispose of, or to obtain accurate quotations of the price
of, our securities. This severely limits the liquidity of the common stock,
and would likely reduce the market price of our common stock and hamper our
ability to raise additional capital.


13





The
market price of our common stock may, and is likely to continue to be, highly
volatile and subject to wide fluctuations.





The
market price of our common stock is likely to be highly volatile and could be
subject to wide fluctuations in response to a number of factors that are beyond
our control, including:




·
            dilution
      caused by our issuance of additional shares of common stock and other
      forms of equity securities, which we expect to make in connection with
      future capital financings to fund our operations and growth, to attract
      and retain valuable personnel and in connection with future strategic
      partnerships with other companies;




·
            announcements
      of new acquisitions, reserve discoveries or other business initiatives by
      our competitors;




·
            our
      ability to take advantage of new acquisitions, reserve discoveries or
      other business initiatives;




·
            fluctuations
      in revenue from our oil and gas business as new reserves come to
      market;




·
            changes
      in the market for natural gas commodities and/or in the capital markets
      generally;




·
            changes
      in the demand for LNG, including changes resulting from the introduction
      or expansion of alternative fuels;




·
            quarterly
      variations in our revenues and operating
  expenses;




·
            changes
      in the valuation of similarly situated companies, both in our industry and
      in other industries;




·
            changes
      in analysts’ estimates affecting our Company, our competitors and/or our
      industry;




·
            changes
      in the accounting methods used in or otherwise affecting our
      industry;




·
            additions
      and departures of key personnel;




·
            announcements
      of technological innovations or new products available to the
      industry;




·
            announcements
      by relevant governments pertaining to incentives for alternative energy
      development programs;




·
            fluctuations
      in interest rates and the availability of capital in the capital markets;
      and




·
            significant
      sales of our common stock, including sales by the investors following
      registration of the shares of common stock issued in this Offering and/or
      future investors in future offerings we expect to make to raise additional
      capital.





These and
other factors are largely beyond our control, and the impact of these risks,
singly or in the aggregate, may result in material adverse changes to the market
price of our common stock and/or our results of operations and financial
condition.





The Company’s common stock is subject
to the “Penny Stock” rules of the SEC and the trading market in its securities
is limited, which makes transactions in its stock cumbersome and may adversely
affect trading and liquidity of the common stock and, accordingly, reduce the
value of an investment in our common stock.





A stock
is considered to be a "penny stock" if it meets one or more of the definitions
in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Exchange
Act. These include but are not limited to the following: (i) the stock trades at
a price less than $5.00 per share; (ii) it is NOT traded on a “recognized”
national exchange; (iii) it is NOT quoted on The NASDAQ Stock Market, or even if
so, has a price less than $5.00 per share; or (iv) is issued by a company with
net tangible assets less than $2.0 million, if in business more than a
continuous three years, or with average revenues of less than $6.0 million for
the past three years. The principal result or effect of being designated a
"penny stock" is that securities broker-dealers cannot recommend the stock but
must trade in it on an unsolicited basis.





In
accordance with these rules, broker-dealers participating in transactions in
low-priced securities must first deliver a risk disclosure document which
describes the risks associated with such stocks, the broker-dealer’s duties in
selling the stock, the customer’s rights and remedies and certain market and
other information. Furthermore, the broker-dealer must make a suitability
determination approving the customer for low-priced stock transactions based on
the customer’s financial


14


situation,
investment experience and objectives. Broker-dealers must also disclose these
restrictions in writing to the customer, obtain specific written consent from
the customer, and provide monthly account statements to the customer. The effect
of these restrictions probably decreases the willingness of broker-dealers to
make a market in our common stock, decreases liquidity of our common stock and
increases transaction costs for sales and purchases of our common stock as
compared to other securities.




Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document
before effecting any transaction in a penny stock for the investor's
account.  Moreover, Rule 15g-9 requires broker-dealers in penny stocks to
approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for holders of our common stock to
resell their shares to third parties or to otherwise dispose of them in the
market or otherwise.





Trading
of our common stock on the OTC Bulletin Board may be subject to certain
provisions of the Securities Exchange Act of 1934, commonly referred to as the
"penny stock" rule. A penny stock is generally defined to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on
broker-dealers.





These may
require a broker-dealer to:




·
            make
      a special suitability determination for purchasers of our
      shares;





·
            receive
      the purchaser's written consent to the transaction prior to the purchase;
      and





·
            deliver
      to a prospective purchaser of our stock, prior to the first transaction, a
      risk disclosure document relating to the penny stock
    market.





Consequently,
penny stock rules may restrict the ability of broker-dealers to trade and/or
maintain a market in our common stock. Also, prospective investors may not want
to get involved with the additional administrative requirements which may have a
material adverse effect on the trading of our shares.





Item
1B.                 
Unresolved Staff Comments





None.


Item
2.                   
Description
Of Property.




The
Company’s Topock, Arizona facility is an operating, natural-gas liquefaction
plant located in Arizona near the Arizona-California state line and is owned by
the Company. It has insulated storage tanks, kept above ground and serves
metropolitan markets in Arizona, California and Nevada. The plant’s natural gas
feedstock is supplied by an El Paso natural gas pipeline located
immediately adjacent to the Company’s facility. The facility is physically
located on approximately 1.882 acres of land leased from El Paso. The lease
expires on December 14, 2020.




Our
principal executive offices are located at 5310 Harvest Hill Road, Suite 229,
Dallas Texas 75230. This operating lease covers 1800 sq ft of office space and
expires on October 31, 2009.


Item
3. Legal
Proceedings.


Clean Energy.  The
Company has been served with a summons and complaint in an action commenced
against it by Clean Energy Fuels Corp., a California corporation, in the United
States District Court for the Central District of California, Case No.
SACV08-746. In the action, Clean Energy alleges that the Company breached its
written agreement to supply Liquefied


15


Methane
Gas (LMG) and is seeking damages and an injunction compelling the Company to
abide its contractual obligations. At the same time Clean Energy filed the
action, it also moved for issuance of a preliminary injunction. The Company has
answered the complaint and asserted counterclaims for monies due and owing to it
by Clean Energy for LMG previously delivered and for the attorneys’ fees it will
incur in defending the action. The Company also filed opposition to the motion
for a preliminary injunction. A hearing on the motion was held on August 4,
2008. The Court subsequently denied the Clean Energy’s request for a preliminary
injunction. While the Company has asserted a number of defenses and affirmative
defenses, no assurance can be made that the Company will be successful in
defending this lawsuit. An adverse ruling could have an adverse effect on the
Company.





Kelley.  In
December 2008, Ken Kelley and certain affiliated parties filed a lawsuit against
AP Holdings International, Inc. et. al. that includes PNG Ventures, Inc. and
Earth Leasing, Inc. (“Earth Leasing”), a wholly owned subsidiary of the
Company.




The
lawsuit alleges that certain preferred stock was issued by Earth Leasing in 2006
in favor of plaintiffs, and that dividends on this preferred stock are accrued,
accruing and unpaid. This lawsuit also alleges various other claims and
assertions, including that other payables are owed to the Kelley group. The
Company disputes all claims that are alleged, believes that there are valid
defenses to these claims and intends to vigorously defend its
position.





Kelley
and affiliates have also informally asserted other claims in connection with the
transactions that resulted in the acquisition of the LNG Business by EBOF.
Management believes that these allegations are without merit. The Company has,
however, included an accrual in its balance of a liability in the amount of
$947,000 to reflect the amounts alleged to be due in the pending litigation, as
well as to reflect the contingent issuance of shares claimed by Kelley and
affiliates.





Customer
Matters:


In
September 2008, one of our transit customers notified us that it was assessing
penalties of $200,000 related to our alleged failure to comply with certain
terms of our LNG supply contract with this customer. In early 2009, we agreed to
a settlement of this issue that required us to pay the amount of $50,000 and to
further comply with certain performance measures during the six-month period
following the settlement. In the event that the Company fails to comply with the
conditions of the settlement, the remaining penalties could be reinstated,
requiring us to pay the remainder of the alleged penalties. We recognized the
$50,000 penalty in 2008 as an expense.





Many of
our customer contracts include substantial penalties for non-compliance, and we
are occasionally involved in disputes with customers regarding compliance with
contractual terms, applicability of liquidated damages, and various other
matters of contractual compliance, performance, and/or interpretation.
Management does not believe that any such disputes which currently exist are
likely to result in a material adverse change in the financial condition of the
Company.





Other
Matters:


From time
to time, we are involved in a variety of claims, suits, investigations,
proceedings, and legal actions arising in the ordinary course of our business.
We intend to vigorously defend all claims against us. Although the ultimate
outcome of these matters cannot be accurately predicted due to the inherent
uncertainty of litigation, in the opinion of management, based upon current
information, no currently pending or overtly threatened claim is expected to
have a material adverse effect on our business, financial condition, or results
of operations. However, even if we are successful on the merits, any pending or
future lawsuits, claims or proceedings could be time-consuming and expensive to
defend or settle and could result in the diversion of significant management
time and operational resources, which could materially and adversely affect us.
In addition, it is possible that an unfavorable resolution of one or more such
proceedings could in the future materially and adversely affect our financial
position, results of operations or cash flows.




Item
4.                    
Submission
Of Matters To A Vote Of Security Holders.




None.




PART
II




Item
      5.
            Market
      For Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities






Dividends.




We have
not paid any dividends on our common stock and do not anticipate paying any cash
dividends in the foreseeable future. We intend to retain any earnings to finance
the growth of the business. We cannot assure you that we will ever
pay




16


cash
dividends. Whether we pay any cash dividends in the future will depend on the
financial condition, results of operations and other factors that the Board of
Directors will consider.




Our
common stock is quoted on the OTC Bulletin Board (the “OTCBB”) under the symbol
PNGX. The following table sets forth, for the fiscal quarters indicated, the
high and low bid prices. These quotations reflect inter-dealer prices, without
mark-up, mark-down or commission, and may not represent actual
transactions.





Quarter
      Ended
            
            High
            
            
            LowMarch  31,
      2007
            
            
            0.5
            
            
            
            0.3June
      30, 2007
            
            
            0.7
            
            
            
            0.3September
      30, 2007
            
            
            0.75
            
            
            
            0.3December
      31, 2007
            
            
            0.35
            
            
            
            0.15March
      31, 2008
            
            
            0.35
            
            
            
            0.15June
      30, 2008
            
            
            4.7
            
            
            
            0.15September
      30, 2008
            
            
            10.5
            
            
            
            2.0December
      31, 2008
            
            
            5.0
            
            
            
            1.0




Holders.




As of
March 12, 2009, we had 10,013,019 shares of our common stock outstanding which
were held by 198 stockholders of record and approximately 300 beneficial
stockholders.




Recent
Sales Of Unregistered Shares.




None.




Item
      6.
            Selected
      Financial Data


Not
Applicable.


Item
      7.
            Management's
      Discussion and Analysis or Plan of
Operation.





Forward-Looking
Statements





The
information in this report contains forward-looking statements. All statements
other than statements of historical fact made in report are forward looking. In
particular, the statements herein regarding industry prospects and future
results of operations or financial position are forward-looking statements.
These forward-looking statements can be identified by the use of words such as
“believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,”
“projects,” “expects,” “may,” “will,” or “should” or other variations or similar
words. No assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. Forward-looking statements reflect
management’s current expectations and are inherently uncertain. Our actual
results may differ significantly from management’s expectations. A reader,
whether investing in the Company’s securities or not, should not place undue
reliance on these forward-looking statements, which are made only as of the date
of this annual report.  Important factors that may cause actual
results to differ from expectations and projections, include, for example: the
success or failure of management’s implementation of the Company’s plan of
operation; the ability of the Company to fund its operating expenses; the
ability of the Company to obtain a source of funds on terms that are acceptable;
the ability of the Company to compete with other companies that supply LNG to
user ; and the effect of changing economic conditions impacting our plan of
operation.




We
believe that the statements in this annual report on Form 10-K that we make
regarding the following matters, by their nature, are
forward-looking:




·
            our
      ability to capture a substantial share of the significant anticipated
      growth in the market for natural gas as a vehicle fuel and to enhance our
      leadership position as that market
expands;


17




·
            any plans to expand business with
      existing customers, retain existing customer accounts and to win business
      with new customers;




·
            any plan to expand our sales in
      the regional trucking, ports, public transit, refuse hauling and airport
      markets;




·
            any plans to expand our sales and
      marketing team and to hire sales experts to focus on targeted metropolitan
      areas;




·
            any plans to build natural gas
      fueling stations or the expansion of our Topock, Arizona
      facility;




·
            developments and trends in the
      natural gas and fleet vehicle markets, including increased transition from
      diesel and gasoline powered vehicles to natural gas
      vehicles;




·
            estimated increases in costs for
      diesel engine and natural gas vehicles to meet federal 2010 emission
      standards;




·
            more stringent emissions
      requirements continuing to make natural gas vehicles an attractive
      alternative to traditional gasoline and diesel powered
      vehicles;




·
            anticipated federal and state
      certification of additional natural gas vehicle models in
      2009;




·
            expanded use of natural gas
      vehicles at and sales of LNG to trucks operating at the Los Angeles and
      Long Beach seaports;




·
            future supply, demand, use and
      prices of fossil and alternative fuels, including crude oil, gasoline,
      diesel, natural gas, biodiesel, ethanol, electricity, and
      hydrogen;




·
            prices for gasoline and diesel
      continuing to be higher than the price of natural gas as a vehicle
      fuel;




·
            estimated incremental costs,
      annual fuel usage, fuel costs, and annual fuel cost savings for vehicles
      using natural gas instead of gasoline or
  diesel;




·
            impact of environmental
      regulations on the cost of crude oil, gasoline, diesel and diesel
      engines;




·
            impact of environmental
      regulations on the use of natural gas as a vehicle
      fuel;




·
            the availability of tax
      incentives and grant programs that provide incentives for using natural
      gas as a vehicle fuel;




·
            our continued receipt of the
      Volumetric Excise Tax
Credit;




·
            projected capital expenditures,
      project development costs and related funding
      requirements;




·
            any plans to retain all future
      earnings to finance future growth and general corporate
      purposes;




·
            estimated costs to cover the
      increased price of natural gas above the inherent prices embedded in our
      customers' fixed price and price cap
  contracts;




·
            any plans to purchase futures
      contracts and to continue offering fixed-price sales requirement
      contracts;




·
            costs associated with remaining
      in compliance with government regulations and
  laws;




·
            our ability to obtain waivers for
      breach of covenants; and




·
            access to equity capital and debt
      financing options, including, but not limited to, equipment financing,
      sale of convertible promissory notes or commercial bank
      financing.




The
foregoing list is not intended to be an exhaustive list of all of our
forward-looking statements. Although the forward-looking statements in this
annual report on Form 10-K reflect our good faith judgment, based on
currently available information, they involve known and unknown risks,
uncertainties and other factors that may cause our actual results or our
industries’ actual results, levels of activity, performance, or achievements to
be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by these forward-looking
statements. Factors that might cause or contribute to such differences include,
but are not limited to, those discussed in the “Risk Factors” contained in this
annual report on Form 10-K. As a result of these factors, we cannot assure
you that the forward-looking statements in this annual report on Form 10-K
will prove to be accurate. Except as required by law, we undertake no obligation
to update




18




publicly
any forward-looking statements for any reason after the date we file this annual
Report on Form 10-K with the Securities and Exchange Commission, to conform
these statements to actual results, or to changes in our expectations. You
should, however, review the factors and risks we describe in the reports we will
file from time to time with the Securities and Exchange Commission after the
date we file this annual report on Form 10-K.




The
following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of our management.





Overview





On June
30, 2008, PNG Ventures Inc., a Nevada corporation (“PNG” or the “Company” or
“us” or “we”) entered into and completed an acquisition pursuant  to a
Share Exchange Agreement (the “Exchange Agreement”) with Earth Biofuels, Inc., a
Delaware corporation (“EBOF”) and its wholly owned subsidiary, Earth LNG, Inc, a
Texas corporation (“ELNG”), as sellers, and its wholly owned subsidiary, New
Earth LNG, LLC, a Delaware limited liability company (“New ELNG”), pursuant to
which PNG acquired 100% ownership of New ELNG from ELNG, in exchange for the
issuance of 7,000,000 shares of the common stock of the Company (“Exchange
Shares”) to ELNG, and certain other consideration and share issuances (said
transaction being referred to herein as the “Share
Exchange”).   The assets and business which were acquired by us
as a result of the Share Exchange, include a Topock, Arizona liquefied natural
gas production facility, and its related distribution and sales businesses, all
of which are held and operated by New ELNG’s subsidiaries as described
below.





As a
result of the Exchange Agreement, (i) New ELNG became a wholly-owned subsidiary
of the PNG and (ii) PNG succeeded to the Arizona based liquid natural gas
operations, which is currently its sole business.  PNG accounted for
the acquisition of the LNG business as a purchase. Prior to the Share Exchange,
ELNG had transferred to New ELNG all right and marketable title to the member
interests of Applied LNG Technologies USA, LLC and Arizona LNG, L.L.C.
and all their other assets (other than receivables from EBOF and other
subsidiaries of EBOF); that, together, comprise the west coast liquefied natural
gas (“LNG”) business ("LNG Business") of PNG effective after the closing of
the Share Exchange.





In all,
the subsidiaries of New ELNG, which are now owned by us as a result of the Share
Exchange, include Arizona LNG, L.L.C., a Nevada limited liability company
(“Arizona LNG”), which owns the Topock, Arizona plant, Applied LNG Technologies
USA, L.L.C., a Delaware limited liability company (“Applied LNG”) and, the
subsidiaries of Applied LNG, Fleet Star, Inc., a Delaware corporation (“Fleet
Star”) and Earth Leasing, Inc., a Texas corporation f/k/a Alternative Dual
Fuels, Inc. (“Earth Leasing”). Arizona LNG, Applied LNG, Fleet Star and Earth
Leasing are sometimes collectively referred to herein as the “New ELNG
Subsidiaries.” The primary asset of the Company is a liquefied natural gas
(LNG) processing facility and related equipment located in Topock,
Arizona.





Prior to
the acquisition of New ELNG, PNG had no operating business revenues and was a
blank check company.





Current
Business




Our
business strategy is to capitalize on the anticipated growth in the consumption
of natural gas, and in particular LNG, as a vehicle fuel and to enhance our
leadership position as that market expands.




We sell
substantially all of our LNG to fleet customers, who typically own and operate
their fueling stations. We also sell a small volume of LNG to customers for
non-vehicle use. We also own one public LNG fueling station from which we sell
LNG to numerous parties. We produce LNG at our liquefaction plant in Arizona,
but also purchase approximately 10% of our LNG supplies from third-parties,
typically on spot contracts. We sell LNG principally through supply contracts
that are normally on an index-plus basis, although we also occasionally enter
into fixed-price contracts.




We are
headquartered in Dallas, Texas. The LNG Business, generally known externally as
“Applied LNG” or “ALT”, conducts its operations principally in Arizona and
California.




Management
believes that Applied LNG’s processing facility in Topock, AZ, which has
been acquired as a result of the Share Exchange, is capable of
producing approximately 86,000 gallons of vehicle-grade LNG per
day. LNG produced by this plant is sold primarily to municipal and
commercial fleet customers located along the west coast of
California.




19


Applied
LNG offers turnkey fuel solutions, including clean LNG fuel (99% methane gas)
and delivery, equipment storage, fuel dispensing equipment and fuel loading
facilities.





We
produce LNG at our Topock, AZ plant by processing pipeline quality natural gas
through various purification applications, and then refrigerating such gas to a
temperature of approximately -260 degrees F. Once liquefied, the LNG is stored
at our plant site in above ground, cryogenic storage tanks and ultimately
shipped via tractor trailers to customer sites. We sell LNG to approximately 50
customers located in Arizona, California, and Nevada, who utilize the LNG
principally as transportation fuel for heavy-duty vehicle fleets. Typical
customer fleet applications include city and regional busses, garbage hauling
trucks, heavy-duty tractors, port drayage trucks, and various other similar
applications.




The
Topock, AZ production facility is located approximately one mile east of
Arizona’s border with California. The facility serves metropolitan markets in
Arizona, California, and Nevada. The plant’s natural gas feedstock is supplied
by an El Paso natural gas pipeline located immediately adjacent to our
plant.




One of
the largest markets in the U.S. for clean, vehicle-grade LNG today is
Southern California and surrounding areas. This market has been the focus of
Applied LNG’s efforts for over ten years. In recent years, various governmental
agencies in California, Arizona and surrounding areas have enacted environmental
and clean air regulations that have served to encourage fleet operators to
convert portions of their vehicle fleets to cleaner fuel alternatives such a
LNG.





