UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


FORM
10-Q





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




For the
quarterly period ended September 30, 2009




 ̈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. 1-34022




NEW
GENERATION BIOFUELS HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)




Florida
              26-0067474(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)




5850
Waterloo Road, Suite 140


Columbia,
MD  21045


(Address
of principal executive offices)




(410)
480-8084


(Registrant’s
telephone number, including area code)




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





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




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




Large
accelerated filer  ̈Accelerated filer
 ̈Non-accelerated
filer   ̈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




At
October 31, 2009, the registrant had 29,205,459 shares of common stock,
$0.001 par value, issued and outstanding.





INDEX





PagePART
      I.   FINANCIAL INFORMATIONCautionary
      Note Regarding Forward-Looking Statements
                1Item
      1.
                Financial
      Statements
                2Consolidated
      Balance Sheets as of September 30, 2009 (Unaudited) and December 31,
      2008
                2Consolidated
      Statements of Operations for the three and nine months ended September 30,
      2009 (Unaudited), and for the three and nine months ended September 30,
      2008 (Unaudited)
                3Consolidated
      Statement of Changes in Stockholders’ Equity for the nine months ended
      September 30, 2009 (Unaudited)
                4Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2009
      (Unaudited), and for the nine months ended September 30, 2008
      (Unaudited)
                5Notes
      to Consolidated Financial Statements
                6Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                19Item
      3.
                Qualitative
      and Quantitative Disclosures About Market Risk
                26Item
      4.
                Controls
      and Procedures
                26PART
      II.   OTHER INFORMATIONItem
      1A.
                Risk
      Factors
                27Item
      5.
                Other
      Information
                28Item
      6.
                Exhibits
                28Signatures




i


CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve numerous assumptions,
risks and uncertainties, many of which are beyond our control. Our actual
results could differ materially from anticipated results. Important factors
that may cause actual results to differ from projections include without
limitation:




·
            our lack of operating
      history;


·
            our dependence on additional
      financing to continue as a going
concern;


·
            our inability to generate
      revenues or profits from sales of our biofuel and to establish commercial
      scale production facilities;


·
            the
      disproportionally higher cost of production relative to units
      sold;


·
            our ability to fully realize the
      value of our technology license agreement, which is our principal
      asset;


·
            our inability to enter into
      acceptable sublicensing agreements with respect to our technology or the
      inability of any sublicensee to successfully manufacture, market or sell
      biofuel utilizing our licensed
  technology;


·
            market acceptance of our
      biofuel;


·
            our inability to compete
      effectively in the renewable fuels
  market;


·
            governmental regulation and
      oversight, including our ability to qualify our biofuel for certain tax
      credits and renewable portfolio
  standards;


·
            our ability to protect our
      technology through intellectual property
  rights;


·
            unexpected costs and operating
      deficits;


·
            adverse results of any material
      legal proceedings; and


·
            other specific risks set forth
      under the heading “Risk Factors” beginning on page 27 of this
      report.





All
statements that are not clearly historical in nature regarding our strategy,
future operations, financial position, prospects, plans and management
objectives are forward-looking statements. When used in this report, the words
“will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,”
“project,” “plan” and similar expressions generally are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements are based on information
available at the time the statement was made. We undertake no obligation to
update any forward-looking statements or other information contained in this
report as a result of new information, future events or otherwise. You should
not place undue reliance on these forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in or suggested by
the forward-looking statements are reasonable, these plans, intentions or
expectations may not be achieved.


- 1
-


PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Balance Sheets




September
      30,
                                                        
                                                        
                                                        December
      31,2009
                                                        
                                                        
                                                        2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                        
                                                        $
                                                        1,300,728
                                                        
                                                        
                                                        $
                                                        1,476,246Accounts
      receivable
                                                        
                                                        
                                                        18,237
                                                        
                                                        
                                                        
                                                        22,943Related
      party receivables
                                                        
                                                        
                                                        77,820
                                                        
                                                        
                                                        
                                                        -Inventory
                                                        
                                                        
                                                        11,708
                                                        
                                                        
                                                        
                                                        -Prepaid
      expenses
                                                        
                                                        
                                                        373,064
                                                        
                                                        
                                                        
                                                        195,369Total
      current assets
                                                        
                                                        
                                                        1,781,557
                                                        
                                                        
                                                        
                                                        1,694,558Property
      and equipment - net
                                                        
                                                        
                                                        914,150
                                                        
                                                        
                                                        
                                                        378,946Other
      assets – net
                                                        
                                                        
                                                        390,452
                                                        
                                                        
                                                        
                                                        392,208License
      agreement - net
                                                        
                                                        
                                                        5,805,106
                                                        
                                                        
                                                        
                                                        6,267,460TOTAL ASSETS
                                                        
                                                        $
                                                        8,891,265
                                                        
                                                        
                                                        $
                                                        8,733,172LIABILITIES AND STOCKHOLDER'S
      EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                                                        
                                                        $
                                                        1,393,546
                                                        
                                                        
                                                        $
                                                        1,385,311Loan
      payable-related party
                                                        
                                                        
                                                        50,000
                                                        
                                                        
                                                        
                                                        50,000License
      agreement payable-current portion(net
      of unamortized discount of $205,584 and $71,270)
                                                        
                                                        
                                                        794,416
                                                        
                                                        
                                                        
                                                        928,730Accrued
      dividend on preferred stock
                                                        
                                                        
                                                        1,068,388
                                                        
                                                        
                                                        
                                                        765,369Total
      current liabilities
                                                        
                                                        
                                                        3,306,350
                                                        
                                                        
                                                        
                                                        3,129,410License
      agreement payable(net
      of unamortized discount of $991,126 and $1,464,132)
                                                        
                                                        
                                                        3,008,874
                                                        
                                                        
                                                        
                                                        3,535,868Total
      liabilities
                                                        
                                                        
                                                        6,315,224
                                                        
                                                        
                                                        
                                                        6,665,278Stockholders'
      equity:Series
      A Cumulative Convertible Preferred Stock: $100 stated value, 300,000
      shares authorized, 18,400 and 26,400 shares issued and outstanding as of
      September 30, 2009 and December 31, 2008, respectively
                                                        