Special
cryogenic tank trailers are used to transport LNG from our plant site to
customer sites. We own several of these specialty trailers, but also lease
sufficient additional trailers from third parties to accommodate the logistics
of our shipment needs.




Our
principal executive offices are located at 5310 Harvest Hill Road, Suite 229,
Dallas, Texas 75230.




Current
Debt Obligations





As a
condition to closing of the Share Exchange, and among other conditions and
closing deliveries, PNG and its subsidiaries entered into an Amended and
Restated Credit Agreement dated June 26, 2008. In conjunction with this Credit
Agreement, PNG became obligated for the repayment of secured debt in the
principal amount of $34 million. The Credit Agreement is secured by virtually
all of the Company’s assets, excluding accounts receivables, and requires
monthly payments, in advance, of interest at the annualized rate of Libor plus
7.25%, with Libor subject to a floor of 2.5%. As such, the rate in effect as of
December 31, 2009 was an annualized rate of 9.75%. The Credit Agreement also
contains restrictions on the payment of dividends, capital expenditures and
other customary covenants and conditions, including a covenant to maintain
minimum positive EBITDA (earnings before interest, taxes, depreciation and
amortization) of at least $1,050,000 for any quarter ending on or after December
31, 2008, and a requirement to maintain a fixed charge coverage ratio (as
defined) of 1.10:1 for all quarters through June 30, 2009, and 1.15:1
thereafter. The Credit Agreement also requires quarterly payments of principal,
base upon 50% of quarterly EBITDA, adjusted (reduced) by principal and interest
payments and certain other changes in working capital. The Credit Agreement
matures on June 26, 2010. As of December 31, 2008, the Company was fully in
compliance with all terms of the Credit Agreement.





On
January 1, 2009, the Company entered into a modification to its Credit
Agreement. The amendment deferred payment of the Company’s January 1, 2009
interest payment in the amount of approximately $285,000, and required
additional principal payments to be made in the amount of $50,000 per month
commencing April 1, 2009.





In
connection with the Share Exchange, the Company also entered into a Master
Rights Agreement with the lender. As part of this agreement, 1,100,000
shares were issued to the lender as additional consideration for the amended
credit agreement. And, up to an additional 1,100,000 shares may be issued
to the lender in the future upon the occurrence of certain circumstances. This
agreement also grants lender certain registration rights that may require us to
use our best efforts to register under the Securities Act of 1933, as amended
(the “Securities Act”), the shares of common stock issued, and certain
additional shares that may be issued in the future, as described below. The
value of the shares issued pursuant to the Amended Credit Agreement were
recorded as a discount to the note based on relative fair values in the amount
of $156,795. As of December 31, 2008, there was $39,645 amortized on the
discount.




Line
of Credit





In
connection with the Share Exchange, the Company became obligated for the
repayment of a secured revolving line of credit with a lender that provides up
to $2.5 million of working capital financing against certain eligible accounts
receivables. This line of credit is secured via a senior lien on all
receivables, and bears interest at an annual rate of prime plus


20


2%, and
includes provisions for other monthly fees for services provided under the
agreement. During the 3rd quarter
of 2008, this line of credit was increased to a maximum of $3.0 million. As of
December 31, 2008, the outstanding balance related to the line of credit was
$1,871,000. The Company’s average annualized costs associated with this facility
is approximately 20%.





On
February 27, 2009, the maturity date on this revolving line of credit was
extended to March 1, 2010. In addition, the line of credit was reduced to $2.5
million, and the interest rate was modified to Libor plus 7%, with the Libor
rate subject to a floor of 2%. The amendment also added a prepayment penalty in
the amount of $25,000, a loan fee of .75% of the average loan amount
outstanding, payable monthly, and a loan commitment fee of $25,000 paid upon
execution of the amendment.





Convertible
Debt





In
connection with the Share Exchange, the Company became obligated for the
repayment of a $626,250 convertible promissory note payable to Black Forest
International, LLC (“BFI”). The note was convertible at any time into
756,325 shares of PNG stock, at $10 per share for a portion of the note totaling
$563,250, and $.09 per share for $63,000 balance of the note. Proceeds from the
third quarter private debt financing were used to repay $563,250 principle
balance on the note (the portion convertible at $10 per share), leaving a
balance outstanding as of December 31, 2008 of $63,000 that is convertible into
700,000 common shares at the conversion rate of $.09 per share, subject to
adjustment under certain circumstances as described below. Interest accrues at
12%, and is payable monthly. The note has no maturity date, but is due upon
demand.





The note
provides for future adjustment to the conversion rate any time that PNG issues
common shares or derivatives of common shares at an effective price of less than
$10 per share. The conversion rate adjustment provisions provide for
reduction in the conversion price based upon a factor, the numerator of which is
the effective price of the issued shares/derivatives, and the denominator of
which is $10. Further, the note has no stated maturity date, and does not
provide for prepayment in the absence of consent by the holder. The extent of
the dilution that may result from the application of the conversion provisions
may limit our ability to obtain additional capital investment. Although we plan
to address the punitive provisions of the Note either through negotiations
and/or litigation, we may not be able to succeed in eliminating their
provisions.





Also, in
connection with the Share Exchange, the Company became liable for a Subordinated
Convertible Promissory Note in the amount of $171,000. The note bears interest
at 12%, which is due and payable upon maturity of June 5, 2009. The note is
convertible at any time at a conversion price of $.09 per share, or 1,900,000
shares. The Company recognized a beneficial conversion feature in the amount of
$171,000, which was based on the intrinsic value of the conversion feature.
Amortization on the debt discount totaled $162,459 as of December 31,
2008. During the last half of 2008, $103,000 of the Note was converted to
1,190,000 common shares, leaving a remaining balance on the note as of December
31, 2008 was $67,500, net of the remaining discount of $8,541.





Private
Convertible Debt Financing





Effective
as of August 19, 2008, PNG Ventures, Inc. (the “Company”) entered into a
securities purchase agreement (the “Agreement”) with Castlerigg PNG Investments,
LLC (the “Investor”) pursuant to which the Investor purchased a 15% subordinated
convertible note for an aggregate principal amount of $3,188,235 (the “Note”).
As of December 31, 2008, the Investor also owned a beneficial interest of 60.38%
of the outstanding common shares of PNG. The Note bears interest at 15% per
annum and such interest is payable in arrears on the first day after the end of
each quarterly period, beginning September 30, 2008. Upon the closing of
the transactions contemplated by the Agreement, the Company prepaid interest to
the Investor in the amount of $477,000, representing interest due and payable on
the Note through August 19, 2009 (the “Prepaid Interest”). In addition,
$1,000,000 was placed into escrow to be used to pay interest accruing on the
Amended and Restated Credit Agreement.





The Note
matures on August 19, 2010 (the “Maturity Date”) however, the Maturity
Date may be extended at the option of the Investor through August 19,
2012.





The Note
is convertible at the option of the Investor at any time into shares of common
stock, $0.001 par value (the “Common Stock”) at an initial conversion price
equal to $10.00 per share (“Initial Conversion Price”) subject to adjustment
under certain circumstances.





In
connection with the Agreement, the Investor received a warrant to purchase
797,059 shares of Common Stock of the Company (the “Warrant”). The Warrant is
exercisable for a period of ten years from the date of issuance at an initial
exercise


21


price of
$10.00 per share, subject to adjustment under certain circumstances. At the date
of original issuance, the warrants had a relative fair value of $58,566.
Amortization on the related debt discount totaled $10,708 as of December 31,
2008.





Notes
Payable and Other Current Liabilities





The
Company entered into a note agreement dated September 29, 2008 in the amount of
$1,802,788 with a vendor that had previously supplied, but had not received
payment for, natural gas feedstocks to the Predecessor Entity. The note is due
on September 25, 2009, and requires monthly payments of $25,000 per month. If
the note is not paid in full on maturity, then the interest rate on any
remaining balance shall revert to the highest lawful rate, as defined, but in no
event higher than 18% per annum until such time as the note is fully paid. Under
certain conditions, including the sale by PNG of its common stock in a public
offering, the due date of the note may be accelerated. The balance of this note
as of December 31, 2008 was $1,763,583.





In
connection with the Share Exchange, the Company became liable to a vendor that
had previously provided, but not been paid for, transportation services to the
Predecessor Entity for natural gas feedstock to the plant. The Company agreed to
an informal arrangement to retire this liability over time. Generally, PNG has
agreed to make payments toward this trade debt in the amount of $20,000 per
month, with no interest due. As of December 31, 2008, the balance owed to the
vender was $1,032,428. The trade debt arose from transactions between the Vendor
and the Predecessor Entity in January and February 2008.





Other
current liabilities





The
Company has recorded an accrual in the amount of approximately $947,000 relating
to certain claims asserted by the Kelley Group, including, but not limited to,
its claim that it owns certain preferred stock in a PNG subsidiary, is due
certain accrued dividends related to such Preferred stock, and is owed certain
other amounts disputed by the Company.





Results
of Operations—PNG Ventures, Inc.





The
accompanying financial statements include a consolidated balance sheet,
consolidated statement of operations, consolidated statement of stockholders’
equity (deficit) and consolidated statement of cash flows for the Predecessor
Entity as of and for the year ended December 31, 2007. In addition, the
financial statements include a consolidated statement of operations and
consolidated statement of cash flows for the Predecessor entity for the six
month period ending June 30, 2008. These financial statements have been prepared
in accordance with generally accepted accounting principles in the United States
from the historical accounting records of Earth LNG, Inc. and are presented on a
historical basis until June 30, 2008, the date of the Share
Exchange.





The
accompanying financial statements also include a consolidated balance sheet,
consolidated statement of operations, consolidated statement of stockholders’
equity (deficit) and consolidated statement of cash flows for the Successor
Entity as of and for the six month period ended December 31,
2008.





For
management discussion and analysis purposes, we are including, for comparison
purposes, certain key statements of operations data for the year ended December
31, 2008. This data represents the mathematical addition of the results for the
Predecessor Entity for the period January 1, 2008 to June 30, 2008 and for
the Successor Entity for the period July 1, 2008 to December 31, 2008, and is
presented, in the table below, as “adjusted” December 31, 2008
data. Although this approach is not consistent with generally accepted
accounting principles, we believe it is the most meaningful way to review the
statements of operations data for such periods.





Also, in
the interest of presenting a meaningful comparison of operating data, we are
including a comparison of operating data for the Predecessor entity for the six
month period ended June 30, 2008 as compared to the Successor entity for the six
month period ended December 31, 2008.





The new
basis of accounting resulting from the share exchange effective as of June 30,
2008 and related financing had a significant effect on statements of operations
data for the subsequent period and reflects additional depreciation of property,
plant and equipment and interest expense on debt which is not comparable to the
Predecessor Entity.


22






Six Months Ended
                (dollars in thousands)
              
              
              Twelve Months Ended
      (dollars in thousands)Successor
      December 31, 2008
              
              
              Predecessor
                June 30,
      2008
              
              
              Adjusted
      December 31, 2008
              
              
              Predecessor
      December 31, 2007Statement
      of Operations Data:Revenue
              
              $
              17,099
              
              
              $
              14,804
              
              
              $
              31,903
              
              
              $
              26,068Cost
      of revenue
              
              
              12,814
              
              
              
              13,500
              
              
              
              26,314
              
              
              
              20,876Gross
      profit
              
              
              4,285
              
              
              
              1,304
              
              
              
              5,589
              
              
              
              5,192Compensation
              
              
              959
              
              
              
              531
              
              
              
              1,490
              
              
              
              992Other
      selling, general and administrative expenses
              
              
              1,948
              
              
              
              1,628
              
              
              
              3,576
              
              
              
              2,363Depreciation
              
              
              1,142
              
              
              
              753
              
              
              
              1,895
              
              
              
              1,734Operating
      income
              
              
              236
              
              
              
              (1,608
              )
              
              
              (1,372
              )
              
              
              103Interest
      expense, net
              
              
              (3,674
              )
              
              
              (3,147
              )
              
              
              (6,821
              )
              
              
              (3,519
              )Other
      income (expenses)
              
              
              —
              
              
              
              372
              
              
              
              372
              
              
              
              (219
              )Net
      loss before income tax provision
              
              
              (3,438
              )
              
              
              (4,383
              )
              
              
              (7,821
              )
              
              
              (3,635
              )Net
      Loss
              
              $
              (3,438
              )
              
              $
              (4,383
              )
              
              $
              (7,821
              )
              
              $
              (5,276
              )




Year
Ended December 31, 2008 (as defined) compared to December 31, 2007:





Revenue.  Total revenue
for 2008 increased $5.8 million, or 22%, to approximately $31.9 million
from approximately $26.1 million in 2007. The increase in total revenues
is due almost entirely to an approximate 21% increase in the average sales
price of LNG, due principally to generally higher prices for natural gas. The
volume of LNG sold during each of 2008 and 2007 was 24.1 million gallons, the
Topock plant contributed 92% and 97% of these volumes, respectively. The
remaining volumes were provided from LNG production facilities located in other
areas of the country.





Cost of
Sales.   The types of expenses included in the cost of
sales line item include the cost of natural gas, transportation charges,
purchasing and receiving costs, terminal fees for storage and loading. ELNG’s
cost of sales excludes depreciation, amortization, and compensation related to
the production of LNG. Cost of sales in 2008 increased $5.4 million, or 26.0%,
to approximately $26.3 million from approximately $20.9 million for 2007. ELNG’s
cost of goods sold is mainly affected by the cost of natural gas prices, and
volumes sold. Since the volumes of LNG sold during both periods was
approximately the same, virtually all of the increase in cost of sales is
attributable the generally higher market prices of pipeline quality natural gas
during 2008.





As an
additional note, during most of the six month period ended June 30, 2008, the
Predecessor Entity had a “swap” agreement in place with its former parent
company, whereby the former parent agreed to assume the risk or benefit of
securing gas supplies at spot prices, and guaranteeing a fixed monthly price to
the company. Since gas prices were generally trending up during this
period, the former parent sustained loss as a result of the Swap
agreement. Had this agreement not been in place, the Predecessor Entity
would have recorded additional cost of sales related to gas procurements during
the six-months ended June 30, 2008 of approximately $2 million.





Gross Profit and
Margin:Gross profit increased from $5.2 million in 2007 to
$5.6 million in 2008; however, the gross profit margin declined from 19.9% in
2007 to 17.5% in 2008. Virtually all of this decline can be attributed to
increasing gas prices in 2008. Many of our customer contracts contain index plus
pricing provisions that lock our margins to a fixed increment over the
applicable gas index price. Accordingly, in periods of rising natural gas
prices, our revenues may increase, without a corresponding increase in gross
margin. Management considers that the margin per LNG gallon sold is a more
meaningful metric of performance. Margins per LNG gallon sold were $0.232 in
2008 and $0.215 in 2007.





Compensation
Expenses.Compensation expenses increased from approximately
$1.0 million in 2007 to $1.5 million in 2008. Virtually all of this increase
occurred subsequent to the share exchange during the last six months of 2008,
and is associated with increased staffing, related principally to the separation
of the LNG Business from the former parent.


23


Other Operating
Expenses.  The types of expenses included in other operating
expenses include repairs and maintenance, field operating expense, office
expenses, insurance, professional services, travel expenses and other
miscellaneous expenses. Other operating expenses during 2008 increased
approximately $1.2 million, or approximately 51% higher than the level 2007. The
2008 cost increases over the 2007 costs related primarily to repairs and
maintenance, plant operating costs, professional services, insurance costs, and
other miscellaneous expenses, many of which relate to the period subsequent to
the Share Exchange.





Interest Expenses. 
Interest expenses increased by $3.3 million in 2008 due to substantially higher
debt levels, and to the assumption of additional term debt facilities as part of
the share exchange, and also due to substantial amortization of deferred
financing expenses, also related to the share exchange. Total interest bearing
debt was approximately $39 million as of December 31, 2008, compared to $20
million as of December 31, 2007. In addition, interest expense during 2008
includes non-cash amortization debt discount of $1.3 million compared to $.5
million in 2007.





Six
Months Ended December 31, 2008(Successor Entity) Compared to Six Months Ended
June 30, 2008 (Predecessor Entity)





Revenue.  Total revenue
for the six months ended December 31, 2008 increased $2.3 million, or 15.5%, to
approximately $17.1 million. The increase in total revenues is due in
part to a 9.5% increase in the volume of LNG sold, and in part to an 1.5%
increase in the average price of LNG sold. Total LNG gallons sold during the
last half of the year were 12.6 million gallons, compared to 11.5 million
gallons during the first half of the year. The Topock plant provided 88% and
98%, of LNG gallons sold during the last half of 2008 and first half of 2008,
respectively, representing plant efficiency factors of 70% and 72%,
respectively.





Cost of
Sales.   The types of expenses included in the cost of
sales line item include the cost of natural gas, transportation charges,
purchasing and receiving costs, terminal fees for storage and loading. ELNG’s
cost of sales excludes depreciation, amortization, and compensation related to
the production of LNG. Cost of sales for the last half of 2008 decreased by $.7
million as compared to the first half of 2008, due in part to falling natural
gas prices during late 2008, but offset by a 9.5% increase in the volume of LNG
gallons sold.





Gross Profit and
Margin:Gross profit increased from $1.3 million in the first
half of 2008 to $4.3 million in the last half 2008, an increase of 228%. The
gross profit margin increased from 8.9% in the first half of 2008 to 25.1% in
the last half of 2008. Margins per LNG gallon sold were $0.34 in the last half
of 2008 compared to $0.113 in the first half of 2008. Most of the improvement in
margin per LNG gallon sold can be attributed to better natural gas feedstock
procurement practices that were implement after the Share Exchange, and by the
favorable effect of one major fixed price customer contract that commenced on
July 1, 2008, coupled with generally declining natural gas prices during the
last half of 2008.





Compensation
Expenses:Compensation expenses increased from approximately
$.5 million in the first half of 2008 to $1.0 million in the last half of 2008.
Virtually all of this increase occurred as a result of the Share Exchange, and
is associated with increased staffing, related principally to the separation of
the LNG Business from the former parent.





Other Operating
Expenses. The types of expenses included in other operating expenses
include office expenses, insurance, professional services, travel expenses and
other miscellaneous expenses. Other operating expenses for the last half of 2008
increased approximately $320,000, or approximately 41%. This increase over the
cost levels experienced during the first half of 2008 relates primarily to
repairs and maintenance, plant operating costs, professional services, insurance
costs, and other miscellaneous expenses, much of which relates to the addressing
and correction of operations subsequent to the Share Exchange.





Liquidity
and Capital Resources




The
Company's primary sources of liquidity are cash flows from operations and
existing cash and cash equivalents. Operating assets and liabilities consist
primarily of receivables from customers, accounts payable, accrued expenses, and
accrued payroll and related benefits. The volume of billings and timing of
collections and payments affect these account balances. As of December 31, 2008,
the Company's liquidity and capital resources included cash and cash equivalents
of $419,000.




In
conjunction with the acquisition of the LNG business, PNG assumed substantial
obligations of the LNG business, including the $34 million Amended and Restated
Credit Facility,  and the line of credit, as well as other debts
described in the Notes to the financial statements, and trade payable accounts
of the LNG business. As of December 31, 2008, the Company had a negative
working capital of approximately $3.4 million, and substantial future interest
and principal payments related to its credit facilities and other structured
debts. As a result, the Company expects to seek additional equity capital
in order to


24


reduce
its overall debt and strengthen its financial condition. While management
believes that the company can continue as a going concern, there is no assurance
that attempts to secure additional equity financing will be successful, nor that
the Company can continue as a going concern.




The
Company believes that cash flows generated from operations, existing cash and
cash equivalents and borrowing capacity under our new senior secured credit
facility are marginally sufficient to finance the current requirements of our
operations and anticipates the need for future equity investment and/or a
restructuring of the Company’s existing indebtedness. The Company will need
additional capital to continue its business plan and increase capacity at its
Topock facility. Management also intends to pursue a growth strategy for
the Company that will include the securing of additional LNG production
capacity, either by the construction of new facilities, or acquisition of
existing facilities. Increasing production capacity will require the
company to expand is marketing efforts, as well as its current area of
geographic operations. This growth strategy will require additional equity
capital to fund both capital and operating requirements. While management
believes that equity capital to fund growth may be available, there is no
assurance that such capital can be secured.