                                                        
                                                        710,970
                                                        
                                                        
                                                        
                                                        1,020,087Series
      B Cumulative Convertible Preferred Stock: $100 stated value, 250,000
      shares authorized, 53,660 and 72,126 shares issued and outstanding as of
      September 30, 2009 and December 31, 2008, respectively
                                                        
                                                        
                                                        3,671,440
                                                        
                                                        
                                                        
                                                        5,023,429Common
      stock, $0.001 par value, 100,000,000 shares authorized; 29,161,473 and
      19,299,168 shares issued and outstanding as of September 30, 2009 and
      December 31, 2008, respectively
                                                        
                                                        
                                                        29,162
                                                        
                                                        
                                                        
                                                        19,299Additional
      paid-in-capital
                                                        
                                                        
                                                        44,240,211
                                                        
                                                        
                                                        
                                                        29,889,220Accumulated
      deficit
                                                        
                                                        
                                                        (46,075,742
                                                        )
                                                        
                                                        
                                                        (33,884,141
                                                        )Total
      stockholders' equity
                                                        
                                                        
                                                        2,576,041
                                                        
                                                        
                                                        
                                                        2,067,894TOTAL LIABILITIES AND STOCKHOLDERS'
      EQUITY
                                                        
                                                        $
                                                        8,891,265
                                                        
                                                        
                                                        $
                                                        8,733,172




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




- 2
-




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statements of Operations


(Unaudited)





Three Months
                                  
                                  
                                  Three
                                  
                                  
                                  
                                  
                                  
                                  Nine MonthsEnded
                                  
                                  
                                  Months Ended
                                  
                                  
                                  Nine Months
                                  
                                  
                                  EndedSeptember 30,
                                  
                                  
                                  September 30,
                                  
                                  
                                  Ended September
                                  
                                  
                                  September 30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  30, 2009
                                  
                                  
                                  2008Net
      revenues
                                  
                                  $
                                  34,412
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  77,048
                                  
                                  
                                  $
                                  -Cost
      of revenues (including depreciation and amortization for the three and
      nine months ended September 30, 2009 and 2008 of $178,670, $511,282, $-
      and $- , respectively)
                                  
                                  
                                  584,745
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,391,240
                                  
                                  
                                  
                                  -Gross
      loss
                                  
                                  
                                  (550,333
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,314,192
                                  )
                                  
                                  
                                  -Operating
      expenses:Research
      and development expenses
                                  
                                  
                                  73,126
                                  
                                  
                                  
                                  497,773
                                  
                                  
                                  
                                  363,160
                                  
                                  
                                  
                                  840,545General
      and administrative expenses
                                  
                                  
                                  2,279,523
                                  
                                  
                                  
                                  1,739,009
                                  
                                  
                                  
                                  6,775,806
                                  
                                  
                                  
                                  5,787,887Legal
      settlement
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  359,595Total
      operating expenses
                                  
                                  
                                  2,352,649
                                  
                                  
                                  
                                  2,236,782
                                  
                                  
                                  
                                  7,138,966
                                  
                                  
                                  
                                  6,988,027Loss
      from operations
                                  
                                  
                                  (2,902,982
                                  )
                                  
                                  
                                  (2,236,782
                                  )
                                  
                                  
                                  (8,453,158
                                  )
                                  
                                  
                                  (6,988,027
                                  )Interest
      income
                                  
                                  
                                  1,294
                                  
                                  
                                  
                                  10,525
                                  
                                  
                                  
                                  2,951
                                  
                                  
                                  
                                  27,114Interest
      expense
                                  
                                  
                                  (119,029
                                  )
                                  
                                  
                                  (136,138
                                  )
                                  
                                  
                                  (338,692
                                  )
                                  
                                  
                                  (422,758
                                  )Gain
      on debt extinguishment
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  241,500
                                  
                                  
                                  
                                  -Gain
      (loss) on net change in fair value of warrant liability
                                  
                                  
                                  736,211
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,129,277
                                  )
                                  
                                  
                                  (30,169
                                  )Net
      loss
                                  
                                  
                                  (2,284,506
                                  )
                                  
                                  
                                  (2,362,395
                                  )
                                  
                                  
                                  (9,676,676
                                  )
                                  
                                  
                                  (7,413,840
                                  )Dividends
      to preferred stockholders
                                  
                                  
                                  (167,919
                                  )
                                  
                                  
                                  (225,976
                                  )
                                  
                                  
                                  (4,549,741
                                  )
                                  
                                  
                                  (3,476,201
                                  )Net
      loss attributable to common stockholders
                                  
                                  $
                                  (2,452,425
                                  )
                                  
                                  $
                                  (2,588,371
                                  )
                                  
                                  $
                                  (14,226,417
                                  )
                                  
                                  $
                                  (10,890,041
                                  )Basic
      and diluted net loss per share
                                  
                                  $
                                  (0.09
                                  )
                                  
                                  $
                                  (0.14
                                  )
                                  
                                  $
                                  (0.58
                                  )
                                  
                                  $
                                  (0.59
                                  )Weighted
      average number of shares outstanding
                                  
                                  
                                  28,465,378
                                  
                                  
                                  
                                  18,882,266
                                  
                                  
                                  
                                  24,345,980
                                  
                                  
                                  
                                  18,585,469





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


- 3
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statement of Changes in Stockholders’ Equity


Nine
Months ended September 30, 2009


(Unaudited)





Common
      Stock
                
                
                Preferred
      Stock
                    Series
      A
                
                
                Preferred
      Stock
                    Series
      B
                
                
                Additional
                    Paid-In-Capital
                
                
                Accumulated
                    Deficit
                
                
                TotalShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Shares
                
                
                AmountBalance
      at December 31, 2008
                
                
                19,299,168
                
                
                $
                19,299
                
                
                
                26,400
                
                
                $
                1,020,087
                
                
                
                72,126
                
                
                $
                5,023,429
                
                
                $
                29,889,220
                
                
                $
                (33,884,141
                )
                