Our
ability to obtain needed financing may be impaired by such factors as the
capital markets (both generally and in the natural gas industry in
particular), our status as a new enterprise without a significant demonstrated
operating history, the location of our natural gas properties and prices of
natural gas on the commodities markets (which could impact the amount of
financing available to us) and/or the loss of key management. Further, if
oil and/or natural gas prices on the commodities markets decrease, then our
revenues will likely decrease, and such decreased revenues may increase our
requirements for capital. If the amount of capital we are able to raise
from financing activities, together with our revenues from operations, is not
sufficient to satisfy our capital needs (even to the extent that we reduce our
operations), we may be required to cease our operations.





The
success of our operations and business growth and expansion strategy depends
upon our ability to raise additional equity and debt financing and our ability
to generate sufficient cash flow from operations. We expect to continue to
devote capital resources to fund our business plan. In order to support the
initiatives envisioned in our business plan, we intend to raise additional funds
through the sale of equity, debt or a combination of the two. Our operating
performance and ability to raise additional financing depends on many factors
beyond our control, including the prevailing economic conditions, state of the
capital markets, the market price of our common stock and other risks and
uncertainties including the prices of natural gas and our dependence on key
suppliers and adverse changes in governmental incentives and governmental
regulation. We might not have access to the funding required for the expansion
of our business or such funding might not be available to us on acceptable
terms. We might finance the expansion of our business with additional
indebtedness or by issuing additional equity securities. The amount of any
additional indebtedness could be substantial. We could face financial risks
associated with incurring additional indebtedness, such as reducing our
liquidity and access to financial markets and increasing the amount of cash flow
required to service our debt, or associated with issuing additional stock, such
as dilution of ownership and earnings. An increase in our debt would decrease
the amount of funds available for our growth strategy, thereby making it more
challenging to implement our strategy in a timely manner, or at all. If future
cash flows and capital resources are insufficient to meet our debt obligations
and commitments, we may be forced to reduce or delay activities and capital
expenditures, obtain additional equity capital or debt financing. In the event
that we are unable to do so, we may be left without sufficient liquidity and we
may not be able to continue operations.





Much of
our debt outstanding includes warrants and/or common stock derivatives that
could result in substantial dilution to existing and prospective shareholders,
thereby potentially increasing the difficulty in securing new debt or equity
financings. Virtually all of the existing derivatives include anti-dilution
provisions and conversion price redetermination provisions that potentially
exacerbate the problem. In particular, the remaining portion of the Black Forest
Note is currently convertible into 700,000 PNG shares at the current conversion
rate of $.09 per share. The note provides for future adjustment to the
conversion rate any time that PNG issues common shares or derivatives of common
shares at an effective price of less than $10 per share. The note and its
embedded conversion rate adjustment provisions are considered extremely punitive
and toxic, since the adjustment provision provides for reduction in the
conversion price based upon a factor, the numerator of which is the effective
price of the issued shares/derivatives, and the denominator of which is $10.
Under the terms of the note, the conversion price is subject to unlimited
adjustments. Further, the note has no due date, and the note cannot be prepaid
in the absence of consent by the holder. The extent of the dilution that may
result from the application of the conversion provisions may limit our ability
to obtain additional capital investment. Although we plan to address the
punitive provisions of the Note either through negotiations and/or litigation,
we may not be able to succeed in eliminating their adverse effect.





We may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which may adversely impact
our financial condition.


25





Net cash
used by operating activities was approximately $984,000 during the six months
ended December 31, 2008 compared to cash provided by operating activities of $.8
million during the first half of 2008. Much of the cash consumed in the
operation during the last half of 2008 can be attributed to sales growth
(increase in receivables), and improvements in the Company’s aging of accounts
payable. Management believes that operating activities are substantially more
stable now than at the closing of the Share Exchange, and expects that future
operations should result in positive cash flow provided by operating
activities.





Net cash
used in investing activities during the last half of 2008 was approximately
$381,000, most of which related to capital expenditures, principally related to
major maintenance and equipment replacements at the Topock facility during
September 2008. Management expects that equipment replacements at Topock of this
magnitude will likely occur every year.





Critical
Accounting Policies and Estimates





Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
and requires management to make estimates and assumptions that affect the
amounts reported in the accompanying financial statements and related
footnotes.





Management
bases its estimates and assumptions on historical experience, observance of
industry trends and various other sources of information and factors. Estimates
are based on information available as of the date of the financial statements
and, accordingly, actual results could differ from these estimates, sometimes
materially. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and potentially could
result in materially different results under different assumptions and
conditions. The most critical accounting policies and estimates are described
below.





The
accompanying PNG consolidated financial statements (“Successor Entity”) and the
supporting and supplemental material is the responsibility of the management of
the Company.





Use of Estimates — The
preparation of Successor Entity consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.





Fair Market Value of Financial
Instruments— The estimated fair value of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses and other liabilities
approximate their carrying amounts in the financial statements. The Company’s
financial instruments include notes payable. The carrying value of notes payable
approximates market value because the borrowing rate is similar to other
financial instruments with similar terms.





Accounts Receivable —
Accounts receivable are recorded at net realizable value, which includes an
allowance for estimated uncollectible accounts to reflect any loss anticipated
on the collection of accounts receivable balances. The Company uses the
allowance method of accounting for doubtful accounts. The year-end balance is
based on historical collections and management’s review of the current status of
existing receivables and estimate as to their collect ability. We calculate
the allowance based on our history of write-offs, level of past due accounts and
economic status of the customers.





Impairment of Long-Lived Assets — In accordance with Statement of Financial Accounting Standards
No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,”
the Company reviews the carrying value of its long-lived assets annually or
whenever events or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be appropriate. The Company
assesses recoverability of the carrying value of the asset by estimating the
future net cash flows expected to result from the asset, including eventual
disposition. If the future net cash flows are less than the carrying value of
the asset, an impairment loss is recorded equal to the difference between the
asset’s carrying value and fair value.





Revenue— Revenues consist
principally of liquefied natural gas which is sold to end users and is
recognized based on actual volumes of LNG sold. Revenue is recognized in
accordance with SEC Staff Accounting Bulletin (SAB) No. 104 “Revenue
Recognition” (“SAB 104”), when persuasive evidence of an arrangement
exists, the fee is fixed or determinable,


26


collectability
is probable, delivery of a product has occurred and title and risk of loss has
transferred or services have been rendered. Revenues include shipping and
handling costs billed to the customers.





Income Taxes — On a
prospective basis, the Company expects to file a consolidated federal tax
return. Income taxes are expected to be allocated to each member in
the consolidated group based on the taxable temporary differences of each member
using the asset and liability method of accounting. Deferred tax assets and
liabilities are recognized for temporary differences between financial statement
carrying amounts and the tax bases of assets and liabilities, and are measured
using the tax rates expected to be in effect when the differences reverse.
Deferred tax assets are also recognized for operating loss and tax credit carry
forwards. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the results of operations in the period that includes the
enactment date. A valuation allowance is used to reduce deferred tax assets when
uncertainty exists regarding their realization.





Significant
Concentrations — Financial instruments that potentially subject us
to a concentration of credit risk consist principally of trade accounts
receivable. We perform ongoing credit evaluations of our customers and generally
do not require collateral on accounts receivable, as the majority of our
customers are government entities. We maintain reserves for potential
credit losses, but historically have not experienced any significant losses
related to any particular geographic area.




Off-Balance
Sheet Arrangements




PNG does
not have any off-balance sheet financing arrangements or liabilities, guarantee
contracts, retained or contingent interests in transferred assets or any
obligation arising out of a material variable interest in an unconsolidated
entity.




Recent
Accounting Announcements:





In
December 2007, the Financial Accounting Standards Board issued FASB No. 141R,
“Business Combinations.” FASB 141R establishes principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. FASB 141R also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FASB 141R will become effective as of the beginning of the
Company's fiscal year beginning after December 15, 2008. The impact that
adoption of FASB No. 141R will have on the Company's consolidated financial
statements will depend on the nature, terms, and size of business combinations
that occur after the effective date.





In
December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) 110 Share-Based Payment. SAB 110
amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based
Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of
Topic 14 expresses the views of the staff regarding the use of the “simplified”
method in developing an estimate of the expected term of “plain vanilla” share
options and allows usage of the “simplified” method for share option grants
prior to December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007. SAB 110 was effective
January 1, 2008. The Company has used the “simplified” method to estimate the
expected term for share option grants as it does not have enough historical
experience to provide a reasonable estimate. The Company will continue to use
the “simplified” method until it has enough historical experience to provide a
reasonable estimate of expected term in accordance with SAB 110. The adoption of
SAB 110 did not have a material impact on its consolidated balance sheets,
statements of operations and cash flows.





The
Company adopted SFAS No. 157, Fair Value Measurements(“SFAS 157”).
In February 2008, the FASB issued FSP No. 157-2, Effective Date of FASB Statement
No. 157, which provides a one-year deferral of the effective date of
SFAS 157 for non-financial assets and non-financial liabilities, except for
those that are recognized or disclosed in the financial statements at fair value
at least annually. Therefore, the Company has adopted the provisions of
SFAS 157 only with respect to financial assets and liabilities, as well as
any other assets and liabilities carried at fair value. SFAS 157 defines
fair value, establishes a framework for measuring fair value under generally
accepted accounting principles and enhances disclosures about fair value
measurements. Fair value is defined under SFAS 157 as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under SFAS 157 must
maximize the use of observable inputs and minimize the use of unobservable
inputs. The standard describes how to measure fair value based on a three-level
hierarchy of inputs, of which the first two are considered observable and the
last unobservable.


27




•
            Level 1 —
      Quoted prices in active markets for identical assets or
      liabilities.•
            Level 2 —
      Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.•
            Level 3 —
      Unobservable inputs that are supported by little or no market activity and
      that are significant to the fair value of the assets or
      liabilities.




The
adoption of this statement did not have a material impact on the Company’s
consolidated results of operations or financial condition. The Company does not
currently expect the application of the fair value framework established by
SFAS 157 to non-financial assets and liabilities measured on a
non-recurring basis to have a material impact on the consolidated financial
statements. However, the Company will continue to assess the potential effects
of SFAS 157 as additional information becomes available.





The
Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS 159”).
SFAS 159 allows an entity the irrevocable option to elect fair value for
the initial and subsequent measurement for specified financial assets and
liabilities on a contract-by-contract basis. The Company did not elect to adopt
the fair value option on any assets or liabilities not previously carried at
fair value under SFAS 159.





In March
2008, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement No. 133(“SFAS 161”). The objective of SFAS 161 is to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS 161 is not
expected to have a material impact on the Company’s financial condition and
results of operations. However, the Company believes it will likely be required
to provide additional disclosures as part of future financial statements,
beginning with the first quarter of fiscal 2009.





In April
2008, FASB issued FASB Staff Position (“FSP”) No. 142-3
(“FSP 142-3”),
Determination of the Useful Life of Intangible Assets, which amends the
factors that must be considered in developing renewal or extension assumptions
used to determine the useful life over which to amortize the cost of a
recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets. FSP 142-3 requires an entity to consider its own assumptions
about renewal or extension of the term of the arrangement, consistent with its
expected use of the asset. FSP 142-3 also requires the disclosure of the
weighted-average period prior to the next renewal or extension for each major
intangible asset class, the accounting policy for the treatment of costs
incurred to renew or extend the term of recognized intangible assets and for
intangible assets renewed or extended during the period, if renewal or extension
costs are capitalized, the costs incurred to renew or extend the asset and the
weighted-average period prior to the next renewal or extension for each major
intangible asset class. FSP 142-3 is effective for financial statements for
fiscal years beginning after December 15, 2008. The adoption of
FSP 142-3 is not expected to have a material impact on the Company’s
financial condition and results of operations.





Recent
Events




Cem
Hacioglu, a director of the Company, was appointed by the Company’s Board of
Directors as President and Chief Executive Officer, effective February 16, 2009.
Mr. Hacioglu remains a director of the Company, but has resigned his employment
with Sandell Asset Management Corp., an affiliate of Castlerigg PNG Investments,
LLC, effective February 16, 2009. The appointment, and a copy of Mr. Hacioglu’s
employment agreement, were included in the Company’s current report on Form 8-K,
filed with the Securities and Exchange Commission on February 4,
2009.





On
January 1, 2009, the Company entered into a modification to its Secured Credit
agreement. The amendment deferred payment of the Company’s January 1, 2009
interest payment in the amount of approximately $285,000, and required
additional principal payments to be made in the amount of $50,000 per month
commencing April 1, 2009.





On
February 27, 2009, the maturity date on the revolving line of credit was
extended to March 1, 2010. In addition, the line of credit was reduced to $2.5
million, and the interest rate was modified to Libor plus 7%, with the Libor
rate subject to a floor of 2%. The amendment also added a prepayment penalty in
the amount of $25,000, a loan processing fee of .75% of the average loan amount
outstanding, payable monthly, and a loan processing fee of $25,000 paid upon
execution of the amendment.


28





Item
7A.                
Quantitative and Qualitative Disclosures about Market Risk.




Commodity
Risk.    We are subject to market risk with respect
to our sales of natural gas, which has historically been subject to volatile
market conditions. Our exposure to market risk is heightened when we have a
fixed price sales contract with a customer that is not covered by a futures
contract, or when we are otherwise unable to pass through natural gas price
increases to customers. Natural gas prices and availability are affected by many
factors, including weather conditions, overall economic conditions and foreign
and domestic governmental regulation and relations.




Natural
gas costs represented 71% of our cost of sales for the six month period ended
December 31, 2008. Prices for natural gas during 2008, based on the NYMEX daily
futures data, have ranged from a low of $5.21 per MMBtu to a high of $13.69 per
MMBtu. At December 31, 2008, the NYMEX index price of natural gas was $5.62
per MMBtu.




To reduce
price risk caused by market fluctuations in natural gas, we may enter into
exchange traded natural gas futures contracts. These arrangements also expose us
to the risk of financial loss in situations where the other party to the
contract defaults on its contract or there is a change in the expected differential between the underlying price in the
contract and the actual price of natural gas we pay at the delivery point. We
account for these futures contracts in accordance with
SFAS 133.




The fair
value of the futures contracts we use is based on quoted prices in active
exchange traded or over the counter markets which are then discounted to reflect
the time value of money for contracts applicable to future periods. The fair
value of these futures contracts is continually subject to change due to
changing market conditions. The net effect of the realized and unrealized gains
and losses related to these derivative instruments for the six-month period
ended December 31, 2008 was a $176,000 decrease to pre-tax
income.




We
currently have one major fixed price customer contract that comprised 37% or our
revenues during the six-months ended December 31, 2008, and is scheduled to
expire on June 30, 2008. We have not hedged any portion of this contract, nor do
we have any plans to hedge any portion of this contract. However, the fixed
pricing provision of this contract is sufficiently high such that management
believes that any exposure to a loss on this contract as a result of substantial
increases in gas prices is remote.




Interest Rate
Risk.  Our business is highly leveraged and, accordingly, is
highly sensitive to fluctuations in interest rates. Any significant increase in
interest rates could have a material adverse affect on our financial condition
and ability to continue as a going concern. See Part II, Item 7, “Current Debt
Obligations” and “Line of Credit.”





Item
8.                     Financial
Statements and Supplementary Data.





The  information
required by this item is set forth on pages F-1 through F-21 of this
report.





Item
9.                     Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.





None.





Item
9A.                  Controls
and Procedures.





Evaluation
of Disclosure Controls and Procedures.





The Chief
Executive Officer and the Principal Financial and Accounting Officer evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2008,
the end of the period covered by this report. Based upon their evaluation, they
concluded that as of December 31, 2008, our disclosure controls and
procedures were designed at the reasonable assurance level and were effective at
the reasonable assurance level to provide reasonable assurance that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to management, including our Chief Executive
Officer and our Principal Financial and Accounting Officer, as appropriate
to allow timely decisions regarding required disclosure.


29





Changes
in Internal Control Over Financial Reporting





There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter
ended December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





Management’s
Report on Internal Control Over Financial Reporting





We are
responsible for establishing and maintaining adequate internal control over
financial reporting in accordance with Exchange Act Rule 13a-15. With the
participation of our Chief Executive Officer and Principal Financial and
Accounting Officer evaluated the effectiveness of our internal control over
financial reporting as of December 31, 2008, based on the criteria we
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Given the Company’s
corporate history, as a shell company until June 30, 2008, that completed an
acquisition of an operating business on June 30, 2008, this was the initial
evaluation by current management of such controls.





In its
evaluation, management evaluated whether the Company had sufficient “preventive
controls” which are controls that have the objective of preventing the
occurrence of errors or fraud that could result in a misstatement of the
financial statements, and “detective controls” which have the objective of
detecting errors or fraud that has already occurred that could result in a
misstatement of the financial statements. In its evaluation, management
considered whether there were sufficient internal controls over financial
reporting, in the context of the Company’s control environment, financial risk
assessment, internal control activities, monitoring, and communication to
determine whether sufficient controls are present and functioning
effectively.





Management
recognizes that a control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.





However,
management evaluated whether it has implemented controls that adequately address
the risk that a material misstatement of the financial statements would not be
prevented or detected in a timely manner. In this regard, management undertook a
top-down, risk-based approach to this evaluation, including an evaluation of
entity-level controls in assessing financial reporting risks and the adequacy of
controls. In its evaluation, management focused on those controls that are
needed to adequately address the risk of a material misstatement of its
financial statements.





The
controls that management sought to identify and evaluate were those processes
designed by, or under the supervision of, the Company’s principal financial
officers, or persons performing similar functions, and implemented by our board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:





(1)       pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the
Company;


(2)        provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the issuer are
being made only in accordance with authorizations of management and directors of
the Company; and


(3)       provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the issuer’s assets that could have a
material effect on the financial statements.





A
deficiency in the design of internal control over financial reporting exists
when (a) necessary controls are missing or (b) existing controls are not
properly designed so that, even if the control operates as designed, the
financial reporting risks would not be addressed.





Unfortunately,
it became apparent to the Company during its assessment that the Company did not
maintain a sufficient complement of personnel with an appropriate level of
accounting knowledge, experience and training in the application of generally
accepted accounting principles commensurate with our financial reporting
requirements.





Nevertheless,
the Company clearly recognizes the importance of implementing and maintaining
disclosure controls and procedures and internal control over financial reporting
and has worked to implement of an effective system of controls.


30





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. Management has
determined that we have at least the following material weakness in our internal
control over financial reporting as of December 31, 2008, which has been
disclosed to, and reviewed with, our independent auditor.





Insufficient
personnel with appropriate accounting knowledge and training.





We did
not maintain a sufficient complement of personnel with an appropriate level of
accounting knowledge, experience and training in the application of generally
accepted accounting principles commensurate with our financial reporting
requirements. This deficiency could result in misstatements of the
aforementioned accounts and disclosures that would result in a material
misstatement to the annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, management has determined this
control deficiency constitutes a material weakness. Based on the above described
material weakness, our management, including our CEO and principal financial and
accounting officer concluded that we did not maintain effective internal control
over financial reporting as of December 31, 2008, based on the criteria in Internal Control-Integrated
Frameworkissued by the COSO.





Implemented
or Planned Remedial Actions of the Material Weakness





As of
February 16, 2008, Cem Hacioglu was appointed as President and Chief Executive
Officer of the Company. This appointment strengthens the overall management of
the Company, including its financial management qualifications and
expertise.





In order
to address the internal control weakness, management intends to implement a
number of changes in the very near future, that include substantially more
documentation of internal control procedures and processes, additional
segregation of duties, and compensating controls to strengthen control issues
resulting from limited staff. In addition, management intends to implement an
internal test program designed to test the effectiveness of its internal control
over financial reporting.





This
annual report does not, and is not required to, include an attestation report of
the Company’s registered accounting firm regarding internal control over
financial reporting.





Limitations in Control
Systems





Our
controls and procedures were designed at the reasonable assurance level.
However, because of inherent limitations, any system of controls and procedures,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance of achieving the desired objectives of the control system.
In addition, the design of a control system must reflect the fact that there are
resource constraints, and management must apply its judgment in evaluating the
benefits of controls relative to their costs. Further, no evaluation of controls
and procedures can provide absolute assurance that all errors, control issues
and instances of fraud will be prevented or detected. The design of any system
of controls and procedures is also based in part on certain assumptions
regarding the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future
conditions.





Item
9B.              
  Other Information





Changes
in Control of Registrant





None.





Change
of Management





As of
February 16, 2008, Cem Hacioglu was appointed as President and Chief Executive
Officer of the Company. Since May 2005, Mr. Hacioglu has been co-portfolio
manager of the Direct Investment Group of Sandell Asset Management
Corp. Prior to May 2005, Mr. Hacioglu worked as a Portfolio Manager at
Millennium Partners where he helped manage Millennium’s direct investment
portfolio. Prior to joining Millennium Partners, Mr. Hacioglu was a Vice
President at Fletcher Asset Management, an associate in the Private Equity
Placements Group at Merrill Lynch and an analyst at the World Bank. Mr.
Hacioglu earned his B.S. Degree in Economics from the United States Military
Academy, West Point, and his M.B.A. in Financial Management from the MIT Sloan
School of Management.


31


Entry
into a Material Definitive Agreement





None.





PART
      III




Item
      10.
            Directors,
      Executive Officers, Promoters And Control
  Persons.




Our
executive officers and directors and their respective ages and positions are as
follows:





Name
            
            Age
            
            PositionW.
      Phillip Marcum
            
            65
            
            Director
      and Chairman since August 19, 2008Cem
      Hacioglu
            
            38
            
            Director,
      since August 20, 2008; President and Chief Executive Officer since
      February 16, 2009Matthew
      Pliskin
            
            32
            
            Director,
      since August 20, 2008John
      F. Levy
            
            53
            
            Director,
      since November 21, 2008Corey
      B. Davis
            
            37
            
            Director,
      since November 21, 2008Kevin
      P. Collins
            
            58
            
            Director,
      since November 21, 2008John
      Devenny
            
            36
            
            Director
      since June 23, 2008 (resigned October 21, 2008)Luis
      J. Leung
            
            39
            
            Director
      since May 22, 2008 (resigned December 7, 2008)Mark
      L. Baum
            
            35
            
            Director,
      CEO, CFO and Secretary  since June 23, 2004 (resigned May 22,
      2008)Kevin
      Markey
            
            49
            
            Chief
      Executive Officer from May 22, 2008 to February 15,
2009





Executive
Biographies





W.
Phillip Marcum, Director and Chairman of the Board


Since
2007, Mr. Marcum has served as a principal of MG Advisors, LLC. From 1991
until 2007, Mr. Marcum co-founded and served as Chairman of the board,
President and Chief Executive Officer of Metretek Technologies, Inc. (now known
as PowerSecure International, Inc.), an energy management company. Mr.
Marcum holds a B.B.A from Texas Tech University. Mr. Marcum
currently serves as a director of the following public companies: ADA-ES, Inc.
an environmental technology company and Key Energy Services, Inc., a well
servicing company.




Cem
Hacioglu, President, Chief Executive Officer, and Director


Mr.
Hacioglu joined the Company as President and CEO on February 16, 2009.
From  May 2005 to February 2009, Mr. Hacioglu was a co-portfolio
manager of the Direct Investment Group of Sandell Asset Management Corp., an
affiliate of the Investor. Prior to May 2005, Mr. Hacioglu worked as a
Portfolio Manager at Millennium Partners where he helped manage Millennium’s
direct investment portfolio. Prior to joining Millennium Partners, Mr.
Hacioglu was a Vice President at Fletcher Asset Management, an associate in the
Private Equity Placements Group at Merrill Lynch and an analyst at the World
Bank. Mr. Hacioglu earned his B.S. Degree in Economics from the United
States Military Academy, West Point, and his M.B.A. in Financial Management from
the MIT Sloan School of Management.





Matthew
Pliskin, Director


Since May
2005, Mr. Pliskin has been portfolio manager at Sandell Asset Management
Corp. Prior to May 2005, Mr. Pliskin was an Investment Analyst and
Trader at Millennium Partners where he managed the direct investment portfolio
of over $300 million. Before joining Millennium Partners, Matthew was an
assistant portfolio manager at Redwood Partners managing positions across
various equity strategies, an assistant sales-trader on the risk arbitrage desk
at Knight Securities and an analyst at Arthur Andersen performing financial due
diligence for private equity transactions. Mr. Pliskin graduated from
Pennsylvania State University with a B.S. Degree in accounting.





John
F. Levy, Director


Since May
2005, Mr. Levy has served as the Chief Executive Officer of Board Advisory, a
consulting firm which advises companies in the areas of corporate governance,
corporate compliance, financial reporting and financial strategies. Mr.
Levy has served as the Interim Chief Financial Officer of Photovoltaic Power
Corporation, a development stage company formedto manufacture and
market copper indium selenide (CIS) thin film solar modules. Mr. Levy
served as Interim Chief Financial Officer from November 2005 to March 2006 of
Universal Food & Beverage Company, which filed a voluntary petition under
the provisions of Chapter 11 of the United States Bankruptcy Act on August 31,
2007. From November 1997 to May 2005, Mr. Levy served as Chief Financial
Officer of MediaBay, Inc., a NASDAQ company and provider of spoken word audio
content. While at MediaBay, he also served for a period as its Vice
Chairman. Mr. Levy is a Certified Public


32


Accountant
with nine years experience with the national public accounting firms of Ernst
& Young, Laventhol & Horwath and Grant Thornton. Mr. Levy is a director
and Chairman of the Audit Committee of Take-Two Interactive Software, Inc., a
publicly traded company that develops, markets, distributes and publishes
interactive entertainment software games, Lead Director and Audit Committee
Chairman of Gilman Ciocia, Inc, a financial planning and tax preparation firm,
and is a director and Chair of a Special Committee of Atlas Mining Company, an
exploration stage natural resource and mining company. Mr. Levy has a B.S.
degree in economics from the Wharton School of the University of Pennsylvania
and received his M.B.A. from St. Joseph's University in
Philadelphia.





Corey
B. Davis, Director


Since
November 2007, Mr. Davis has been the President of Barrington Capital Advisors
LLC, an independent advisory firm he founded. From April 2004 until November
2007, Mr. Davis was an investment banker at Banc of America Securities in the
Financial Institutions Group. There he advised clients within the insurance
and reinsurance industry. From August 2000 to March 2004, Mr. Davis was a Vice
President at Credit Suisse by way of its acquisition
of Donaldson, Lufkin & Jenrette (“DLJ”). Mr. Davis joined DLJ in July
1998 and was an investment banking Associate in the Financial Institutions
Group at the time of the acquisition by Credit Suisse. From July 1994 to June
1996, Mr. Davis was an investment banking analyst at J.P. Morgan Securities
covering depository institutions. Mr. Davis earned his B.S. Degree in Finance
from Georgetown University in 1994, and his M.B.A. from Harvard Business School
in 1998.





Kevin
P. Collins, Director


Since
1997, Mr. Collins has been Managing Member of The Old Hill Company LLC,
Westport, Connecticut. The Old Hill Company provides corporate finance and
management consulting services primarily to companies that have undergone
financial reorganization. Prior to that, Mr. Collins worked with several large
financial institutions in lending, investing, and advisory capacities; these
institutions include New York Life Insurance Company, Chemical Bank, Lloyds Bank
International, and Samuel Montagu, Inc. and DG Investment Bank. Mr. Collins
holds B.S. and MBA degrees from the University of Minnesota and is a Chartered
Financial Analyst.





Kevin
Markey, Chief Executive Officer (from May 22, 2008 through February 15,
2009)


Mr.
Markey has been the Vice President of Sales & Operations since February
16, 2009, and prior to that served as interim Chief Executive Officer of PNG
Ventures, Inc. from May 22, 2008 to February 15, 2009. Mr. Markey is a CPA/MBA
and has been a financial controller in the Dallas/Fort Worth area for
approximately 22 years. He began his career with Phillips Petroleum’s
alternative fuels’ Geothermal Group during which time he introduced innovations
in accounting funding processes. He then worked with a software consulting
company, followed by a media consulting company, then returned to the
alternative fuels industry with a start-up ethanol company. Most recently, he
worked four years for a consumer products manufacturing company as Operations
Manager where he managed logistics and assisted in cost-cutting efforts. He
holds a Bachelor of Arts and Bachelor of Science in Accounting and Sciences from
the University of Texas at Dallas and an Executive MBA from East Texas State
(now Texas A&M - Commerce).





Luis
J. Leung, Director (resigned December 7, 2008)


Mr. Leung
began his career in São Paulo, Brazil in 1988 with Smar Equipamentos Industrias
Ltd as a Research and Development Software Engineer. In 1991, he helped
establish the company’s operations in the United States and was promoted to CIO
and Comptroller. From 1994 to 1997 Mr. Leung helped structure operations
and systems for the company’s headquarters as well as for its subsidiaries in
Germany, France and Singapore. In 2004, Mr. Leung co-founded Scitus Corporation,
a Microsoft VAR and ISV, and the Alba Spectrum Group a consulting company. The
Alba Spectrum Group has operations in Chicago, Houston and São Paulo, Brazil.
Its line of products includes Microsoft, SAP, and Oracle. In 2001, Mr.
Leung co-founded Advent Corporation, a software development company and
Microsoft Partner. The company merged with Enterlogix Corporation in 1992.
Enterlogix Corporation, after the merger, was the largest Microsoft Great Plains
implementation practice in the state of Texas. In 1997, Mr. Leung started
his consulting career at Hein + Associates LLP in Houston, TX as a Project
Manager. In 1999, he was hired by Grant Thornton, LLP as a Consulting Manager
and participated in several multi-country systems implementations. In 2000, he
worked at ePartners, Inc. as a CRM Practice Leader. Mr. Leung holds a
Bachelors of Science from Instituto Tecnologico Aerospacial,
Brazil.





Mark
L. Baum, Esq., Director, President, Chief Executive Officer, Chief Financial
Officer, and Secretary (resigned May 22, 2008)


In 2002,
Mr. Baum founded Business Consulting Group Unlimited, Inc., a Southern
California-based merchant banking firm. Mr. Baum is a licensed attorney in the
State of California. Mr. Baum has more than 11 years experience in creating,
financing, and growing development stage enterprises in a variety of industries.
Mr. Baum has participated in numerous public spin-offs, venture fundings,
private-to-public mergers, corporate restructurings, asset acquisitions, and
asset divestitures.


33


John
Devenny, Director (resigned October 21, 2008)


Mr.
Devenny is one of the founding partners of Invision Capital Group, a financial
services group that provides capital and support to growing middle market
companies, founded in January of 2008. Prior to founding Invision Capital, Mr.
Devenny was a Founder and Managing Director of Diamond Creek Capital, a
commercial lender in the lower middle market since October of 2005. In
addition to having primary underwriting responsibility at Diamond Creek, Mr.
Devenny also sourced and structured new investment opportunities and managed the
firm's portfolio, which aggregated $95 million in gross commitments. Prior to
founding Diamond Creek, Mr. Devenny was a Vice President at Roth Capital
Partners since March 2004, where he evaluated, underwrote, and marketed debt and
equity opportunities in both the public and private sector. Prior to joining
Roth, from 2002 to March 2004, Mr. Devenny received his M.B.A in Finance from
the Anderson School at UCLA. Prior to such education, Mr. Devenny was an
international intellectual property attorney at General Electric Company
starting in February 2001 as well as law firms in NY and NJ. Mr. Devenny holds a
B.S. in Mechanical Engineering from Villanova University, a J.D. from
Boston College Law School and an M.B.A in Finance from the Anderson School
at UCLA. He was admitted to practice law in NY and NJ and before the US Patent
Bar.





Board
of Directors





Our
Directors are elected by the vote of a majority in interest of the holders of
our voting stock and hold office until the expiration of the term for which he
or she was elected and until a successor has been elected and qualified. A
majority of the authorized number of directors constitutes a quorum of the Board
for the transaction of business. The directors must be present at the meeting to
constitute a quorum. However, any action required or permitted to be taken by
the Board may be taken without a meeting if all members of the Board
individually or collectively consent in writing to the action. Directors may
receive compensation for their services and reimbursement for their expenses as
shall be determined from time to time by resolution of the Board. Each of our
directors currently receives no compensation for their service on the Board of
Directors.





Family
Relationships.





To our
knowledge, there are no family relationships between or among the directors and
executive officers.


Legal
Proceedings.
  None.
  Committees;
Audit Committee Financial Expert.


Currently,
the Company does not have an executive, audit or any standing committee of the
Board. The Company does not have an audit committee, or an audit committee
financial expert.





Section
16 Beneficial Ownership Compliance





Section
16(a) of the Securities and Exchange Act of 1934, as amended, requires our
executive officers and directors, and persons who beneficially own more than 10%
of the Company’s common stock, to file initial reports of ownership and reports
of changes in ownership of our common stock with the SEC. The Company is
not aware of any required reports that have not been filed or have been filed
untimely.





Limitation
on Liability and Indemnification of Directors and Officers




Our
certificate of incorporation provides that no director or officer shall have any
liability to the company if that person acted in good faith and with the same
degree of care and skill as a prudent person in similar
circumstances.




Our
certificate of incorporation and bylaws provide that we will indemnify our
directors and officers and may indemnify our employees or agents to the fullest
extent permitted by law against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices or
positions with us.  However, nothing in our certificate of
incorporation or bylaws protects or indemnifies a director, officer, employee or
agent against any liability to which that person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of that person’s office or
position. To the extent that a director has been successful in defense of
any proceeding, the Delaware General Corporation Law provides that the director
shall be indemnified against reasonable expenses incurred in connection with the
proceeding.


34





Code
of Ethics





We have
not as yet adopted a code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions because we just recently
became subject to this requirement. We plan to adopt a code of ethics as
soon as practicable, at which time, it will be available in print to any person
who requests it and on our website, when our website is completed. Any
amendments and waivers to the code will also be available in print and on our
website.





Item
      11.
            Executive
      Compensation.




The
following table sets forth all compensation we awarded or paid to all
individuals serving as our chief executive officer and those individuals who
received compensation in excess of $100,000 per year for the fiscal year ended
December 31, 2008 (collectively, the “Named Executives”). There are no Named
Executives for the fiscal year ended December 31, 2007.





SUMMARY
COMPENSATION TABLE




Name
      and Principal
                Position
              
              Year
              
              Salary
                ($)
              
              
              Bonus
                ($)
              
              
              Stock
                Awards
              
              
              Option
                awards
                ($)
              
              
              Total
                ($)Kevin
      Markey
              
              2008
              
              $
              183,000
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              $
              183,000 ____________





(1)
            Mr.
      Markey has been given a stock warrant award of 150,000 warrants at an
      exercise price of $10 per share.





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END




There
were no equity awards granted to the Named Executive Officers that are
outstanding at December 31, 2008.




Director
Compensation





Effective
as of December 10, 2008, Directors receive annual compensation of $20,000 per
year, for the actual attendance at not less than four regular or special
meetings of the Board of Directors per year. From July 1, 2008 through December
10, 2008, Directors receive annual compensation of $25,000 per year, for the
actual attendance at not less than four regular or special meetings of the Board
of Directors per year. In addition, former directors Leung and Devenny received
grants of common stock on July 18 and 22, 2008, respectively, of 5,000 shares
and 15,000 shares, respectively. Mr. Marcum also receives a consulting fee of
$3,750 per month, as well as reimbursement of certain office expenses. Prior to
July 1, 2008, Directors received no formal compensation.





Potential
Payments Upon Termination




The
employment of both Mr. Markey and Mr. Hacioglu are subject to formal employment
agreement. If Mr. Markey is terminated without cause prior to the termination
date of his contract, he is to receive a payment of $200,000 plus accrued
salary. If Mr. Hacioglu is terminated without cause prior to the termination of
his contract, he is to receive a payment of his Base Salary which will include
what is owed him through the remainder of his employment period (January 31,
2012) plus bonuses that would have been earned to date.





EQUITY
COMPENSATION PLAN INFORMATION





The
Company had no equity compensation plans in effect during 2008 or
2007.





Employment
Agreements:





The
Company has employment agreements with two of its key officers, Kevin W. Markey
and Cem Hacioglu. In addition, the Company also has a consulting agreement with
its Director, W. Phillip Marcum.


35


On May
21, 2008, Mr. Markey entered into an employment agreement with PNG Ventures,
Inc. to serve in the capacity of its Chief Executive Officer for a period of 10
days, with automatic extensions every 10 days. The Agreement provides for a
salary of $50 per day, and is subject to immediate cancellation by either party
upon notice.





On June
24, 2008, Mr. Markey entered into an employment agreement New Earth LNG, LLC,
(wholly owned subsidiary of PNG) and all of its subsidiaries, which collectively
includes all of the entities involved in the LNG Business (“the LNG Business
entities”). This Agreement provides that Mr. Markey shall serve as the
President, Chief Operating Officer and Vice President of Operations of LNG
Business entities for a term of one year at a base salary of $200,000, and
subject to cancellation by either party upon five days written notice.
Subsequently, Mr. Markey also assumed the roles of Chief Financial Officer and
Principal Accounting Officer of the LNG Business Entities, as well as for
PNG.The Agreement
also provides for bonuses to be paid upon satisfaction of certain conditions,
none of which have been met, and a stock warrant award of 150,000 warrants at an
exercise price of $10 per share. To date, the stock warrant has not been issued
and no further terms for the stock warrant, including term, exercise provisions,
etc. have been defined. Mr. Markey’s title of President was dropped on February
16, 2009, effective with the various appointments of Mr. Hacioglu.





On
February 1, 2009, the Company entered into a three year employment agreement
with Cem Hacioglu (effective February 16, 2009), who assumed the positions of
Chief Executive Officer and Presidentof PNG and all of PNG’s
subsidiaries. Major terms of the employment agreement include:





·
            An
      initial base salary of $270,000 per annum, subject to minimum increases of
      at least 10% per year;


·
            An
      annual cash bonus of 5% of earnings before interest, taxes, depreciation
      and amortization (EBITDA), if EBITDA exceeds $4.2
  million.


·
            An
      annual stock option award, valued at 7% of EBITDA, if EBITDA exceeds $4.2
      million.


·
            An
      immediate award of 1,000,000 stock
options.





All stock
options awarded under the Agreement shall have an initial strike price of $10
per share, subject to adjustment under certain conditions, and a term of 10
years, and shall vest ratably over twelve quarters subsequent to each
award.  All options shall vest immediately in the event of a change in
control, or upon Mr. Hacioglu’s termination without cause.





Upon
termination of Mr. Hacioglu without cause, or in the event of Mr. Hacioglu’s
death, disability, or if Mr. Hacioglu elects to terminate the contract for “good
reason” as defined in the agreement, then the Company shall be obligated to pay
the remainder of the base pay through the term of the contract, plus any bonuses
that would have been earned. If Mr. Hacioglu is terminated with cause, or elects
to leave the Company in the absence of “good reason,” the Company is only
obligated to pay Mr. Hacioglu’s base pay through the termination date and vested
stock options.





Consulting
Agreement with Director:





On July
16, 2008, Mr. Marcum entered into a six-month consulting agreement with the
Company that provides for a monthly consulting fee of $3,125 per month. This
agreement also awarded Mr. Marcum 10,000 stock options at a strike price of $10
per share, and a seven-year term. All options vested six months after the date
of the agreement. The agreement also provided for additional consideration and
the award of additional stock options under certain conditions, none of which
have been satisfied. This agreement is currently being informally extended on a
month-to-month basis.





Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.




The
following table sets forth certain information, as of March 12, 2009, with
respect to the beneficial ownership of the Company’s outstanding common stock by
(i) any holder of more than five (5%) percent; (ii) each of the named executive
officers, directors and director nominees; and (iii) our directors, director
nominees and named executive officers as a group. Except as otherwise indicated,
each of the stockholders listed below has sole voting and investment power over
the shares beneficially owned.