                $
                2,067,894Cumulative
      effect of reclassification of warrants (ASC Topic 815)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,242,878
                )
                
                
                2,034,816
                
                
                
                (208,062
                )Balance
      at January 1, 2009, as adjusted
                
                
                19,299,168
                
                
                
                19,299
                
                
                
                26,400
                
                
                
                1,020,087
                
                
                
                72,126
                
                
                
                5,023,429
                
                
                $
                27,646,342
                
                
                $
                (31,849,325
                )
                
                $
                1,859,832Issuance
      of stock options and restricted to employees
                
                
                918,422
                
                
                
                919
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,048,070
                
                
                
                -
                
                
                
                2,048,989Issuance
      of stock options to non-employees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25,951
                
                
                
                -
                
                
                
                25,951Issuance
      of warrants to non-employees for prepaid consulting
    services
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                483,439
                
                
                
                -
                
                
                
                483,439Issuance
      of warrants for payment of accounts payable and accrued
      expenses
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                99,732
                
                
                
                -
                
                
                
                99,732Issuance
      of common stock for payment of accounts payable and accrued
      expenses
                
                
                25,000
                
                
                
                25
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                24,975
                
                
                
                -
                
                
                
                25,000Issuance
      of restricted stock to non-employees for prepaid consulting
      services
                
                
                125,000
                
                
                
                125
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                117,375
                
                
                
                -
                
                
                
                117,500Issuance
      of common stock for settlement of license agreement
payable
                
                
                925,000
                
                
                
                925
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                757,575
                
                
                
                -
                
                
                
                758,500Proceeds
      from the issuance of common stock and warrants, net of offering
      costs
                
                
                7,001,881
                
                
                
                7,001
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,792,451
                
                
                
                -
                
                
                
                5,799,452Accrued
      preferred stock dividends converted into shares of common
      stock
                
                
                71,879
                
                
                
                72
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                241,491
                
                
                
                -
                
                
                
                241,563Conversion
      of preferred stock into common stock
                
                
                795,123
                
                
                
                796
                
                
                
                (8,000
                )
                
                
                (309,117
                )
                
                
                (18,466
                )
                
                
                (1,351,989
                )
                
                
                1,660,310
                
                
                
                -
                
                
                
                -Warrant
      liability associated with issuance of common stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,361,380
                )
                
                
                -
                
                
                
                (1,361,380
                )Reclassification
      of warrant liability associated with antidilution triggering event on
      Series B preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                126,730
                
                
                
                -
                
                
                
                126,730Reclassification
      of warrant liability in connection with waiver of antidilution
      provision
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,571,989
                
                
                
                -
                
                
                
                2,571,989Deemed
      dividend associated with the beneficial conversion feature on Series B
      preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,005,161
                
                
                
                (4,005,161
                )
                
                
                -Preferred
      stock dividends
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (544,580
                )
                
                
                (544,580
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (9,676,676
                )
                
                
                (9,676,676
                )Balance
      at September 30, 2009
                
                
                29,161,473
                
                
                $
                29,162
                
                
                
                18,400
                
                
                $
                710,970
                
                
                
                53,660
                
                
                $
                3,671,440
                
                
                $
                44,240,211
                
                
                $
                (46,075,742
                )
                
                $
                2,576,041





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


- 4
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statements of Cash Flows


(Unaudited)





Nine Months
                  Ended September 30,
                  2009
              
              
              Nine Months
                  Ended September 30,
                  2008CASH FLOWS FROM OPERATING
      ACTIVITIES:Net
      loss
              
              $
              (9,676,676
              )
              
              $
              (7,413,840
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization expense
              
              
              68,747
              
              
              
              1,190Loss
      on disposal of property and equipment
              
              
              70,423
              
              
              
              -Amortization
      of license agreement
              
              
              462,354
              
              
              
              -Amortization
      of discount
              
              
              338,692
              
              
              
              422,758Compensation
      expense associated with stock options and restricted stock to
      employees
              
              
              2,048,989
              
              
              
              1,538,212Compensation
      expense associated with stock and warrants
              
              
              -
              
              
              
              85,626Stock
      options issued to non-employees for services
              
              
              25,951
              
              
              
              588,826Penalty
      share expense
              
              
              -
              
              
              
              230,277Warrant
      expense related to legal settlement
              
              
              -
              
              
              
              359,595Loss
      on change in fair value of warrant liability
              
              
              1,129,277
              
              
              
              30,169Gain
      on extinguishment of debt
              
              
              (241,500
              )
              
              
              -Amortization
      of prepaid consulting fee
              
              
              400,625
              
              
              
              -Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              4,706
              
              
              
              -Inventory
              
              
              (11,708
              )
              
              
              -Prepaid
      expenses
              
              
              22,619
              
              
              
              (75,783
              )Other
      assets
              
              
              (15,180
              )
              
              
              (82,031
              )Accounts
      payable and accrued expenses
              
              
              132,969
              
              
              
              (61,644
              )Net
      cash used in operating activities
              
              
              (5,239,712
              )
              
              
              (4,376,645
              )CASH FLOWS FROM INVESTING
      ACTIVITIES:Related
      party receivables
              
              
              (77,820
              )
              
              
              -Purchases
      of property and equipment
              
              
              (657,438
              )
              
              
              (133,157
              )Net
      cash used in investing activities
              
              
              (735,258
              )
              
              
              (133,157
              )CASH FLOWS FROM FINANCING
      ACTIVITIES:Payments
      for license agreement payable
              
              
              -
              
              
              
              (1,000,000
              )Proceeds
      from issuance of common stock, net
              
              
              5,799,452
              
              
              
              -Proceeds
      from issuance of preferred stock, net
              
              
              -
              
              
              
              7,187,650Proceeds
      from the exercise of warrants
              
              
              -
              
              
              
              457,080Net
      cash provided by financing activities
              
              
              5,799,452
              
              
              
              6,644,730Net
      (decrease) increase in cash and cash equivalents
              
              
              (175,518
              )
              
              
              2,134,928Cash
      and cash equivalents - beginning of period
              
              
              1,476,246
              
              
              
              1,644,145Cash
      and cash equivalents - end of period
              
              $
              1,300,728
              
              
              $
              3,779,073Supplemental
      Disclosure of Non-Cash Operating and Financing ActivitiesAccrued
      dividends on preferred stock
              
              $
              544,580
              
              
              $
              512,206Issuance
      of restricted stock to non-employees for prepaid consulting
      services
              
              $
              117,500
              
              
              $
              -Issuance
      of warrants to non-employees for prepaid consulting
    services
              
              $
              483,439
              
              
              $
              -Common
      stock warrant liability
              
              $
              1,361,380
              
              
              $
              -Reclassification
      of warrant liability in connection with waiver of antidilution
      provision
              
              $
              2,571,989
              
              
              $
              -Reclassification
      of warrant liability in association with antidilution triggering
      event
              
              $
              126,730
              
              
              $
              -Cumulative
      effect of reclassification of warrants (ASC Topic 815)
              
              $
              208,062
              
              
              $
              -Common
      stock issued for payment of license agreement payable
              
              $
              758,500
              
              
              $
              -Common
      stock issued for payment of accounts payable and accrued
      expenses
              
              $
              25,000
              
              
              $
              -Warrants
      issued for payment of accounts payable and accrued
expenses
              
              $
              99,732
              
              
              $
              -Accrued
      preferred stock dividends converted into shares of common
      stock
              
              $
              241,563
              
              
              $
              -Deemed
      dividend related to beneficial conversion feature on Series B Preferred
      Stock
              
              $
              4,005,161
              
              
              $
              -Conversion
      of Series A preferred stock to common stock
              
              $
              309,117
              
              
              $
              -Conversion
      of Series B preferred stock to common stock
              
              $
              1,351,989
              
              
              $
              -





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


- 5
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




NOTE 1
–ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




The
Company




New
Generation Biofuels Holdings, Inc. (the “Company”), formerly known as H2Diesel
Holdings, Inc., a Florida corporation, through its wholly owned subsidiary, New
Generation Biofuels, Inc., formerly known as H2Diesel Inc., a Delaware
corporation, holds an exclusive license for North America, Central America and
the Caribbean to commercialize proprietary technology (the “Technology”) to
manufacture alternative biofuels from vegetable oils and animal fats that the
Company intends to market as a new class of renewable fuel for power generation,
commercial and industrial heating and marine transportation.




Basis of Presentation and
Going Concern




The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles in the
United States of America (“U.S. GAAP”) and the rules and regulations of the
Securities and Exchange Commission (“SEC”) for interim financial information.
Accordingly, they do not include all of the information and footnotes required
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, which are necessary
for a fair presentation of the results of the interim periods presented, have
been included. The results of the operations for the interim periods are not
necessarily indicative of results to be expected for any other interim period or
for the year as a whole. These unaudited consolidated financial statements and
footnotes thereto should be read in conjunction with the audited financial
statements and footnotes thereto contained in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008, filed with the SEC on March 31,
2009.




The
Company has incurred a net loss of $9.7 million for the nine months ended
September 30, 2009 and has an accumulated deficit of $46 million as of September
30, 2009. The Company is obligated to pay $5.0 million in additional payments
under the Master License, of which $1.0 million is due in two equal installments
in February and March 2010.




These
factors raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. This basis
of accounting contemplates the recovery of the Company’s assets and the
satisfaction of liabilities in the normal course of business.




During
the nine months ended September 30, 2009, the Company raised a total of $5.8
million, net of offering expenses and fees. The Company will need to raise
additional capital to continue operations. The Company’s continued existence is
dependent upon several factors, including obtaining additional debt or equity
financing, producing biofuel, developing a market for its biofuel, and achieving
certain levels of sales volume and profitability from the sale of its biofuel
and sublicenses of its technology. Management is investigating various sources
of debt or equity financing and is developing marketing and production plans for
its products.




If the
Company is unsuccessful in raising additional capital from any of these sources,
it will defer, reduce, or eliminate certain planned expenditures. The Company
will continue to consider other financing alternatives. There can be no
assurance that the Company will be able to obtain any sources of financing on
acceptable terms, or at all.




If the
Company cannot obtain sufficient additional financing in the short-term, it may
be forced to restructure or significantly curtail its operations, file for
bankruptcy or cease operations. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
should the Company be forced to take any such actions.


- 6
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




Basis of
Consolidation




The
consolidated financial statements include the Company and its wholly owned
subsidiaries New Generation Biofuels, Inc. and NGB Marketing, LLC. All
intercompany accounts and transaction have been eliminated in
consolidation.




Use of
Estimates




The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, 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 periods. The Company’s most significant estimates
and assumption relate to the recoverability of its Technology and the valuation
of stock-based transactions. These estimates are based on historical experience,
on information received from third parties, and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions




Related Party
Receivables




As of
September 30, 2009, related party receivables were $77,820 which was comprised
of non-trade receivables from certain employees. No allowance has been provided
due to the short-term nature and recoverability of such non-trade
receivables.




Property and
Equipment




Property
and equipment are stated at cost and depreciated over the estimated useful lives
of the assets (generally three to fifteen years) using the straight-line method.
Depreciation expense for the three and nine months ended September 30, 2009 and
2008 was $20,853 and $51,811 and $1,190 and $1,190, respectively.




Property
and equipment consists of the following at September 30, 2009 and December 31,
2008:





2009
                          
                          
                          2008Furniture
      and fixtures
                          
                          $
                          -
                          
                          
                          $
                          82,181Property
      and equipment
                          
                          
                          927,964
                          
                          
                          
                          54,439Construction
      in progress
                          
                          
                          28,714
                          
                          
                          
                          249,709956,678
                          
                          
                          
                          386,329Less:
      accumulated depreciation
                          
                          
                          (42,528
                          )
                          
                          
                          (7,383
                          )Property
      and equipment - net
                          
                          $
                          914,150
                          
                          
                          $
                          378,946




- 7
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




Long-Lived
Assets




Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be recoverable.
Conditions that would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant change in the
extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company recognizes
an impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and fair value. The Company believes that as of
September 30, 2009 no impairment of long-lived assets existed.