36




Name
      of Beneficial Owner
              
              Common
      Stock Beneficially Owned
              
              Percentage
      of Common
                Stock  Beneficially
      Owned (1)Kevin
      Markey
                c/o
      PNG Ventures, Inc.
                5310
      Harvest Hill Road, Suite 229
                Dallas,
      Texas 75230
              
              0
              
              *W.
      Phillip Marcum
                c/o
      PNG Ventures, Inc.
                5310
      Harvest Hill Road, Suite 229
                Dallas,
      Texas 75230
              
              0
              
              *Cem
      Hacioglu
                c/o
      PNG Ventures, Inc.
                5310
      Harvest Hill Road,Suite
      229
                Dallas,
      Texas 75230
              
              0
              
              *Matthew
      Pliskin
                c/o
      Sandell Asset Management Corp.
                40
      West 57th
      Street, 26th
      Floor
                New
      York, New York 10019
              
              0
              
              *John
      F. Levy
                c/o
      PNG Ventures, Inc.
                5310
      Harvest Hill Road, Suite 229
                Dallas,
      Texas 75230
              
              0
              
              *Corey
      B. Davis
                c/o
      PNG Ventures, Inc.
                5310
      Harvest Hill Road, Suite 229
                Dallas,
      Texas 75230
              
              0
              
              *Kevin
      P. Collins
                c/o
      PNG Ventures, Inc.
                5310
      Harvest Hill Road, Suite 229
                Dallas,
      Texas 75230
              
              0
              
              *Castlerigg
      PNG Investments LLC
                c/o
      Sandell Asset Management Corp.
                40
      West 57th
      Street, 26th
      Floor
                New
      York, New York 10019
              
              6,421,428(2)
              
              60.38Radcliffe
      SPC, Ltd.
                c/o
      Radcliffe Capital Management, L.P.,
                50
      Monument Road, Suite 300
                Bala
      Cynwyd, Pennsylvania 19004
              
              739,096(3)
              
              7.30BCGU,
      LLC
                2038
      Corte del Nogal, Suite 110
                Carlsbad,
      California 92008
              
              965,000(4)
              
              8.99Fourth
      Third, LLC
                375
      Park Avenue, Suite 3304
                New
      York, New York 10152
              
              1,100,000(5)
              
              9.90Black
      Forest International LLC
                2038
      Corte del Nogal, Suite 110
                Carlsbad,
      California 92008
              
              700,000(6)
              
              6.52All
      officers and directors as a group
              
              0
              
              **
      Under 1%




(1)           Beneficial
ownership is determined in accordance with the SEC’s rules. In computing
percentage ownership of each person, shares of common stock subject to options
held by that person that are currently exercisable, or exercisable
within


37


60 days,
are deemed to be beneficially owned. These shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of each other
person. The percentage of shares beneficially owned is based upon 10,013,019
shares of common stock outstanding as of March 12, 2009 and does not
include 1,900,000 shares issuable upon conversion of the Settlement Notes or
700,000 shares issuable upon conversion of the note held by Black Forest
International, LLC which are held in escrow by Madison Stock Transfer, Inc.
pursuant to a Settlement Agreement and Amended Court Order.




(2)           Includes
(i) 5,600,000 shares owned by Castlerigg PNG Investments, LLC (“Castlerigg”),
(ii) 200,000 shares issuable to Castlerigg upon the exchange of the Amended and
Restated Senior Secured convertible exchangeable Note of EBOF,
and  (iii) 621,429 shares issuable upon conversion of EBOF Note issued
to Sandell Asset Management Corp., a Cayman Islands exempted company (“SAMC”),
an entity controlled by or affiliated with Castlerigg and does not include any
remaining shares issuable upon conversion of the EBOF Settlement Notes. The
aggregate of the 5,600,000, 200,000, and 621,429 shares is referred to as the
“Castlerigg Shares.” Commencing on the date of the Share Exchange, each of
Castlerigg PNG Investments LLC, a Delaware limited liability company
(“Castlerigg”); Castlerigg Master Investments Ltd., a British Virgin Islands
company (”Castlerigg Master Investments”); SAMC; Castlerigg International
Limited, a British Virgin Islands company ("Castlerigg International");
Castlerigg International Holdings Limited, a British Virgin Islands company
(“Castlerigg Holdings”); and Thomas E. Sandell (“Sandell”) may be deemed to
beneficially own and have shared voting and dispositive authority with respect
to the Castlerigg Shares. Castlerigg Master Investments is the sole member
and managing member of Castlerigg. SAMC is the investment manager of Castlerigg
Master Investments. Mr. Sandell is the controlling person of SAMC and may
be deemed to share beneficial ownership of the shares beneficially owned by
Castlerigg. Castlerigg International is the controlling shareholder of
Castlerigg Holdings. Castlerigg Holdings is the controlling shareholder of
Castlerigg Master Investments. Each of Castlerigg Holdings, Castlerigg Master
Investments and Castlerigg International may be deemed to share beneficial
ownership of the shares beneficially owned by Castlerigg. The business address
of each of these entities is as follows: c/o Sandell Asset Management Corp. 40
W. 57th Street,
26th
Floor, New York, New York 10019. SAMC, Mr. Sandell, Castlerigg Holdings,
Castlerigg Master Investments and Castlerigg International each disclaims
beneficial ownership of the securities with respect to which indirect beneficial
ownership is described. This does not include 1,200,000 shares covered by an
Irrevocable Proxy delivered by EBOF to Castlerigg, which shares are beneficially
owned by others, and as to which Castlerigg has no dispositive power and
disclaims beneficial ownership.





(3)           Includes
666,667 shares of common stock, inclusive of 71,429 shares issuable upon
conversion of the Settlement Note issued by EBOF.





(4)           Includes
700,000 shares issuable to Black Forest International, LLC, an affiliate of
BCGU, LLC by virtue of affiliated ownership.





(5)           Includes
up to 1,100,000 shares that may be issued in the event that the trading price of
the Company’s common stock does not trade at certain prices, pursuant to the
Master Rights Agreement.





(6)           Includes
700,000 shares issuable upon conversion of the note held by Black Forest
International, LLC which are held in escrow by Madison Stock Transfer, Inc.
pursuant to a Settlement Agreement and Amended Court Order.





Item
      13.
            Certain
      Relationships and Related
Transactions.




None.





Item
      14.
            Principal
      Accountant Fees and Services




The
aggregate fees billed by Montgomery Coscia Greilich, LLP for professional
services rendered for the audit of the Company’s annual financial statements for
the fiscal year ended December 31, 2008 was $75,000.




The Board
acts as the audit committee and had no pre-approval policies and procedures in
effect for the auditors' engagement for the audit year 2007 and
2008.





All audit
work was performed by the auditors’ full-time employees.


38





PART
IV





Item
15. Exhibits
and Financial Statement Schedules.




The
      following documents are filed as a part of this report or incorporated
      herein by reference:




(1)
            Our
      Consolidated Financial Statements.(2)
            Financial
      Statement Schedules:


None.




(3)
            Financial
      Statement Exhibits: None




INDEX TO EXHIBITS.




Exhibit
      No.
              Document
      Description2.1
              Share
      Exchange Agreement, dated June 30, 2008, between the Company and EBOF,
      incorporated by reference to Exhibit 2.1 of the Company’s current report
      on Form 8-K, filed with the Securities and Exchange Commission (the “SEC”)
      on July 7, 2008.3.1
              Articles
      of Incorporation of Telecommunications Technologies, Ltd., incorporated by
      reference to Exhibit 2.1 of the Amendment to the Company’s Registration
      Statement filed on Form 10SB12G (the “Form 10SB12G/A”), filed with the SEC
      on May 16, 2005.3.1.1
              Articles
      of Amendment: PNG Ventures, Inc., incorporated by reference to Exhibit 2.2
      of the Company’s Form 10SB12G/A, filed with the SEC on May 16,
      2005.3.2
              By-Laws
      of Telecommunications Technologies, incorporated by reference to Exhibit
      2.3 of the Company’s Form 10SB12G/A, filed with the SEC on May 16,
      2005.4.1
              12%
      Subordinated Secured Convertible Promissory Note of the Company in favor
      of BFI, dated June 3, 2008 (the “BFI Note”), incorporated by reference to
      Exhibit 10.2 of the Company’s current report on Form 8-K, filed with the
      SEC on June 9, 2008.4.2
              12%
      $171,000 Convertible Note of the Company in favor of EBOF on June 5, 2008,
      incorporated by reference to Exhibit 10.9.1 of the Company’s current
      report on Form 8-K, filed with the SEC on July 7, 2008.4.3
              12%
      Convertible Note of the Company in favor of Castlerigg PNG Investments LLC
      (“Castlerigg”), which was initially issued to EBOF on June 5, 2008
      and transferred on June 26, 2008, incorporated by reference to Exhibit
      10.9.2 of the Company’s current report on Form 8-KA, filed with the SEC on
      August 6, 2008.4.4
              12%
      Convertible Note of the Company in favor of Portside Growth and
      Opportunity Fund (“Portside”), which was initially issued to EBOF on June
      5, 2008 and transferred on June 26, 2008, incorporated by reference to
      Exhibit 10.9.3 of the Company’s current report on Form 8-K/A, filed with
      the SEC on August 6, 2008.4.5
              12%
      Convertible Note of the Company in favor of Radcliffe SPC, Ltd. for and on
      behalf of the Class A Segregated Portfolio (“Radcliffe”), which was
      initially issued to EBOF on June 5, 2008 and transferred on June 26, 2008,
      incorporated by reference to Exhibit 10.9.4 of the Company’s current
      report on Form 8-K/A, filed with the SEC on August 6,
  2008.4.6
              12%
      Convertible Note of the Company in favor of YA Global Investments, LP
      (“YA”), which was initially issued to EBOF on June 5, 2008 and transferred
      on June 26, 2008, incorporated by reference to Exhibit 10.9.5 of the
      Company’s current report on Form 8-K/A, filed with the SEC on August 6,
      2008.4.7
              Subordinated
      Convertible Note of the Company in favor of Castlerigg, dated August 19,
      2008, incorporated by reference to Exhibit 4.1 of the Company’s current
      report on Form 8-K, filed with the SEC on August 22,
  2008.4.8
              Warrant
      to purchase 797,023 shares of common stock of the Company, issued to
      Castlerigg, dated August 19, 2008, incorporated by reference to Exhibit
      4.2 of the Company’s current report on Form 8-K, filed with the SEC on
      August 22, 2008.4.9
              Securities
      Purchase Agreement by and among the Company and Castlerigg, dated August
      19, 2008, incorporated by reference to Exhibit 10.1 of the Company’s
      current report on Form 8-K, filed with the SEC on August 22,
      2008.5.1
              Employment
      Agreement of Cem Hacioglu, dated February 1, 2009, incorporated by
      reference to Exhibit 5.1 of the Company’s current report on Form 8-K,
      filed with the SEC on February 4, 2009.9.1
              Voting
      Proxy of EBOF in favor of Castlerigg, dated June 25, 2008, incorporated by
      reference to Exhibit 9 of the Company’s current report on Form 8-K, filed
      with the SEC on July 2, 2008.
  39
   10.1
              Employment
      Agreement of Kevin Markey, dated May 21, 2008, incorporated by reference
      to Exhibit 10.1 of the Company’s current report on Form 8-K, filed with
      the SEC on June 5, 2008.10.2
              Unsigned
      Letter of Intent and amendment, regarding the exchange transaction with
      Earth Biofuels, Inc. and its affiliates (collectively “EBOF”),
      incorporated by reference to Exhibit 10.1 of the Company’s amended current
      report on Form 8-K/A, filed with the SEC on June 5,
  2008.10.3
              Settlement
      Agreement and Release, dated as of June _, 2008, between the Company,
      Black Forest International, LLC (“BFI”), and EBOF, incorporated by
      reference to Exhibit 10.1 of the Company’s current report on Form 8-K,
      filed with the SEC on June 9, 2008.10.4
              Escrow
      Agreement, dated June _, 2008, between the Company, BFI and an undisclosed
      escrow agent regarding shares of the Company’s common stock, incorporated
      by reference to Exhibit 10.31 of the Company’s current report on Form 8-K,
      filed with the SEC on June 9, 2008.10.5
              Convertible
      Promissory Note of the Company, in favor of EBOF, dated June _, 2008,
      incorporated by reference to Exhibit 10.4 of the Company’s current report
      on Form 8-K, filed with the SEC on June 9, 2008.10.6
              Escrow
      Agreement, dated June _, 2008, between the Company, EBOF and Madison Stock
      Transfer, regarding shares of the Company’s common stock, incorporated by
      reference to Exhibit 10.5 of the Company’s current report on Form 8-K,
      filed with the SEC on June 9, 2008.10.7
              Subscription
      Agreement, dated June _, 2008, between the Company and Fourth Third, LLC
      (“Medley”), incorporated by reference to Exhibit 10.3 of the Company’s
      current report on Form 8-K, filed with the SEC on July 7,
      2008.10.8
              Master
      Rights Agreement, dated June 26, 2008, between the Company and Medley,
      incorporated by reference to Exhibit 10.4 of the Company’s current report
      on Form 8-K, filed with the SEC on July 7, 2008.10.9
              Settlement
      Agreement, dated as of June 5, 2008, between the Company, EBOF and BFI and
      related note, incorporated by reference to Exhibit 10.5 of the Company’s
      current report on Form 8-K, filed with the SEC on July 7,
      2008.10.10
              Amended
      and Restated Security Agreement, dated as of June 25, 2008, by EBOF, in
      favor of named lenders, incorporated by reference to Exhibit 10.6 of the
      Company’s current report on Form 8-K, filed with the SEC on July 7,
      2008.10.11
              Transfer
      of Securities and Acknowledgement Agreement, dated June 26, 2008 by and
      between the Company and Castlerigg, incorporated by reference to Exhibit
      10.7.1 of the Company’s current report on Form 8-K/A, filed with the SEC
      on August 6, 2008.10.12
              Transfer
      of Securities and Acknowledgement Agreement, dated June 26, 2008 by and
      between the Company and YA, incorporated by reference to Exhibit 10.7.2 of
      the Company’s current report on Form 8-K/A, filed with the SEC on August
      6, 2008.10.13
              Transfer
      of Securities and Acknowledgement Agreement, dated June 26, 2008 by and
      between the Company and Portside, incorporated by reference to Exhibit
      10.7.3 of the Company’s current report on Form 8-K/A, filed with the SEC
      on August 6, 2008.10.14
              Transfer
      of Securities and Acknowledgement Agreement, dated June 26, 2008 by and
      between the Company and Radcliffe, incorporated by reference to Exhibit
      10.7.4 of the Company’s current report on Form 8-K/A, filed with the SEC
      on August 6, 2008.10.15
              Release,
      Consent and Acknowledgment, dated as of June 26, 2008, by and among EBOF,
      the Company, certain of their subsidiaries and Castlerigg, incorporated by
      reference to Exhibit 10.8.1 of the Company’s current report on Form 8-K/A,
      filed with the SEC on August 6, 2008.10.16
              Release,,
      Consent and Acknowledgment, dated as of June 26, 2008, by and among EBOF,
      the Company, certain of their subsidiaries and YA, incorporated by
      reference to Exhibit 10.8.2 of the Company’s current report on Form 8-K,
      filed with the SEC on July 7, 2008.10.17
              Release,
      Consent and Acknowledgment, dated as of June 26, 2008, by and among EBOF,
      the Company, certain of their subsidiaries and Portside, incorporated by
      reference to Exhibit 10.8.3 of the Company’s current report on Form 8-K,
      filed with the SEC on July 7, 2008.10.18
              Release,
      Consent and Acknowledgment, dated as of June 26, 2008, by and among EBOF,
      the Company, certain of their subsidiaries and Radcliffe, incorporated by
      reference to Exhibit 10.8.4 of the Company’s current report on Form 8-K,
      filed with the SEC on July 7, 2008.10.19
              Release,
      Consent and Acknowledgment, dated as of June 26, 2008, by and among EBOF,
      the Company, certain of their subsidiaries and Castlerigg, incorporated by
      reference to Exhibit 10.8.5 of the Company’s current report on Form 8-K,
      filed with the SEC on July 7, 2008.10.20
              Intercreditor
      Agreement with Greenfield Commercial Credit, LLC as Revolving Lender, BFI
      and New Earth LNG, LLC, a Delaware limited liability company, dated as of
      June 30, 2008.,  incorporated by reference to Exhibit 10.10 of
      the Company’s current report on Form 8-K/A, filed with the SEC on August
      6, 2008.
  40
   10.21
              Guaranty
      Agreement by the Company, New Earth LNG, LLC and each of its subsidiaries
      in favor of BFI, with respect to the BFI Note, incorporated by reference
      to Exhibit 10.11 of the Company’s current report on Form 8-K, filed with
      the SEC on July 7, 2008.10.22
              Subordination
      and Intercreditor Agreement between BFI, Medley, the Company and New Earth
      LNG, LLC and its subsidiaries with respect to the BFI Note, incorporated
      by reference to Exhibit 10.12 of the Company’s current report on Form 8-K,
      filed with the SEC on July 7, 2008.10.23
              General
      Security Agreement by the Company in favor of BFI, with respect to the BFI
      Note, incorporated by reference to Exhibit 10.13 of the Company’s current
      report on Form 8-K, filed with the SEC on July 7, 2008.10.24
              BFI
      Acknowledgement and Consent to Amendment to Credit Agreement No. 1, dated
      _____, 2008, incorporated by reference to Exhibit 10.14 of the Company’s
      current report on Form 8-K, filed with the SEC on July 7,
      2008.10.25
              Contribution
      Agreement between Earth LNG, Inc. and New Earth LNG, LLC, dated as of
      June 25, 2008, relating to transfer to New Earth LNG, LLC of all assets of
      Earth LNG, Inc., incorporated by reference to Exhibit 10.15 of the
      Company’s current report on Form 8-K, filed with the SEC on July 7,
      2008.10.26
              Amendment
      No. 2 to the Amended and Restated Credit Agreement, dated August 19, 2008,
      by and among New Earth LNG, LLC, the other person designated as “Loan
      Parties” on the signature pages hereto and Fourth Third, LLC, as agent,
      incorporated by reference to Exhibit 10.2 of the Company’s current report
      on Form 8-K, filed with the SEC on August 22, 2008.10.27
              Subordination
      and Intercreditor Agreement, dated August 19, 2008, by and among
      Castlerigg, the Company and Medley, as Agent, incorporated by reference to
      Exhibit 10.3 of the Company’s current report on Form 8-K, filed with the
      SEC on August 22, 2008.10.28
              Letter
      Agreement, dated December 22, 2008, from the Company to Medley,
      incorporated by reference to Exhibit 10.1 of the Company’s current report
      on Form 8-K, filed with the SEC on December 24, 2008.10.29
              Employment
      Agreement, dated as of February 1, 2009, with Cem Hacioglu, incorporated
      by reference to Exhibit 5.1 to the Company’s current report on Form 8-K,
      filed with the SEC on February 4, 2009.10.30
              Amendment
      No. 4, dated as of January 1, 2009, between the Loan Parties and Fourth
      Third, incorporated by reference to Exhibit 10.1 to the Company’s current
      report on Form 8-K, filed with the SEC on February 4,
  2009.10.31
              Third
      Amendment to Loan and Security Agreement entered into as of February 27,
      2009, among Applied LNG Technologies USA, L.L.C. and Arizona LNG, L.L.C.
      (jointly, as borrower), and Greenfield Commercial Credit, L.L.C. as lender
      incorporated by reference to Exhibit 10.1 to the Company’s current report
      on Form 8-K, filed with the SEC on March 23, 2009.10.32
              Third
      Amended and Restated Revolving Credit Loan Note, dated February 27, 2009,
      made by Applied LNG Technologies USA, L.L.C. and Arizona LNG, L.L.C.
      (jointly, as borrower), to the order of Greenfield Commercial Credit,
      L.L.C. as lender incorporated by reference to Exhibit 10.2 to the
      Company’s current report on Form 8-K, filed with the SEC on March 23,
      2009.11.1
              Statement
      of computation of Earnings Per Share, incorporated by reference to Exhibit
      11.1 of the Company’s current report on Form 8-K, filed with the SEC on
      July 7, 2008.21.1
              Subsidiaries
      of the Company, incorporated by reference to Exhibit 21.1 of the Company’s
      current report on Form 8-K, filed with the SEC on July 7,
      2008.23.1
              Report
      of Auditors Chisholm, Bierwolf & Nilson, LLC, dated March 26, 2008,
      regarding the financial reports for the annual periods ended December 31,
      2006 and December 31, 2007, incorporated by reference to Exhibit 23.1 of
      the Company’s annual report on Form 10-KSB, filed with the SEC on April
      14, 2008.31.1
              Certification
      by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
              Certification
      by Principal Financial and Accounting Officer pursuant to Rule 13a-14(a)
      or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.32.1
              Certification
      by Chief 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 Principal Financial and Accounting Officer pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.




41


SIGNATURES




In
accordance with the requirements of the Exchange Act, as amended, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




PNG
      VENTURES, INC.April 14, 2009
            By:         
      /s/ Cem
      HaciogluCem
      HaciogluPresident,
      Chief Executive Officer
and Director





In
accordance with the Exchange Act, this Report has been signed below by the
following persons or on behalf of the Registrant and in the capacities on the
dates indicated.




April 14,
      2009
            By:      /s/W. Phillip
      MarcumW.
      Phillip Marcum, DirectorApril 14,
      2009
            By:      /s/Matthew
      PliskinMatthew
      Pliskin, DirectorApril 14,
      2009
            By:      /s/
      John F.
      LevyJohn
      F. Levy, DirectorApril 14,
      2009
            By:      /s/
      Corey B DavisCorey B. Davis, DirectorApril 14,
      2009
            By:      /s/
      Kevin P. CollinsKevin
      P. Collins, Director


42


FORM
10-K


PNG
Ventures, Inc.


INDEX TO FINANCIAL STATEMENTS




The
following financial statements of PNG Ventures, Inc. are included in response to
Item 7:





Report
      of Independent Registered Public Accounting Firm
            F-2Report
      of Independent Registered Public Accounting Firm
            F-3Consolidated
      Balance Sheet for the fiscal years ended December 31, 2008 and
      2007
            F-4Consolidated
      Statements of Operations for the periods ended December  31, 2008,
      June 30, 2008 and year ended December 31, 2007
            F-5Consolidated
      Statements of Stockholders’ Equity for the fiscal year ended December 31,
      2008 and 2007 and period ended June 30, 2008, December 31, 2007 and
      2006.
            F-6Consolidated
      Statements of Cash Flows for the periods ended December  31, 2008,
      June 30, 2008 and year ended December 31, 2007
            F-7Notes
      to Consolidated Financial Statements
            F-8








F-1


MONTGOMERYCOSCIAGREILICHLLP
 Certified
Public Accountants
 2701
Dallas Parkway, Suite 300
 Plano,
Texas 75093
 972.378.0400
p
 972.378.0416
f
 
 Thomas A.
Montgomery, CPA
 Matthew
R. Coscia, CPA
 Paul E.
Greilich, CPA
 Jeanette
A. Musacchio
 James M.
Lyngholm
 Chris C.
Johnson, CPA
 J. Brian
Simpson, CPA
 Rene E.
Balli, CPA
 
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors
 PNG
Ventures, Inc.
 Dallas,
Texas
 
 We have
audited the accompanying consolidated balance sheet of PNG Ventures, Inc. and
subsidiaries as of December
31, 2008 (Successor Company) and the related consolidated statement of
operations, changes in stockholders’ equity and cash flows for the periods from
July 1, 2008 through December 31, 2008.  These financial statements
are the responsibility of the Successor Company’s management. Our responsibility
is to express an opinion on these financial statements based on our
audit.
 
 We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audit Included
consideration of internal control over financial reporting as a basis for
designing audit procedures That are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PNG Ventures, Inc. and
subsidiaries as of December 31, 2008 and the results of its operations
and its cash flows for the period from July 1, 2008 through December 31, 2008 in
conformity with U.S generally accepted accounting principles.
 
 
 
 MONTGOMERYCOSCIAGREILICHLLP
 April 12,
2009
 Plano,
Texas
 
 
  F-2
  
 MONTGOMERYCOSCIAGREILICHLLP
 Certified
Public Accountants
 2701
Dallas Parkway, Suite 300
 Plano,
Texas 75093
 972.378.0400
p
 972.378.0416
f
 
 Thomas A.
Montgomery, CPA
 Matthew
R. Coscia, CPA
 Paul E.
Greilich, CPA
 Jeanette
A. Musacchio
 James M.
Lyngholm
 Chris C.
Johnson, CPA
 J. Brian
Simpson, CPA
 Rene E.
Balli, CPA
 
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors
 PNG
Ventures, Inc.
 Dallas,
Texas
 
 We have
audited the accompanying consolidated balance sheet of Earth LNG, Inc. and
subsidiaries as of December 31, 2007 (Predecessor Company) and the related
consolidated statement of operations, changes in stockholders’ equity and cash
flows for the year ended December 31, 2007 and for the period from January 1,
2008 through June 30, 2008.  These financial statements are the
responsibility of the Predecessor Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.
 
 We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the
financial position of Earth LNG, Inc. and subsidiaries as of December 31, 2007
and the results of its operations
and its cash flows for the year ended December 31, 2007 and for the period from
January 1, 2008 through June 30, 2008 in conformity with U.S generally accepted
accounting principles.
 
 
 
 MONTGOMERYCOSCIAGREILICHLLP
 April 12,
2009
 Plano,
Texas
   F-3


PNG
VENTURES, INC.


CONSOLIDATED BALANCE SHEETS


($
in thousands, except per share amounts)





Successor
      Entity
            
            
            Predecessor
      EntityASSETS
            
            December
      31, 2008
            
            
            December
      31, 2007Current
      AssetsCash
      and cash equivalents
            $
            419
            
            
            $
            —Trade
      accounts receivable, net of allowances of $31 and $80
            
            3,365
            
            
            
            2,545Prepaid
      expenses and other current assets
            
            1,124
            
            
            
            1,846Total
      Current Assets
            
            4,908
            
            
            
            4,391Property,
      Plant and equipment, net of accumulated depreciation
            
            33,321
            
            
            
            9,033Goodwill
            
            —
            
            
            
            35,533Prepaid
      and other long term assets
            
            2,943
            
            
            
            1,889Total
      Assets
            $
            41,172
            
            
            $
            50,846LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      LiabilitiesAccounts
      payable and accrued expenses
            $
            1,851
            
            
            $
            2,899Line
      of credit
            
            1,871
            
            
            
            1,508Current
      portion of long term debt
            
            806
            
            
            
            —Notes
      payable and other current liabilities
            
            3,806
            
            
            
            18,750Income
      taxes
            
            —
            
            
            
            17,233Advances
      from affiliate
            
            —
            
            
            
            253Total
      Current Liabilities
            
            8,334
            
            
            
            40,643Convertible
      promissory notes, net of discount $55 and $0
            
            3,201
            
            
            
            —Long
      term debt, net of discount of $119 and $0
            
            33,075
            
            
            
            —Total
      Long Term Liabilities
            
            36,276
            
            
            
            40,643Total
      Liabilities
            
            44,610
            
            
            
            40,643Stockholders’
      Equity (Deficit)Common
      stock, $.001 par value, 50,000,000 shares authorized, 10,013,019
      shares issued and outstanding
            
            10
            
            
            
            250Additional
      paid-in capital
            
            (10
            )
            
            
            39,050Note
      receivable from predecessor parent
            
            —
            
            
            
            (13,562
            )Accumulated
      deficit
            
            (3,438
            )
            
            
            (15,535
            )Total
      Stockholders’ Equity (Deficit)
            
            (3,438
            )
            
            
            10,203Total
      Liabilities and Stockholders’ Equity (Deficit)
            $
            41,172
            
            
            $
            50,846





See
accompanying notes to consolidated financial statements





F-4


PNG VENTURES,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


($
in thousands, except per share amounts)





Successor
      Entity
            
            
            Predecessor EntityPeriod
              July
      1, 2008
              to
              December
      31,
              2008
            
            
            Period
              January 1,
      2008
              to
      June 30, 2008
            
            
            Twelve
      Months
              Ended
              December
      31, 2007Revenue
            
            $
            17,099
            
            
            $
            14,804
            
            
            $
            26,068Cost
      of sales (exclusive of items shown separately below)
            
            
            12,814
            
            
            
            13,500
            
            
            
            20,876Gross
      profit
            
            
            4,285
            
            
            
            1,304
            
            
            
            5,192Compensation
      (including share based compensation)
            
            
            959
            
            
            
            531
            
            
            
            992Other
      selling, general and administrative
            
            
            1,948
            
            
            
            1,628
            
            
            
            2,363Depreciation
            
            
            1,142
            
            
            
            753
            
            
            
            1,734Net
      income (loss) from operations
            
            
            236
            
            
            
            (1,608
            )
            
            
            103Other
      income (expense)Interest
      expense
            
            
            (3,674
            )
            
            
            (3,147
            )
            
            
            (3,519
            )Other
      income (expense)
            
            
            —
            
            
            
            372
            
            
            
            (219
            )Total
      other expense
            
            
            (3,674
            )
            
            
            (2,775
            )
            
            
            (3,738
            )Net
      loss before income tax provision
            
            
            (3,438
            )
            
            
            (4,383
            )
            
            
            (3,635
            )Income
      tax provision
            
            
            —
            
            
            
            —
            
            
            
            (1,641
            )Net
      loss
            
            $
            (3,438
            )
            
            $
            (4,383
            )
            
            $
            (5,276
            )Net
      loss per share - basic and diluted
            
            $
            (0.35
            )
            
            $
            n/a
            
            
            $
            n/aWeighted
      average number of common shares outstanding - basic
      and  diluted
            
            
            9,916,352
            
            
            
            n/a
            
            
            
            n/a











See
accompanying notes to consolidated financial statements


F-5


PNG VENTURES,
INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Deficit)


($
in thousands)





Common
      Stock Shares
            
            
            Common
      Stock at Par
            
            
            Additional
      Paid in Capital
            
            
            Accumulated
      Deficit
            
            
            Notes
      Receivable from Affiliates
            
            
            Totals(Predecessor
      Entity)Balance
      December 31, 2006
            
            
            25,000,000
            
            
            $
            250
            
            
            $
            39,050
            
            
            $
            (10,259
            )
            
            $
            —
            
            
            $
            29,041Parent
      and affiliate notes receivable
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (13,562
            )
            
            
            (13,562
            )Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,276
            )
            
            
            —
            
            
            
            (5,276
            )Balance
      December 31, 2007
            
            
            25,000,000
            
            
            
            250
            
            
            
            39,050
            
            
            $
            (15,535
            )
            
            
            (13,562
            )
            
            $
            10,203Parent
      and affiliate notes receivable
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (6,715
            )
            
            
            (6,715
            )Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4,383
            )
            
            
            —
            
            
            
            (4,383
            )Balance
      June 30, 2008
            
            
            25,000,000
            
            
            $
            250
            
            
            $
            39,050
            
            
            $
            (19,918
            )
            
            $
            (20,277
            )
            
            $
            (895
            )























Common
      Stock Shares
            
            
            Common
      Stock at Par
            
            
            Additional
      Paid in Capital
            
            
            Accumulated
      Deficit
            
            
            Notes
      Receivable from Affiliates
            
            
            Totals(Successor
      Entity)Balance
      December 31, 2007
            
            
            42,198
            
            
            $
            42
            
            
            $
            1,295
            
            
            $
            (1,963
            )
            
            $
            —
            
            
            $
            (626
            )Cancellation
      of shares related to acquisition
            
            
            (41,780
            )
            
            
            (42
            )
            
            
            (1,295
            )
            
            
            1,963
            
            
            
            —
            
            
            
            626Shares
      issued related to acquisition
            
            
            8,380
            
            
            
            8
            
            
            
            (170
            )
            
            
            —
            
            
            
            —
            
            
            
            (162
            )Shares
      issued for converted debt
            
            
            1,190
            
            
            
            1
            
            
            
            32
            
            
            
            —
            
            
            
            —
            
            
            
            33Shares
      issued for compensation
            
            
            25
            
            
            
            1
            
            
            
            69
            
            
            
            —
            
            
            
            —
            
            
            
            70Discount
      related to convertible debt
            
            
            —
            
            
            
            —
            
            
            
            59
            
            
            
            —
            
            
            
            —
            
            
            
            59Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,438
            )
            
            
            —
            
            
            
            (3,438
            )Balance  December
      31, 2008
            
            
            10,013
            
            
            $
            10
            
            
            $
            (10
            )
            
            $
            (3,438
            )
            
            $
            —
            
            
            $
            (3,438
            )








See
accompanying notes to consolidated financial statements


F-6


PNG VENTURES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


($ in
thousands)




Successor
      Entity
            
            
            Predecessor
      EntityPeriod July
      1, 2008 to December 31, 2008
            
            
            Period
      January 1, 2008 to June 30, 2008
            
            
            Twelve
      Months Ended December 31, 2007Cash
      Flows from Operating Activities:Net
      income (loss)
            
            $
            (3,438
            )
            
            $
            (4,383
            )
            
            $
            (5,276
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
            
            
            1,142
            
            
            
            746
            
            
            
            1,734Debt
      discount amortization
            
            
            1,326
            
            
            
            —
            
            
            
            539Shares
      issued for compensation
            
            
            70
            
            
            
            —
            
            
            
            —Decrease
      (increase) in:Accounts
      receivable
            
            
            (1,428
            )
            
            
            530
            
            
            
            182Inventory
            
            
            222
            
            
            
            (227
            )
            
            
            48Prepaids
            
            
            2,043
            
            
            
            (290
            )
            
            
            —Accounts
      payable and accrued expenses
            
            
            (921
            )
            
            
            4,344
            
            
            
            4,209Other
            
            
            —
            
            
            
            76
            
            
            
            —Net
      cash provided by (used in) operating activities
            
            
            (984
            )
            
            
            796
            
            
            
            1,436Cash
      Flows From Investing Activities:Purchases
      of equipment
            
            
            (463
            )
            
            
            —
            
            
            
            (8
            )Notes
      receivable for monies advanced to related parties
            
            
            —
            
            
            
            —
            
            
            
            (9,670
            )Cash
      purchased in acquisition
            
            
            82
            
            
            
            —Prepayments
      of advances from affiliates
            
            
            —
            
            
            
            —
            
            
            
            (3,646
            )Cash
      paid for deposits
            
            
            —
            
            
            
            —
            
            
            
            (494
            )Net
      cash provided (used in) investing activities
            
            
            (381
            )
            
            
            —
            
            
            
            (13,818
            )Cash
      Flows From Financing Activities:Related
      party advances
            
            
            —
            
            
            
            (441
            )
            
            
            —Repayments
      of  convertible debt
            
            
            (563
            )
            
            
            —
            
            
            
            —Cash
      paid for financing fees
            
            
            
            
            
            
            —
            
            
            
            (2,429
            )Net
      Proceeds from debt issuances
            
            
            1,711
            
            
            
            —
            
            
            
            18,750Net
      changes in line of credit
            
            
            636
            
            
            
            (273
            )
            
            
            (4,171
            )Net
      cash provided by (used in) financing activities
            
            
            1,784
            
            
            
            (714
            )
            
            
            12,150Net
      increase  (decrease) in cash
            
            
            419
            
            
            
            82
            
            
            
            (232
            )Cash
      and cash equivalentsBeginning
      of period
            
            
            —
            
            
            
            —
            
            
            
            232End
      of period
            
            $
            419
            
            
            $
            82
            
            
            $
            —Supplemental
      Cash Flow Disclosures:Cash
      paid for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —Cash
      paid for interest
            
            $
            2,321
            
            
            $
            2,997
            
            
            $
            2,772Non-Cash
      investing and financing activities:Escrowed
      Interest
            
            $
            1,477
            
            
            $
            —
            
            
            $
            —Accounts
      Payable converted to loans
            
            $
            2,796
            
            
            $
            —
            
            
            $
            —





See
accompanying notes to consolidated financial statements


F-7


PNG
VENTURES, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008 (Successor Entity) and December 31, 2007 (Predecessor
Entity)





NOTE
1 — BASIS OF PRESENTATION




PNG
Ventures, Inc. (“PNG” or the “Company” or the “Successor Entity” or “us” or
“we”) was incorporated in the state of Nevada on September 23, 1995 as
Telecommunications Technologies, Ltd. On September 24, 1995, the Company
entered a plan of reorganization whereby it purchased all the assets of Temple
Summit Management Corporation (“TSMC”), organized in the state of Texas on
August 23, 1991 and re-incorporated in September 1994. This business
combination was treated as a reverse acquisition for accounting
purposes. On February 20, 1998, the Company changed its name to PNG
Ventures, Inc. The Company has had little activity until December 2002, when the
Company entered into a joint venture agreement and working interest in certain
petroleum and related gas licenses. The joint venture agreement was entered
into with Anhydride Petroleum (Canada) Inc. a wholly owned subsidiary of Uranium
Power Corporation. There is currently no activity under the terms of the
joint venture agreement and the Company believes that there is presently no
current value nor any obligations related to the joint venture
agreement.




On June
30, 2008, the Company entered into the production, distribution and sale of
liquefied natural gas (“LNG”) by completing the acquisition of New Earth LNG,
LLC, a Delaware limited liability company (“New ELNG”) from Earth Biofuels,
Inc. New ELNG is a provider of LNG to transportation, industrial and
municipal markets in the western United States and portions of Mexico. With this
acquisition, the Company changed its primary business focus to liquefied natural
gas production and distribution. Before June 30, 2008, the Company was
considered a blank check company.




The
Company acquired New ELNG via a Share Exchange Agreement (the “Exchange
Agreement”) with sellers Earth Biofuels, Inc., a Delaware corporation (“EBOF”)
and its wholly owned subsidiary, Earth LNG, Inc, a Texas corporation (“ELNG”).
In the Exchange Agreement, PNG acquired 100% ownership of ELNG’s wholly owned
subsidiary New Earth LNG, LLC, a Delaware limited liability company from ELNG,
in exchange for the issuance of 7,000,000 shares of the common stock of the
Company (“Exchange Shares”) to EBOF, and certain other consideration and share
issuances (said transaction being referred to herein as the “Share
Exchange”). EBOF granted an irrevocable voting proxy to certain of their
prior creditors regarding the 7,000,000 PNG shares. Other share issuances
related to the acquisition, included shares issued to creditors for amended debt
terms on assumed debts totaling 1.1 million shares, plus 2.6 million shares
escrowed to extinguish certain other debts assumed in the
acquisition.




As a
result of the Share Exchange agreement, PNG acquired a liquid natural gas
production facility in Topock, Arizona and its related distribution and sales
businesses. PNG has accounted for this acquisition under the purchase accounting
method. The acquisition has resulted in a new reporting entity which is
referred to as the “Successor Entity” in the accompanying consolidated financial
statements. The “Predecessor Entity” includes the financial statements of
ELNG under prior management and is not comparable due to the new basis of
accounting. Accordingly, the consolidated financial statements presented as
of December 31, 2007 and for the period from January 1, 2008 to June 30, 2008
represent the Predecessor Entity. The consolidated financial statements
presented as of December 31, 2008 and for the period from July 1, 2008 to
December 31, 2008 represent the Successor Entity.




NOTE 2 – GOING CONCERN AND
MANAGEMENT’S PLANS (UNAUDITED)




In
connection with the Share Exchange, the Company assumed responsibility for the
ultimate payment of significant debts of the Predecessor Entity, including most
of those described in Note 7. Primarily as a result of the interest expense
associated with such debt, the Successor Entity has incurred negative earnings
and, as of December 31, 2008, carries both a negative current ratio and
stockholders’ deficit. Management, in order to address these concerns, has and
continues to aggressively implement measures to improve operating performance
and cash flow. Steps the Company has already implemented include the
following:




·Restructured senior management team and board of
      directors


·Completed a $3.2 million interim debt
  financing


·Completed significant LNG plant maintenance designed to restore
      production volumes


·Stabilized working capital and cash
flow


·Stabilized vendor, creditor and customer
    relationships


F-8


·Secured significantnew customer contracts.





Management
expects to continue to implement changes to the business designed to improve
operating cash flow and financial condition. Management also expects to seek the
procurement of additional equity capital as market conditions dictate. Based
upon its current 2009 business plan, Management anticipates that PNG will have
sufficient liquidity, cash flow, and other resources to meet its obligations in
the ordinary course of business as such obligations arise.





The
consolidated financial statements do not include adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of
this uncertainty. There can be no assurance that any of management’s plans as
described above will be successfully implemented or that the Company will
continue as a going concern.





NOTE
3 — SIGNIFICANT ACCOUNTING POLICIES





Successor
Entity:





The
accompanying PNG consolidated financial statements (“Successor Entity”) and the
supporting and supplemental material is the responsibility of the management of
the Company.





Principles of
Consolidation — The Successor Entity consolidated balance sheet and
consolidated statement of changes in stockholders’ equity (deficit) as of
December 31, 2008  include the accounts of PNG, New Earth LNG, LLC and
its’ wholly  owned subsidiaries, thereby reflecting the transactions
related to the June 30, 2008 effective date of the Exchange Agreement. The
Successor Entity consolidated statements of operations include the operations of
the LNG Business since June 30, 2008, the effective date of the acquisition of
the LNG business. All significant intercompany accounts and transactions
have been eliminated in consolidation.





Use of Estimates — The
preparation of Successor Entity consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.




Fair Market Value
of Financial Instruments—
The estimated fair value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, and other liabilities approximate their
carrying amounts in the financial statements. The Company’s financial
instruments include trading securities and notes payable. The carrying value of
notes payable approximates market value because the borrowing rate is similar to
other financial instruments with similar terms. The trading securitiesare carried at fair value
with changes in fair value recognized in earnings each period. Valuations based
on quoted prices in active markets for identical assets or liabilities that the
Company has the ability to access. Since valuations are based on quoted prices
that are readily and regularly available in an active market, valuation of these
products does not entail a significant degree of judgment. Assets and liabilities utilizing Level
1 inputs include exchange-traded equity securities.




Cash Equivalents— The
Company considers all highly liquid investments with an original maturity of
three-months or less to be cash equivalents. Cash and cash equivalents are
carried at cost, which approximates fair value. We hold cash and cash
equivalents at several major financial institutions, which often exceed Federal
Deposit Insurance Corporation (“FDIC”) insured limits. Historically, we have not
experienced any losses due to such concentration of credit risk.