Revenue
Recognition




The
Company recognizes revenue when the following criteria have been met: i)
persuasive evidence of an arrangement exists; ii) services have been rendered or
product has been delivered; iii) price to the customer is fixed and
determinable; and iv) collection of the underlying receivable is reasonably
assured.




Fair Value
Measurements




Effective
January 1, 2009, the Company adopted authoritative guidance for fair value
measurements and the fair value option for financial assets and financial
liabilities. The Company did not record an adjustment to accumulated deficit as
a result of the adoption of the guidance for fair value measurements, and the
adoption did not have a material effect on the Company’s consolidated results of
operations. The guidance for the fair value option for financial assets and
financial liabilities provides companies the irrevocable option to measure many
financial assets and liabilities at fair value with changes in fair value
recognized in earnings. The Company has not elected to measure any financial
assets or liabilities at fair value that were not previously required to be
measured at fair value.




Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date. The guidance also establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability and are
developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the
factors market participants would use in valuing the asset or liability. The
guidance establishes three levels of inputs that may be used to measure fair
value:




Level 1 -
Quoted prices in active markets for identical assets and
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.




Assets
and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurements. The Company reviews
the fair value hierarchy classification on a quarterly basis. Changes in the
observability of valuation inputs may result in a reclassification of levels for
certain securities within the fair value hierarchy.




- 8
-




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




The
following table presents the Company’s fair value hierarchy for assets and
liabilities measured at fair value on a recurring basis as of September 30,
2009:





SignificantQuoted Prices in
                
                
                Significant Other
                
                
                UnobservableSeptember 30,
                
                
                Active Markets
                
                
                Observable inputs
                
                
                InputsDescription
                
                2009
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3Assets:Cash
      and cash equivalents
                
                $
                1,300,728
                
                
                $
                1,300,728
                
                
                $
                —
                
                
                $
                —Total
      assets
                
                $
                1,300,728
                
                
                $
                1,300,728
                
                
                $
                
                
                
                $
                —Liabilities:Derivative
      - warrants
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —





The
following table presents a reconciliation of the assets and liabilities measured
at fair value on a quarterly basis using significant unobservable inputs (Level
3) from January 1, 2009 to September 30, 2009:





Derivative
      Liability –
                    WarrantsBalance
      at January 1, 2009
                  
                  $
                  208,062Transfers
      to (from) Level 3(1)
                  
                  
                  1,234,650Adjustment
      to fair value included in earnings (2)
                  
                  
                  103,200Balance
      March 31, 2009
                  
                  $
                  1,545,912Transfers
      to (from) Level 3(3)
                  
                  
                  (1,701,378
                  )Adjustment
      to fair value included in earnings (2)
                  
                  
                  1,762,288Balance
      June 30, 2009
                  
                  $
                  1,606,822Transfers
      to (from) Level 3(3)
                  
                  
                  (870,611
                  )Adjustment
      to fair value included in earnings (2)
                  
                  
                  (736,211
                  )Balance
      September 30, 2009
                  
                  $
                  —





(1)
            Represents
      increase in derivative liability of $1,361,380 related to the detachable
      warrants issued to investors in connection with the March 2009 Private
      Placement, offset by $126,730 reclassification of derivative liability in
      association with Series B Preferred Stock antidilution triggering event
      related to the detachable warrants issued to Series B Preferred Stock
      investors.


(2)
            The
      carrying value of the common stock warrant liability is calculated using
      the Black-Scholes option pricing model, which requires the input of highly
      subjective assumptions. These assumptions include the risk-free rate of
      interest, expected dividend yield, expected volatility, and the remaining
      contractual term of the award. The risk-free rate of interest is based on
      the U.S. Treasury rates appropriate for the expected term of the award.
      Expected dividend yield is projected at 0%, as the Company has not paid
      any dividends on its common stock since its inception and does not
      anticipate paying dividends on its common stock in the foreseeable future.
      Expected volatility is based on the Company’s historical volatility and
      the historical volatilities of the common stock of comparable publicly
      traded companies. For the three and nine months ended September 30, 2009,
      the net adjustment to fair value resulted in a gain (loss) of $736,211 and
      $(1,129,277) and is included in “Gain (loss) on net change in fair value
      of warrant liability” on the accompanying Consolidated Statement of
      Operations.




- 9
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




(3)
            Represents
      reclassification of derivative liability in connection with waiver of
      antidilution provision related to the detachable warrants issued to
      investors in connection with the March 2009 Private
    Placement.




Computation of NetLoss per
Share




Basic
loss per share is computed by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding for all
periods. Diluted earnings per share is computed by dividing net loss
attributable to common shareholders by the weighted average number of shares
outstanding, increased by common stock equivalents. Common stock equivalents
represent incremental shares issuable upon exercise of outstanding options and
warrants, the conversion of preferred stock and the vesting of restricted stock.
However, potential common shares are not included in the denominator of the
diluted loss per share calculation when inclusion of such shares would be
anti-dilutive, such as in a period in which a net loss is recorded.




As of
September 30, 2009 and 2008, there were 19,940,444 and 11,446,315, respectively,
shares of common stock equivalents including options (8,769,845 shares of common
stock as of September 30, 2009 and 6,410,000 shares of common stock as of
September 30, 2008), non employee options (1,741,000 shares of common stock as
of September 30, 2009 and 1,591,000 shares of common stock as of September 30,
2008), and warrants (9,429,599 shares of common stock as of September 30, 2009
and 3,445,315 shares of common stock as of September 30, 2008) excluded from the
computation of diluted earnings per share because the inclusion of such shares
have been anti-dilutive. As of September 30, 2009 and 2008, there were 18,400
and 29,900, respectively, shares of Series A Convertible Preferred Stock
outstanding which are convertible into 460,000 and 747,500, respectively, shares
of common stock excluded from the computation of diluted earnings per share
because the inclusion of such shares have been anti-dilutive. As of September
30, 2009 and 2008, there were 53,660 and 79,405, respectively, shares of Series
B Convertible Preferred Stock outstanding which are convertible into 1,788,667
and 1,868,353, respectively, shares of common stock that were excluded from the
computation of diluted earnings per share because the inclusion of such shares
have been anti-dilutive




Recent Accounting
Pronouncements




The
Financial Accounting Standards Board (“FASB”) established the “FASB Accounting
Standards Codification TM” (“Codification”) as the source of authoritative U.S.
GAAP recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements issued for interim and annual periods ended
after September 15, 2009. The Codification has changed the manner in which U.S.
GAAP guidance is referenced, but did not have an impact on the Company’s
consolidated financial position, results of operations or cash
flows.