Accounts Receivable —
Accounts receivable are recorded at net realizable value, which includes an
allowance for estimated uncollectable accounts to reflect any loss anticipated
on the collection of accounts receivable balances. The Company uses the
allowance method of accounting for doubtful accounts. The year-end balance is
based on historical collections and management’s review of the current status of
existing receivables and estimate as to their collectability. We calculate
the allowance based on our history of write-offs, level of past due accounts and
economic status of the customers.





From time
to time, we derive a material portion of our revenues from one or more
significant customers. During the six-months ended December 31, 2008,
approximately 39% of our revenues were derived from our largest customer, and an
additional 29% of our revenues were derived, collectively, from our second and
third largest customers. No other customer represented more that 10% of our
total revenues during this period. Virtually all of our revenues are derived
domestically.


F-9


Inventory — Inventories
of fuel purchased and manufactured are stated at the lower of cost (on a
first-in, first-out, moving-average basis) or market. Inventories consist of
liquefied natural gas.





Property, Plant and
Equipment — Property, plant and equipment are carried at cost.
Depreciation of property, plant and equipment is provided using the straight
line method at rates based on the estimated useful lives.The cost of asset additions and improvements
that extend the useful lives of property and equipment are capitalized. Routine
maintenance and repairs items are charged to current operations. The original
cost and accumulated depreciation of asset dispositions are removed from the
accounts and any gain or loss is reflected in the statement of operations in the
period of disposition.





Impairment of Long-Lived Assets — In accordance with Statement of Financial Accounting Standards
No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”,
the Company reviews the carrying value of its long-lived assets annually or
whenever events or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be appropriate. The Company
assesses recoverability of the carrying value of the asset by estimating the
future net cash flows expected to result from the asset, including eventual
disposition. If the future net cash flows are less than the carrying value of
the asset, an impairment loss is recorded equal to the difference between the
asset’s carrying value and fair value.




Revenue— Revenues are
derived primarily from the sale of liquefied natural gas, which is sold to end
users and is recognized based on actual volumes of LNG sold. Revenue is
recognized in accordance with SEC Staff Accounting Bulletin (SAB) No. 104
“Revenue Recognition” (“SAB 104”), when persuasive evidence of an
arrangement exists, the fee is fixed or determinable, collectability is
probable, delivery of a product has occurred and title and risk of loss has
transferred or services have been rendered. Revenues include shipping and
handling costs billed to the customers.





Cost of Product Sales—  Cost of sales consists primarily of raw materials and other
production costs incurred to produce LNG. Shipping and handling costs are
included as a component of costs of product sales in our consolidated statements
of operations because we include in revenue the related costs that we bill our
customers.





Income Taxes — On a
prospective basis, the Company expects to file a consolidated federal tax
return. Income taxes are expected to be allocated to each member in
the consolidated group based on the taxable temporary differences of each member
using the asset and liability method of accounting. Deferred tax assets and
liabilities are recognized for temporary differences between financial statement
carrying amounts and the tax bases of assets and liabilities, and are measured
using the tax rates expected to be in effect when the differences reverse.
Deferred tax assets are also recognized for operating loss and tax credit
carry-forwards. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the results of operations in the period that includes
the enactment date. A valuation allowance is used to reduce deferred tax assets
when uncertainty exists regarding their realization.





Net Loss Per Common Share —Basic and diluted net loss per common share are presented in conformity
with the SFAS No. 128, “Earnings Per Share.” Basic net loss per share
is computed by dividing net loss available to common shareholders (numerator) by
the weighted average number of common shares outstanding during the year
(denominator). Diluted net income per share is computed, if applicable, using
the weighted average number of common shares and dilutive potential common
shares outstanding during the year.





Significant
Concentrations — Financial instruments that potentially subject us
to a concentration of credit risk consist principally of trade accounts
receivable. We perform ongoing credit evaluations of our customers and generally
do not require collateral on accounts receivable, as the majority of our
customers are either government or other credit-worthy entities. We
maintain reserves for potential credit losses, but historically have not
experienced any significant losses related to any particular geographic
area.





Predecessor
Entity:





Earth
LNG, Inc. (ELNG) operated the LNG Business prior to the Share Exchange. The
accompanying financial statements include the Balance Sheet of ELNG (the
Predecessor Entity) as of December 31, 2007, and the Statement of Operations,
Statement of Cash Flows, and Statement of Changes in Equity (Deficit) for the
year then ended, as well as the Statement of Operations and Statement of Cash
Flows for the period ended June 30, 2008.





Principles of Consolidation—
The financial statements include the accounts of Earth LNG, Inc. and its’ wholly
and majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.





F-10


Use of Estimates— The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America required ELNG’s
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates included in the
accompanying financial statements include the value of the goodwill asset of
$35,533,000, realization of notes receivable from shareholders of $13,562,000
and income tax liabilities of $17,233,000. Actual results could differ from
those estimates.





Fair Market Value of Financial
Instruments— The estimated fair value of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses, and other
liabilities approximate their carrying amounts in the financial statements.
ELNG’s financial instruments include notes payable. The carrying value of notes
payable approximates market value because the borrowing rate is similar to other
financial instruments with similar terms.





Cash Equivalents— ELNG
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents. Cash and cash equivalents are carried at
cost, which approximates fair value.





Accounts Receivable—
Accounts receivable are recorded at net realizable value, which includes an
allowance for estimated uncollectible accounts to reflect any loss anticipated
on the collection of accounts receivable balances. ELNG uses the allowance
method of accounting for doubtful accounts. The year-end balance is based on
historical collections and ELNG’s management’s review of the current status of
existing receivables and estimate as to their collectability. An allowance is
calculated based on our history of write-offs, level of past due accounts and
economic status of the customers.





Inventory— Inventories of
fuel purchased and manufactured are stated at the lower of cost (on a first-in,
first-out, moving-average basis) or market. Inventories consist of liquefied
natural gas.





Property, Plant and Equipment— Property, plant and equipment are carried at cost. Depreciation of
property, plant and equipment is provided using the straight line method at
rates based on the estimated useful lives. The cost of asset additions and
improvements that extend the useful lives of property and equipment are
capitalized. Routine maintenance and repairs items are charged to current
operations. The original cost and accumulated depreciation of asset dispositions
are removed from the accounts and any gain or loss is reflected in the statement
of operations in the period of disposition.





Notes Receivable from Parent and
Affiliates—Notes receivable from Parent and Affiliates consist of
advances made to EBOF and Apollo Resources pursuant to inter-company credit
agreements. The notes are due upon demand and consist of market interest rates
ranging from 6% to 15%. Amounts advanced to related parties were used to fund
operations and investments. The amounts due from the Parent totaling $13.5
million was reflected as a reduction in equity in conformity with the EITF 85-1
and SAB Topic 4-G, which requires that notes or other receivables from a parent
or another affiliate be treated as a deduction from stockholders’ equity in the
balance sheet.





Impairment of Long-Lived Assets— In accordance with Statement of Financial Accounting Standards No. 144
“Accounting for the Impairment or Disposal of Long-Lived Assets,” ELNG reviews
the carrying value of its long-lived assets annually or whenever events or
changes in circumstances indicate that the historical cost-carrying value of an
asset may no longer be appropriate. ELNG assesses recoverability of the carrying
value of the asset by estimating the future net cash flows expected to result
from the asset, including eventual disposition. If the future net cash flows are
less than the carrying value of the asset, an impairment loss is recorded equal
to the difference between the asset’s carrying value and fair
value.





Goodwill and Other Intangible Assets— The Company accounts for goodwill and other intangible assets in
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill
and other intangible assets are required to be tested at least on an annual
basis for impairment or on an interim basis if an event occurs or circumstances
change that would reduce the fair value of a reporting unit below its carrying
value. ELNG assesses goodwill for impairment by periodically comparing the fair
value of its reporting units to their carrying amounts to determine if there is
potential impairment. Fair values for reporting units are determined based on
discounted cash flows, market multiples or appraised values as appropriate. The
fair value of definite lived intangible assets is determined by using a “relief
from royalty” approach. ELNG selected December 31, 2007, as the date of
valuation and performed its annual tests of goodwill as of December 31, 2007,
and there was no impairment indicated.





Revenue— Revenues consist of
liquefied natural gas which is sold to end users and is recognized based on
actual volumes of LNG sold. Revenue is recognized in accordance with SEC Staff
Accounting Bulletin (SAB) No. 104 “Revenue Recognition” (“SAB 104”), when
persuasive evidence of an arrangement exists, the fee is fixed or determinable,
collectability is probable, delivery of a product has occurred and title and
risk of loss has


F-11


transferred
or services have been rendered. Revenues include shipping and handling costs
billed to the customers.





Cost of Product Sales— Cost
of sales consists primarily of raw materials costs incurred to produce LNG.
Shipping and handling costs are included as a component of costs of product
sales in our consolidated statements of operations because we include in revenue
the related costs that we bill our customers.





Income Taxes—The Company
files a consolidated federal tax return with EBOF. Income taxes are allocated to
each member in the consolidated group based on the taxable temporary differences
of each member using the asset and liability method of accounting. Deferred tax
assets and liabilities are recognized for temporary differences between
financial statement carrying amounts and the tax bases of assets and
liabilities, and are measured using


the tax
rates expected to be in effect when the differences reverse. Deferred tax assets
are also recognized for operating loss and tax credit carry-forwards. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the results of operations in the period that includes the enactment date. A
valuation allowance is used to reduce deferred tax assets when uncertainty
exists regarding their realization.





Net Loss Per Common Share —Basic and diluted net loss per common share are presented in conformity
with the SFAS No. 128, “Earnings Per Share.” Basic net income per share is
computed by dividing net income available to common shareholders (numerator) by
the weighted average number of common shares outstanding during the year
(denominator). Diluted net income per share is computed using the weighted
average number of common shares and dilutive potential common shares outstanding
during the year. There were no outstanding options and warrants and thus were
not included in the computation of diluted loss per share.





Significant Concentrations —Financial instruments that potentially subject us to a concentration of
credit risk consist principally of trade accounts receivable. ELNG performs
ongoing credit evaluations of our customers and generally do not require
collateral on accounts receivable, as the majority of our customers are
government entities. We maintain reserves for potential credit losses, but
historically have not experienced any significant losses related to any
particular geographic area. Municipal customers represent approximately 42% of
the consolidated revenues of the Company. Total sales to these customers for the
three months ended March 31, 2008 was approximately $3.1 million.





NOTE 4 —
PREPAIDS AND OTHER ASSETS




Prepaids
and other assets consist of the following at December 31, 2008 (amounts in
000’s):





Description
            
            Successor
      Entity as of December 31, 2008
            
            
            Predecessor
      Entity as of December 31, 2007Prepaid
      expenses
            
            $
            487
            
            
            $
            820Deposits
            
            
            744
            
            
            
            987Escrow
      monies
            
            
            307
            
            
            
            —Prepaid
      financing costs
            
            
            2,344
            
            
            
            1,896Inventory
            
            
            37
            
            
            
            32Other
      assets
            
            
            148
            
            
            
            —Less
      current portion
            
            
            (1,124
            )
            
            
            (1,846
            )Long
      term prepaids and other assets
            
            $
            2,943
            
            
            $
            1,889





NOTE 5— PROPERTY, PLANT, AND
EQUIPMENT





Property,
plant, and equipment consisted principally of the assets related to the LNG
Business acquired in the Exchange Agreement. The substantial increase in
carrying value reflects the step up in basis to fair market value upon
completion of the acquisition of the LNG operation by PNG effective June 30,
2008 (see Note 6):




Description
            
            Successor
      Entity as of December 31, 2008
            
            
            Predecessor
      Entity as of December 31, 2007LNG
      Production Facilities
            
            $
            34,441
            
            
            $
            8,040Fixtures
      and equipment
            
            
            22
            
            
            
            10,241Total cost
            
            
            34,463
            
            
            
            18,281Accumulated
      Depreciation
            
            
            (1,142
            )
            
            
            (9,248
            )Net
      property, plant and equipment
            
            $
            33,321
            
            
            $
            9,033






F-12




Depreciation
expense for the year six-month period ended December 31, 2008 was approximately
$1,142,000.





PNG’s
accounting policy is to record depreciation on a straight-line basis over the
estimated useful lives of the various assets as follows:





Furniture
      and fixtures
            5-7
      YearsMachinery
      and equipment
            5-10
      YearsLNG
      Production Facilities
            15
      Years





NOTE
6 — ACQUISITIONS





On June
30, 2008, PNG entered into and completed an acquisition pursuant to the
Share Exchange Agreement with sellers Earth Biofuels, Inc., a Delaware
corporation (“EBOF”) and its wholly owned subsidiary ELNG; pursuant to
which PNG acquired 100% ownership of New ELNG from ELNG, and settled and
restructured certain debts in exchange for the issuance of 8,380,000 shares of
the of common stock of the Company. The assets and business that were
acquired by us as a result of the Share Exchange includes a Topock, Arizona
liquefied natural gas production facility, and its related distribution and
sales businesses, all of which are held and operated by New ELNG’s subsidiaries.
The six months of operations of the acquired entity since the acquisition date
of June 30, 2008, are included in the Consolidated Statement of Operations of
the successor.




As of a
result of the change in control of the acquired assets, this acquisition was
recorded using the purchase method of accounting for business combinations.
Under the purchase method the Company reports the acquired entities assets and
liabilities at fair market value. Based upon the terms of the Share exchange,
the primary purchase accounting adjustments to carrying values of assets and
liabilities included the step up in carrying value of property plant and
equipment to estimated fair market values, the elimination of goodwill that was
previously carried on the books of the predecessor entity, the elimination of
the income tax payable amount that was previously carried on the books of the
predecessor entity, and the recognition and recording of additional debts,
including those described in note 7. The value of the stock issued in the
transaction was deemed nominal based upon the estimated fair market value of the
underlying assets and liabilities.





The
following is a condensed balance sheet disclosing the fair values of the LNG
Business assets and liabilities acquired (amounts in thousands).




ASSETSCash
      and cash equivalents
            
            $
            82Accounts
      receivable
            
            
            1,939Inventory
            
            
            259Prepaid
      and other assets
            
            
            3,891Total
      current assets
            
            
            6,171Property,
      plant and equipment
            
            
            34,000Other
      long-term assets
            
            
            1,888Total
      Assets
            
            $
            42,059LIABILITIES
      AND STOCKHOLDERS’ DEFICITAccounts
      payable
            
            $
            5,569Line
      of credit
            
            
            1,236Other
      current liabilities
            
            
            1,573Total
      current liabilities
            
            
            8,378Term
      debt facilities
            
            
            33,843Total
      Liabilities
            
            
            42,221Stockholders’
      Deficit
            
            
            (162)Total
      Liabilities and Stockholders’ Deficit
            
            $
            $42,059




The
following represents the approximate pro-forma effect assuming the acquisition
with the companies had occurred on January 1, 2008, and 2007, the beginning of
the Company’s current fiscal year, including proforma adjustments for
depreciation and interest expense (amounts in 000’s).


F-13





Year
      Ended December 31,  2008
            
            
            Year
      Ended December 31,  2007Net
      loss
            
            $
            (9,221
            )
            
            $
            (11,476
            )Losses
      per share
            
            $
            (.93
            )
            
            $
            (1.16
            )








NOTE 7 — NOTES PAYABLE, CONVERTIBLE
DEBTS AND LINE OF CREDIT





As a
condition to closing of the Share Exchange, and among other conditions and
closing deliveries, PNG and its subsidiaries entered into an Amended and
Restated Credit Agreement dated June 26, 2008. In conjunction with this Credit
Agreement, PNG became obligated for the repayment of secured debt in the
principal amount of $34 million. The Credit Agreement is secured by virtually
all of the Company’s assets, excluding accounts receivables, and requires
monthly payments, in advance, of interest at the annualized rate of Libor plus
7.25%, with Libor subject to a floor of 2.5%. As such, the rate in effect as of
December 31, 2008 was an annualized rate of 9.75%. The Credit Agreement also
contains restrictions on the payment of dividends, capital expenditures and
other customary covenants and conditions, including a covenant to maintain
minimum positive EBITDA (earnings before interest, taxes, depreciation and
amortization) of at least $1,050,000 for any quarter ending on or after December
31, 2008, and a requirement to maintain a fixed charge coverage ratio (as
defined) of 1.10:1 for all quarters through June 30, 2009, and 1.15:1
thereafter. The Credit Agreement also requires quarterly payments of principal,
base upon 50% of quarterly EBITDA, adjusted (reduced) by principal and interest
payments and certain other changes in working capital. The Credit Agreement
matures on June 26, 2010. As of December 31, 2008, the Company was fully in
compliance with all terms of the Credit Agreement.





Effective
January 1, 2009, the Company entered into a modification to its Credit
Agreement. The amendment deferred payment of the Company’s January 1, 2009
interest payment in the amount of approximately $285,000, and required
additional principal payments to be made in the amount of $50,000 per month
commencing April 1, 2009.





In
connection with the Share Exchange, the Company also entered into a Master
Rights Agreement with the lender. As part of this agreement, 1,100,000
shares were issued to the lender as additional consideration for the amended
credit agreement. In addition, up to an additional 1,100,000 shares may be
issued to the lender upon the earlier of July 1, 2009, or the occurrence of
certain other defined events, such earlier date being defined as the “price
determination date.” Upon the price determination date, an assumed value (as
defined) is determined. The number of shares to be issued is then calculated
based upon a formula that divides $11,000,000 by the assumed value of the common
stock to determine the maximum number of shares to be issued (including the
1,100,000 shares already issued), subject to a maximum issuance of an additional
1,100,000 shares. Management believes that 1,100,000 common shares are likely to
be issued on or before July 1, 2009.  This agreement also grants
lender certain registration rights that may require us to use our best efforts
to register under the Securities Act of 1933, as amended (the “Securities Act”),
the shares of common stock issued, and certain additional shares that may
be issued in the future, as described below. The value of the shares issued
pursuant to the Amended Credit Agreement was recorded as a discount to the note
based on relative fair values in the amount of $156,795. As of December 31,
2008, there was $39,645 amortized on the discount.




Line
of Credit





In
connection with the Share Exchange, the Company became obligated for the
repayment of a secured revolving line of credit with a lender that provides up
to $2.5 million of working capital financing against certain eligible accounts
receivables. This line of credit is secured via a senior lien on all
receivables, and bears interest at an annual rate of prime plus 2% (5.25% at
December 31, 2008), and includes provisions for other monthly fees for services
provided under the agreement. Including the interest rate and various fees, the
Company’s average annualized effective interest rate associated with this
facility is approximately 20%. As of December 31, 2008, the outstanding balance
of the line of credit was $1,871,000.





During
the 3rd quarter
of 2008, this line of credit was increased to a maximum of $3.0 million. On
February 27, 2009, the maturity date on this revolving line of credit was
extended to March 1, 2010. In addition, the line of credit was reduced to $2.5
million, and the interest rate was modified to Libor plus 7%, with the Libor
rate subject to a floor of 2%. The amendment also added a prepayment penalty in
the amount of $25,000, a loan fee of .75% of the average loan amount
outstanding, payable monthly, and a loan commitment fee of $25,000 paid upon
execution of the amendment.





Convertible
Debt


F-14





In
connection with the Share Exchange, the Company became obligated for the
repayment of a $626,250 convertible promissory note payable to Black Forest
International, LLC (“BFI”). The note was convertible at any time into
756,325 shares of PNG stock, at $10 per share for a portion of the note totaling
$563,250, and $.09 per share for $63,000 balance of the note. Proceeds from the
third quarter private debt financing were used to repay $563,250 principle
balance on the note (the portion convertible at $10 per share), leaving a
balance outstanding as of December 31, 2008 of $63,000 that is convertible into
700,000 common shares at the conversion rate of $.09 per share, subject to
adjustment under certain circumstances as described below. Interest accrues at
12%, and is payable monthly.





The note
provides for future adjustment to the conversion rate any time that PNG issues
common shares or derivatives of common shares at an effective price of less than
$10 per share. The conversion rate adjustment provisions provide for
reduction in the conversion price based upon a factor, the numerator of which is
the effective price of the issued shares/derivatives, and the denominator of
which is $10. Further, the note has no stated maturity date, is payable on
demand, and does not provide for prepayment in the absence of consent by the
holder.





Also, in
connection with the Share Exchange, the Company became liable for a Subordinated
Convertible Promissory Note in the amount of $171,000. The note bears interest
at 12%, which is due and payable upon maturity of June 5, 2009. The note is
convertible at any time at a conversion price of $.09 per share, or 1,900,000
shares.  The Company recognized a beneficial conversion feature in the
amount of $171,000, which was based on the intrinsic value of the conversion
feature. Amortization on the debt discount totaled $162,459 as of December 31,
2008. During the last half of 2008, $103,000 of the Note was converted to
1,190,000 common shares, leaving a remaining balance on the note as of December
31, 2008 of $67,500, net of the remaining discount of $8,541.