Effective
January 1, 2009, the Company adopted the provisions of Emerging Issues Task
Force (“EITF”) Issue No. 07-05, “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock”, (“EITF 07-05”) or Accounting
Standards Codification (“ASC”) 815-10-65-3. ASC 815-10-65-3 provides that an
entity should use a two-step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument’s contingent exercise and settlement
provisions. As a result of the adoption of ASC 815-10-65-3, the Company
identified 643,850 warrants that contained a strike price adjustment feature
that were not indexed to the Company’s common stock and thus were required to be
reclassified as a liability. In accordance with ASC 815-10-65-3, the Company
calculated the fair value of the warrants using the Black–Scholes option pricing
model, at January 1, 2009, with a corresponding reduction of additional paid in
capital and accumulated deficit of $2,242,878 and $2,034,816, respectively,
recorded as a cumulative effect adjustment.




In
October 2009, the FASB issued authoritative guidance for arrangements with
multiple deliverables. The guidance will allow companies to allocate arrangement
consideration in multiple deliverable arrangements in a manner that better
reflects the transaction’s economics. The guidance also removes non-software
components of tangible products and certain software components of tangible
products from the scope of existing software revenue guidance. The new guidance
requires expanded qualitative and quantitative disclosures and is effective for
fiscal years beginning on or after June 15, 2010. Early adoption of the guidance
is permitted. The Company is currently evaluating the impact of adopting this
guidance on the Company’s future consolidated financial statements.




- 10
-




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




Subsequent
Events




The
Company has evaluated subsequent events through November 16, 2009, the date this
quarterly report on Form 10-Q was filed with the SEC. The Company made no
significant changes to its consolidated financial statements as a result of its
subsequent events evaluation.




NOTE 2–OPTIONS,
WARRANTS AND RESTRICTED STOCK




In
October 2007, the Company’s board of directors approved an Omnibus Incentive
Plan (the “Incentive Plan”) to attract, retain and motivate key employees, to
provide an incentive for them to achieve long-range performance goals and to
enable them to participate in the long-term growth of the Company. The Company’s
shareholders approved the Incentive Plan at their annual meeting in November
2007. Options granted under the Incentive Plan may include non-qualified stock
options as well as incentive stock option intended to qualify under Section 422A
of the Internal Revenue Code. The aggregate number of shares of common stock
that are reserved for issuance under the Incentive Plan must not exceed 2.7
million shares.




In April
2009, the Company’s board of directors and shareholders approved an amendment to
the Incentive Plan to increase the number of shares reserved for issuance under
the Plan from 2.7 million to 6.4 million shares. Other than this increase in the
number of shares reserved for issuance, all other provisions of the Plan will
remain the same as adopted in October 2007 by the Company’s board of directors
and in November 2007 by the Company’s shareholders.




Each
stock option agreement specifies when all or any installment of the option
becomes exercisable. Option awards are generally granted with an exercise price
equal to the market price of the Company’s common stock on the grant date,
generally vest immediately or in equal installments over three years
of continuous service and have a ten year contractual term.




The
Company utilizes the Black-Scholes option pricing model to estimate the fair
value of option and warrant grants on the date of grant. The following table
summarizes information about the stock options outstanding at September 30,
2009:




Weighted
      Average Exercise Price
                      
                      $
                      2.38Expected
      Life
                      
                      5
      yearsVolatility
                      
                      
                      100.0
                      %Dividend
      Yield
                      
                      
                      0
                      %Risk-free
      interest rate
                      
                      
                      1.54%
      – 3.28
                      %




Employee
Options




A summary
of the status of the Company’s options outstanding as of September 30, 2009 and
the changes during the period ending on that date are presented
below:


- 11
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




Number of
                        Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life
                        (Years)
                      
                      
                      Aggregate
                        Intrinsic
                        ValueOptions
      outstanding at December 31, 2008
                      
                      
                      6,566,289
                      
                      
                      $
                      2.85
                      
                      
                      
                      8.10Granted
                      
                      
                      3,187,254
                      
                      
                      $
                      1.06
                      
                      
                      
                      9.67Forfeited
      or cancelled
                      
                      
                      983,698
                      
                      
                      $
                      1.27
                      
                      
                      
                      7.97Options
      outstanding at September 30, 2009
                      
                      
                      8,769,845
                      
                      
                      $
                      2.38
                      
                      
                      
                      8.12Vested
      and expected to vest at September 30, 2009
                      
                      
                      6,940,439
                      
                      
                      $
                      2.44
                      
                      
                      
                      7.85
                      
                      
                      $
                      0Options
      exercisable at September 30, 2009
                      
                      
                      5,525,606
                      
                      
                      $
                      2.46
                      
                      
                      
                      7.30
                      
                      
                      $
                      0





Options
outstanding at September 30, 2009 have an exercise price of $0.90 to $10.50 per
share. Options exercisable at September 30, 2009 do not include 1,329,406
performance based options. The
Company recognizes compensation cost for performance based options once the
performance milestones are probable of achievement. The applicable portion of
the compensation costs earned to date is recognized and the remaining
unrecognized expense attributable to the milestone is recorded over the service
period.For the three months ended September 30, 2009 and 2008, the
Company recorded a non-cash compensation charge of $434,931 and $533,798,
respectively. For the nine months ended September 30, 2009 and 2008, the Company
recorded a non-cash compensation charge of $1,563,307 and $1,512,621,
respectively.