Private
Convertible Debt Financing





Effective
as of August 19, 2008, PNG Ventures, Inc. (the “Company”) entered into a
securities purchase agreement (the “Agreement”) with Castlerigg PNG Investments,
LLC (the “Investor”) pursuant to which the Investor purchased a 15% subordinated
convertible note for an aggregate principal amount of $3,188,235 (the “Note”).
As of December 31, 2008, the Investor also owned a beneficial interest of 60.38%
of the outstanding common shares of PNG. The Note bears interest at 15% per
annum and such interest is payable in arrears on the first day after the end of
each quarterly period, beginning September 30, 2008. Upon the closing of
the transactions contemplated by the Agreement, the Company prepaid interest to
the Investor in the amount of $477,000, representing interest due and payable on
the Note through August 19, 2009 (the “Prepaid Interest”). In addition,
$1,000,000 was placed into escrow to be used to pay interest accruing on the
Amended and Restated Credit Agreement.





The Note
matures on August 19, 2010 (the “Maturity Date”) however; the Maturity
Date may be extended at the option of the Investor through August 19,
2012.





The Note
is convertible at the option of the Investor at any time into shares of common
stock at an initial conversion price equal to $10.00 per share (“Initial
Conversion Price”), and includes anti-dilution provisions that allow for future
adjustment of the conversion price upon the occurrence of certain future events,
including future issuances of common stock and other convertible instruments by
the Company.





In
connection with the Agreement, the Investor received a warrant to purchase
797,059 shares of Common Stock of the Company (the “Warrant”). The Warrant is
exercisable for a period of ten years from the date of issuance at an initial
exercise price of $10.00 per share, subject to adjustment as described in the
previous paragraph. At the date of original issuance, the warrants had a
relative fair value of $58,566. Amortization on the related debt discount
totaled $10,708 as of December 31, 2008.





Notes
Payable and Other Current Liabilities





The
Company entered into a note agreement dated September 29, 2008 in the amount of
$1,802,788 with a vendor that had previously supplied, but had not received
payment for, natural gas feedstocks to the Predecessor Entity. The note is due
on September 25, 2009, and requires monthly payments of $25,000 per month. If
the note is not paid in full on maturity, then the interest rate on any
remaining balance shall revert to the highest lawful rate, as defined, but in no
event higher than 18% per annum until such time as the note is fully paid. Under
certain conditions, including the sale by PNG of its common stock in a public
offering, the due date of the note may be accelerated. The balance of this note
as of December 31, 2008 was $1,763,583.


F-15





In
connection with the Share Exchange, the Company became liable to a vendor that
had previously provided, but not been paid for, transportation services to the
Predecessor Entity for natural gas feedstock to the plant. The Company agreed to
an informal arrangement to retire this liability over time. Generally, PNG has
agreed to make payments toward this trade debt in the amount of $20,000 per
month, with no interest due. As of December 31, 2008, the balance owed to the
vender was $1,032,428. The trade debt arose from transactions between the Vendor
and the Predecessor Entity in January and February 2008.





Other
current liabilities





An
aggregate of 1,450,000 shares of PNG Common Stock may be issued to certain
entities that are affiliated with our major transportation vendor that provide
shipping services for the LNG Business (referred to herein as “the Kelley
Group”), in exchange for a Consent, Release and Debt Discharge Agreement in such
form as agreed to by PNG and the Kelley Group. The shares will only be issued
upon finalization of, and execution and delivery of, a final release agreement
satisfactory to the Company. As of the date hereof, the Kelley Release Agreement
has not been entered into, and no assurance can be made that the Company will
secure such release agreement. Until such time as a final agreement is entered
into, the company has recorded an accrual in the amount of approximately
$947,000 relating to certain claims asserted by the Kelley Group, including, but
not limited to, its claim that it owns certain preferred stock in a PNG
subsidiary, is due certain accrued dividends related to such Preferred stock,
and is owed certain other amounts disputed by the Company (see Note
10).





Summary
Table of Notes Payable, Convertible Debts, and Line of Credit





A summary
of the Company’s structured debts is included in the following table (amounts in
thousands):





Long
      Term Debt
            
            
            Current
      Portion Long Term Debt
            
            
            Notes
      Payable & Other
            
            
            Convertible
      Promissory Note
            
            
            Line
      of Credit
            
            
            TotalSecured
      Credit Agreement
            
            $
            33,194
            
            
            $
            806
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            34,000Line
      of Credit
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,871
            
            
            
            1,871Convertible
      Notes
            
            
            —
            
            
            
            —
            
            
            
            63
            
            
            
            3,256
            
            
            
            —
            
            
            
            3,319Vendor
      Notes
            
            
            —
            
            
            
            —
            
            
            
            2,796
            
            
            
            —
            
            
            
            —
            
            
            
            2,796Other
            
            
            —
            
            
            
            —
            
            
            
            947
            
            
            
            —
            
            
            
            —
            
            
            
            947Discounts
            
            
            (119
            )
            
            
            —
            
            
            
            —
            
            
            
            (55
            )
            
            
            —
            
            
            
            (174
            )Total
            
            $
            33,075
            
            
            $
            806
            
            
            $
            3,806
            
            
            $
            3,201
            
            
            $
            1,871
            
            
            $
            42,759





Maturities
of long-term debts





The
following table sets forth our future long-term debt payment obligations as of
December 31, 2008 (amount in 000s):




DebtOutstanding
      at
              December31,
      20081 year
      or less
            
            $
            8062 years
            
            
            36,4503 years
            
            
            —4 years
            
            
            —5 years
            
            
            —Thereafter
            
            
            —Total
      future payments
            
            $
            37,256





NOTE 8 —
INCOME TAXES




Both the
Company and the Predecessor Entity had net operating losses for the periods
ended December 31, 2008 and June 30, 2008 as well as the year ended December 31,
2007. The Company’s management believes it is more likely than not that
the




F-16




net
deferred tax assets will not be fully realized based on its operating
history. Therefore, the Company and Predecessor Entity have provided a
valuation allowance against its deferred tax assets at December 31, 2008 and
2007. In addition, net operating loss carry forwards that were held by PNG prior
to the date of the Share Exchange in the amount of $2.0 million may be subject
to substantial limitations as to future use by Section 382 of the Internal
Revenue Code. At December 31, 2008, the Company has accumulated operating
losses totaling approximately $4.8 million. The net operating loss
carry-forwards will begin to expire in 2017 if not utilized. There were no
significant differences between the United States federal statutory rates and
income tax expense except for valuation allowances. Non-current deferred
tax assets of approximately $1,474,000 at December 31, 2008 were fully reserved
and no income tax expense or benefit was recorded for the six-months ended
December 31, 2008. Valuation allowances for deferred tax assets increased by
approximately $823,000 during the six months ended December 31,
2008.




The
Company adopted FASB Interpretation No. 48 (“FIN 48”)Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109 Accounting for Income
Taxes. The current Company policy classifies any interest recognized on
an underpayment of income taxes as interest expense and classifies any statutory
penalties recognized on a tax position taken as other general and administrative
expense. The Company has not taken a tax position that, if challenged, would
have a material effect of the financial statements or the effective tax rate
during the six-months ended December 31, 2008.




NOTE
9—STOCKHOLDERS’ EQUITY





Potential
dilutive common shares





There
were no debt conversion options for shares outstanding as of year end
December 31, 2007, and 1,728,824 as of December 31, 2008. There were an
additional 2,550,000 shares that are potentially issuable pursuant to various
agreements described above, as of December 31, 2008. As of December 31, 2008,
there were also 797,059 warrants outstanding issued in connection with the above
private debt financing. As of December 31, 2008, total potential dilutive
common shares were 5,075,883. Due to net losses or anti-dilutive features these
warrants and conversion options were not presented on the Consolidated Statement
of Operations.





Potential
dilutive common shares outstanding during the year are summarized as follows for
the period ended December 31, 2008.





Description
            
            Remaining
      Life
            
            
            Exercise
      Price (1)
            
            
            2008
      Conversion sharesConvertible
      shares:June
      3, 2008 Black Forest Note convertible debt totaling $63,000 at December
      31, 2008
            
            2
      years
            
            
            $
            0.83
            
            
            
            700,000June
      5, 2008 convertible debt totaling $67,500
            
            2
      years
            
            
            $
            0.09
            
            
            
            710,000August
      19, 2008 convertible debt totaling $3,188,235
            
            2
      years
            
            
            $
            10.00
            
            
            
            318,824Total convertible shares as of September 30, 2008
            
            
            —
            
            
            
            —
            
            
            
            1,728,824Contingent
      shares:
            
            
            —
            
            
            
            —Potential
      Kelley Settlement Agreement
            
            
            N/A
            
            
            
            N/A
            
            
            
            1,450,000Potential
      issuance related to Master Rights Agreement
            
            
            N/A
            
            
            
            N/A
            
            
            
            1,100,000Warrants:
            
            
            —
            
            
            
            —August
      19, 2008 warrants on private debt financing 
    $3,188,235
            
            
            —
            
            
            $
            10.00
            
            
            
            797,059Total potential dilutive common shares as of December 31,
    2008
            
            
            —
            
            
            
            —
            
            
            
            5,075,883





(1)  Virtually
all exercise prices and/or conversions are subject to adjustment and/or
substantial reduction under certain circumstances.





Warrants





As of
December 31, 2008, there were 797,059 warrants outstanding issued in connection
with the private debt financing on August 19, 2008 totaling $3,188,235. These
warrants are exercisable at $10 per share, and expire in 10 years. As
of


F-17


December
31, 2008 no warrants have been exercised or forfeited. The weighted average
exercise price for all warrants outstanding as of December 31, 2008 was $10
per share.





The
warrant fair value of $58,566 was determined by using the Black-Scholes option
pricing model. Variables used in the Black-Scholes option-pricing model include
(1) risk-free interest rate, (2) expected warrant life is the actual
remaining life of the warrants as of the year end, (3) expected
volatility, and (4)  zero expected dividends.





A summary
of the Company’s stock warrant activity and related information at December 31,
2008 is as follows:





Number
      of Shares Under Warrant
            
            
            Exercise
      Price
            
            
            Weighted
      Average Exercise PriceWarrants
      outstanding at December 31, 2007Issued
            
            
            797,059
            
            
            $
            10.00
            
            
            $
            10.00Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Repurchased
            
            
            —
            
            
            
            —
            
            
            
            —Expired
            
            
            —
            
            
            
            —
            
            
            
            —Warrants
      outstanding and exercisable atDecember
      31, 2008
            
            
            797,059
            
            
            $
            10.00
            
            
            $
            10.00





In June
2008, the Company entered into an employment agreement with a key employee
that provided for the issuance of 150,000 common stock purchase warrants at an
exercise price of $10 per share. These stock purchase warrants have not been
issued, pending the determination of contractual conditions that were not
defined in the agreement, including term of the warrants, vesting conditions,
and specific exercise rights. In July 2008, the Company agreed to issue
10,000 common stock purchase warrants to a director at an exercise price of $10
per share, and a vesting period of six months. These warrants have not been
formally issued.





Share
based Compensation  —





During
the year ended December 31, 2008, the Company issued 25,000 restricted shares,
valued at approximately $69,000 of PNG’s common stock to directors for services
rendered.





NOTE
10:  LITIGATION





Clean Energy.  The
Company has been served with a summons and complaint in an action commenced
against it by Clean Energy Fuels Corp., a California corporation, in the United
States District Court for the Central District of California, Case No.
SACV08-746. In the action, Clean Energy alleges that the Company breached its
written agreement to supply Liquefied Methane Gas (LMG) and is seeking damages
and an injunction compelling the Company to abide its contractual obligations.
At the same time Clean Energy filed the action, it also moved for issuance of a
preliminary injunction. The Company has answered the complaint and asserted
counterclaims for monies due and owing to it by Clean Energy for LMG previously
delivered and for the attorneys’ fees it will incur in defending the action. The
Company also filed opposition to the motion for a preliminary injunction. A
hearing on the motion was held on August 4, 2008. The Court subsequently denied
the Clean Energy’s request for a preliminary injunction. While the Company has
asserted a number of defenses and affirmative defenses, no assurance can be made
that the Company will be successful in defending this lawsuit. An adverse ruling
could have an adverse effect on the Company.





Kelley. In December 2008, Ken
Kelley and certain affiliated parties filed a lawsuit against AP Holdings
International, Inc. et. al. that includes PNG Ventures, Inc. and Earth Leasing,
Inc. (“Earth Leasing”), a wholly owned subsidiary of the Company.





The
lawsuit alleges that certain preferred stock was issued by Earth Leasing in 2006
in favor of plaintiffs, and that dividends on this preferred stock are accrued,
accruing and unpaid. This lawsuit also alleges that other payables are owed to
the Kelley group. The Company disputes all claims that are alleged, believes
that there are valid defenses to these claims and intends to vigorously defend
its position.


F-18


Kelley
and affiliates have also informally asserted other claims in connection with the
transactions that resulted in the acquisition of the LNG Business by EBOF.
Management believes that these allegations are without merit. The Company has,
however, included an accrual in its balance of a liability in the amount of
$947,000 to reflect the amounts alleged to be due in the pending litigation, as
well as to reflect the contingent issuance of shares claimed by Kelley and
affiliates





Customer
Matters:


In
September 2008, one of our transit customers notified us that it was assessing
penalties of $200,000 related to our alleged failure to comply with certain
terms of our LNG supply contract with this customer. In early 2009, we agreed to
a settlement of this issue that required us to pay the amount of $50,000 and to
further comply with certain performance measures during the six-month period
following the settlement. In the event that the Company fails to comply with the
conditions of the settlement, the remaining penalties could be reinstated,
requiring us to pay the remainder of the alleged penalties. We recognized the
$50,000 penalty in 2008 as an expense.





Many of
our customer contracts include substantial penalties for non-compliance, and we
are occasionally involved in disputes with customers regarding compliance with
contractual terms, applicability of liquidated damages, and various other
matters of contractual compliance, performance, and/or interpretation.
Management does not believe that any such disputes which currently exist are
likely to result in a material adverse change in the financial condition of the
Company.





Other
Matters:


From time
to time, we are involved in a variety of claims, suits, investigations,
proceedings and legal actions arising in the ordinary course of our business. We
intend to vigorously defend all claims against us. Although the ultimate outcome
of these matters cannot be accurately predicted due to the inherent uncertainty
of litigation, in the opinion of management, based upon current information, no
currently pending or overtly threatened claim is expected to have a material
adverse effect on our business, financial condition or results of operations.
However, even if we are successful on the merits, any pending or future
lawsuits, claims or proceedings could be time-consuming and expensive to defend
or settle and could result in the diversion of significant management time and
operational resources, which could materially and adversely affect us. In
addition, it is possible that an unfavorable resolution of one or more such
proceedings could in the future materially and adversely affect our financial
position, results of operations or cash flows.





NOTE
11— CUSTOMER AND SUPPLIER CONCENTRATIONS





Our
business is dependent upon the operation of a single natural gas liquefaction
plant that takes natural gas feedstock directly from an adjacent natural gas
pipeline. While the pipeline is operated as a common carrier and is subject
to applicable common carrier rules and regulations, any extended disruption in
the operations of this pipeline, or in our relationship with the operator of the
pipeline, could have a material adverse effect upon our business.




Our sales
are derived principally from various governmental agencies and authorities,
including our three largest customers that comprised 55.0% of our sales during
the period ended December 31, 2008. The largest of these customers comprised 37%
of sales during this period, and is subject to a contract that is scheduled to
expire June 30, 2009.




NOTE
12—RECENT ACCOUNTING PRONOUNCEMENTS





In
December 2007, the Financial Accounting Standards Board issued FASB No. 141R,
“Business Combinations.” FASB 141R establishes principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. FASB 141R also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FASB 141R will become effective as of the beginning of the
Company's fiscal year beginning after December 15, 2008. The impact that
adoption of FASB No. 141R will have on the Company's consolidated financial
statements will depend on the nature, terms, and size of business combinations
that occur after the effective date.





In
December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) 110 Share-Based Payment. SAB 110
amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based
Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of
Topic 14 expresses the views of the staff regarding the use of the “simplified”
method in developing an estimate of the expected term of “plain vanilla” share
options and allows usage of the “simplified” method for share option grants
prior to December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to


F-19


provide a
reasonable estimate to continue use of the “simplified” method for estimating
the expected term of “plain vanilla” share option grants after December 31,
2007. SAB 110 was effective January 1, 2008. The Company has used the
“simplified” method to estimate the expected term for share option grants as it
does not have enough historical experience to provide a reasonable estimate. The
Company will continue to use the “simplified” method until it has enough
historical experience to provide a reasonable estimate of expected term in
accordance with SAB 110. The adoption of SAB 110 did not have a material impact
on its consolidated balance sheets, statements of operations and cash
flows.





The
Company adopted SFAS No. 157, Fair Value Measurements(“SFAS 157”). In February 2008, the FASB issued FSP No. 157-2,
Effective Date of FASB
Statement No. 157, which provides a one-year deferral of the
effective date of SFAS 157 for non-financial assets and non-financial
liabilities, except for those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore, the Company has adopted
the provisions of SFAS 157 only with respect to financial assets and
liabilities, as well as any other assets and liabilities carried at fair value.
SFAS 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles and enhances disclosures
about fair value measurements. Fair value is defined under SFAS 157 as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under
SFAS 157 must maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes how to measure fair value based on a
three-level hierarchy of inputs, of which the first two are considered
observable and the last unobservable.




•
            Level 1 —
      Quoted prices in active markets for identical assets or
      liabilities.•
            Level 2 —
      Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.•
            Level 3 —
      Unobservable inputs that are supported by little or no market activity and
      that are significant to the fair value of the assets or
      liabilities.




The
adoption of this statement did not have a material impact on the Company’s
consolidated results of operations or financial condition. The Company does not
currently expect the application of the fair value framework established by
SFAS 157 to non-financial assets and liabilities measured on a
non-recurring basis to have a material impact on the consolidated financial
statements. However, the Company will continue to assess the potential effects
of SFAS 157 as additional information becomes available.





The
Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS 159”). SFAS 159 allows
an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for specified financial assets and liabilities on a
contract-by-contract basis. The Company did not elect to adopt the fair value
option on any assets or liabilities not previously carried at fair value under
SFAS 159.





In March
2008, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — An Amendment of FASB Statement
No. 133(“SFAS 161”). The objective of SFAS 161 is to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of
SFAS 161 is not expected to have a material impact on the Company’s
financial condition and results of operations. However, the Company believes it
will likely be required to provide additional disclosures as part of future
financial statements, beginning with the first quarter of fiscal
2009.





In April
2008, FASB issued FASB Staff Position (“FSP”) No. 142-3
(“FSP 142-3”),
Determination of the Useful Life of Intangible Assets, which amends the
factors that must be considered in developing renewal or extension assumptions
used to determine the useful life over which to amortize the cost of a
recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets. FSP 142-3 requires an entity to consider its own assumptions
about renewal or extension of the term of the arrangement, consistent with its
expected use of the asset. FSP 142-3 also requires the disclosure of the
weighted-average period prior to the next renewal or extension for each major
intangible asset class, the accounting policy for the treatment of costs
incurred to renew or extend the term of recognized intangible assets and for
intangible assets renewed or extended during the period, if renewal or extension
costs are capitalized, the costs incurred to renew or extend the asset
and


F-20


the
weighted-average period prior to the next renewal or extension for each major
intangible asset class. FSP 142-3 is effective for financial statements for
fiscal years beginning after December 15, 2008. The adoption of
FSP 142-3 is not expected to have a material impact on the Company’s
financial condition and results of operations.





NOTE
13 – SUBSEQUENT EVENTS





On
January 1, 2009, the Company entered into a modification to its Secured Credit
agreement. The amendment deferred payment of the Company’s January 1, 2009
interest payment in the amount of approximately $285,000, and required
additional principal payments to be made in the amount of $50,000 per month
commencing April 1, 2009.





On
February 27, 2009, the maturity date of the revolving line of credit was
extended to March 1, 2010. In addition, the line of credit was reduced to $2.5
million, and the interest rate was modified to Libor plus 7%, with the Libor
rate subject to a floor of 2%. The amendment also added a prepayment penalty in
the amount of $25,000, a loan processing fee of .75% of the average loan amount
outstanding, payable monthly, and a loan processing fee of $25,000 paid upon
execution of the amendment.


F-21