The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing stock price on September 30,
2009 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had vested option holders
exercised their options on September 30, 2009. This amount changes based upon
changes in the fair market value of the Company’s common stock. As of September
30, 2009, $1,974,111 of the total unrecognized compensation costs related to
stock options is expected to be recognized over a period of approximately two
years and six months.




Non-Employee
Options




The
Company has issued options in exchange for services rendered. The table below
summarizes stock option information with respect to all non-employee stock
options for the period ending September 30, 2009:




Number of
                      Shares
                    
                    
                    Weighted
                      Average
                      Exercise
                      PriceOptions
      outstanding at December 31, 2008
                    
                    
                    1,591,000
                    
                    
                    $
                    6.02Granted
                    
                    
                    150,000
                    
                    
                    $
                    1.04Options
      outstanding at September 30, 2009
                    
                    
                    1,741,000
                    
                    
                    $
                    5.59Options
      exercisable at September 30, 2009
                    
                    
                    141,000
                    
                    
                    $
                    6.23





Non-employee
options outstanding at September 30, 2009 have an exercise price of $1.04 to
$6.40 per share. Options exercisable at September 30, 2009 do not include
1,550,000 performance based options. For the three months ended September 30,
2009 and 2008, the Company recorded a non-cash compensation charge of $9,732 and
$48,178, respectively. For the nine months ended September 30, 2009 and 2008,
the Company recorded a non-cash compensation charge of $25,951 and $377,999,
respectively. As of September 30, 2009, $12,976 of the total unrecognized
compensation costs related to non-employee stock options is expected to be
recognized over a period of approximately four months.




- 12
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




Restricted Stock
Grants




In May
2008, the Compensation Committee of the Company’s board of directors approved a
Management Equity Compensation Plan (the “Equity Compensation Plan”) to ensure
that equity remains a significant component of management compensation, to align
employee and shareholder interests, by providing opportunities for employees to
own the Company’s common stock and to motivate and retain key employees with
multi-year equity incentives. The Equity Compensation Plan generally
contemplates annual restricted stock grants based on achieving certain
performance targets and vesting annually over three years. The amount of each
award is relative to an employee’s total compensation and based on the
individual’s ability to affect the Company’s results, with higher level
positions generally receiving grants equal to a greater percentage of their
compensation than lower level positions. All shares and options issued under the
Equity Compensation Plan are issued pursuant to the Company’s Omnibus Incentive
Plan that has been approved by the
Company's shareholders.




In May
2008, the Company granted under the Equity Compensation Plan 31,989
restricted shares to certain employees based on achieving certain 2007
performance targets. The number of shares was calculated based on the dollar
value of the award divided by the closing price of the Company’s common stock on
the date the grant was approved by the Compensation Committee. The Company
issued the 31,989 restricted shares during the period ending September 30,
2009.




In March
2009, the Company issued under the Equity Compensation Plan 585,015 restricted
shares to employees based on a salary reduction plan whereby employee’s salary
was reduced by 30% and were granted restricted stock and options in lieu of the
reduced compensation. The restricted stock was granted at $0.80 per share. The
restricted stock was granted at $0.80 per share.




In April
2009, the Company issued under the Equity Compensation Plan 100,000 restricted
shares to its former President and Chief Executive Officer as part of a
separation agreement.




In April
2009, the Company issued under the Equity Compensation Plan 585,116 restricted
shares to certain employees based on achieving certain 2008 performance targets.
The number of shares was calculated based on the dollar value of the award
divided by the closing price of the Company’s common stock on the date the grant
was approved by the Compensation Committee.




In July
2009, the Company granted under the Equity Compensation Plan 260,833
restricted shares to an employee vesting in July 2010. The grant was
approved by the Compensation Committee.




In
September 2009, subsequent to the termination of the salary reduction plan, the
Company cancelled 383,698 shares of unvested restricted stock issued in March
2009 to certain employees pursuant to the salary reduction plan. The salary
reduction plan reduced certain employee’s salaries by 30% and granted restricted
stock and options in lieu of the reduced compensation.




For the
three months ended September 30, 2009 and 2008, the Company recorded a non-cash
compensation expense of $178,621 and $17,061 respectively. For the nine months
ended September 30, 2009 and 2008, the Company recorded a non-cash compensation
expense of $485,682 and $25,591, respectively. As of September 30, 2009,
$1,430,510 of the total unrecognized compensation costs related to restricted
stock grants is expected to be recognized over a period of approximately two
years and six months.





- 13
-




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




NOTE 3–COMMON
STOCK




In March
2009, the Company completed a private placement (the “Private Placement”) of
3,957,500 shares of common stock, at a price of $0.80 per share to accredited
investors. The gross proceeds from the Private Placement were $3.2 million and
net proceeds, after deducting placement agent's fees and estimated offering
expenses payable by the Company, were approximately $3.1
million.  Each investor in the Private Placement also received a
warrant exercisable for a number of shares of common stock equal to the number
of shares of common stock purchased by each investor. The exercise price of the
warrants is $0.90 per share. The warrants are exercisable at any time after the
six month anniversary of the issue date but prior to the fifth anniversary of
the issue date.  The warrants have a fair value of $2,166,062 on the
date of issuance based on the Black-Scholes options pricing method.




In
addition, the Company exchanged new warrants at an exercise price of $1.00 per
share with investors that participated in the Company’s 2008 Series
B Private Placement and invested a specified amount in the Private
Placement. Under this exchange, the Company reissued warrants to purchase a
total of 97,792 shares.  The warrants are exercisable at any time
after the six month anniversary but prior to the fifth anniversary of the issue
date, either for cash or by means of a “cashless exercise.” The reissued
warrants had an additional fair value of $13,615 based on the Black-Scholes
options pricing method and were recorded as a cost of the Private
Placement.




The
Private Placement also included certain antidilution provisions. If the Company
issues additional shares of common stock or convertible securities in a
financing transaction within the next fifteen (15) months with a purchase price
or conversion price less than $0.80 per share, the Company will issue additional
shares of its common stock to investors in the offering, up to a maximum cap of
82,322 additional shares.  This cap ensures that the number of shares
issued to all investors in the offering and pursuant to the antidilution
provisions in the aggregate will not exceed the maximum number of shares that
the Company can issue under Nasdaq rules without shareholder approval, which is
slightly less than 20% of the Company’s common stock outstanding prior to the
offering. Similarly, if the Company issues additional warrants in a financing
transaction within the next fifteen (15) months with an exercise price less than
$0.90 per share, the Company will reduce the exercise price of the warrants
issued in the offering to the price of the warrants in the subsequent financing
transaction (but the number of shares subject to the warrants will not
change).  The antidilution adjustments will not apply to certain
excluded issuances of equity securities or warrants, such as securities not
issued in capital raising transactions (for example, to customers, suppliers,
joint venture partners or the Company's technology licensor) or in
connection with equity awards that the Company grants to employees, consultants
and directors under employee benefit plans approved by the Company's board
of directors.




The
warrants are considered to be a derivative liability to be marked to market at
each reporting period due to their exercise price reset feature. The Company
recorded a $1,361,380 warrant liability at issuance and a $736,211 and
$(1,210,609) gain (loss) on fair value adjustment for the three and nine months
ended September 30, 2009. The Company reclassified $2,571,989 of the common
stock warrant liability associated with the antidilution provision to additional
paid-in-capital upon the waiver of the antidilution provision by a warrant
holder effective September 23, 2009. As of September 30, 2009, waivers
for all warrants with the antidilution provision were obtained resulting in the
elimination of the derivative liability.




The
Company agreed to take steps to allow investors to sell their shares under Rule
144 but did not enter into any registration rights agreements in connection with
the Private Placement.




For
services rendered in connection with the Private Placement, the Company paid
cash commissions of $122,080 and issued warrants to purchase 190,750 shares of
common stock. The warrants had a fair value of $100,381 on the date of issuance
based on the Black-Scholes option pricing model. The warrants are considered a
cost directly associated with the issuance of stock.




In July
2009, the Company completed a registered offering of 3,044,381 shares of common
stock and warrants to purchase 608,876 shares of common stock (the
“Offering”).  The common stock and the warrants were sold in units at
a price of $1.05 per unit, with each unit consisting of one share of common
stock and a warrant to purchase 0.20 shares of common stock at an exercise price
of $1.60 per share. The gross proceeds of the Offering were $3.2 million and net
proceeds, after deducting the placement agent’s fees and estimated offering
expenses payable by the Company, were approximately $2.7 million. Units were not
issued or certificated and will not trade on any exchange or be listed for
quotation on any market.  The warrants have a five year term from the
date of issuance, will not be exercisable prior to six months after issuance and
will include provisions providing for adjustments to the number of shares
exercisable thereunder upon stock dividends, stock splits and similar events.
The Company also does not intend that the warrants will trade on any exchange or
be listed for quotation on any market. The warrants have a fair value of
$563,298 on the date of issuance based on the Black-Scholes options pricing
method.




- 14
-




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




NOTE 4–PREFERRED
STOCK




Series A Preferred
Stock




On May 9,
2007, the Company completed the offering (the “Series A Private Placement”) of
27,950 shares of the Company’s newly issued Series A Cumulative Convertible
Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) at
price of $100.00 per share to “accredited investors” as defined under the
Securities Act of 1933, as amended (the “Securities Act”). The gross proceeds
were $2,795,000. Under the terms of the Series A Private Placement, each
investor had the option to purchase additional securities up to the amount
initially purchased on the same terms as those of the Series A Private Placement
(the “Subscriber Option”). On June 8, 2007, the Company sold an additional
14,600 shares of Series A Preferred Stock at price of $100.00 per share in
connection with exercises of the Subscriber Option. The gross proceeds were
$1,460,000.




At any
time prior to the third anniversary of the initial date of issuance, any holder
of Series A Preferred Stock may convert all or a portion of their shares into
shares of the Company’s common stock calculated by multiplying the number of
shares to be converted by such shares’ “stated value” (i.e, $100 per share plus the
amount of all dividends accumulated thereon) and dividing the result by the
“conversion price” then in effect.  The initial conversion price of
each share of Series A Preferred Stock is $4.00, and each share of Series A
Preferred Stock is initially convertible into 25 shares of the
Company's common stock.  Upon the third anniversary of the date
of issuance, each share of Series A Preferred Stock shall automatically, and
without any action on the part of the holder, convert into that number of shares
of the Company's common stock computed by dividing such share’s “stated
value” by the “conversion price” then in effect.  The “conversion
price” is subject to adjustment upon the occurrence of certain events,
including, among others, a stock split, reverse stock split, stock dividend or
combination of the Company's common stock. The Series A Preferred Stock is
not redeemable.




Each
share of Series A Preferred Stock will accrue cumulative dividends on a
quarterly basis at a rate of 8% per annum. All dividends will be paid in shares
of common stock having a fair market value at the time of issuance equal to the
amount of dividends to be paid, provided that to the extent the shares of common
stock to be issued are not then registered under the registration rights
agreements with the Series A Preferred Stock investors, dividends shall cumulate
but shall remain unpaid until such time as the shares are registered and
issued.  The Company may elect to pay any dividends in cash in lieu of
issuing shares of common stock.  The Series A Preferred Stock shall
also participate on an as-converted basis with all dividends paid on the shares
of common stock. As of September 30, 2009 and December 31, 2008, accrued
dividends for the Series A Preferred Stock were $408,944 and $360,906,
respectively.




Upon any
liquidation of the Company, the holders of the Series A Preferred Stock will be
entitled to be paid, prior to the common stock or any other securities that by
their terms are junior to the Series A Preferred Stock, the original issue price
of the Series A Preferred Stock plus all accrued and unpaid dividends. To the
extent the proceeds of liquidation are insufficient to pay such amounts in full,
the proceeds available will be allocated pro rata among the shares of Series A
Preferred Stock. As of the most recent balance sheet date, September 30, 2009,
the liquidation value of the Series A Preferred Stock was
$2,249,692.




Each
investor in the Series A Private Placement also received a warrant exercisable
for a number of shares of common stock equal to 50% of the number of shares of
common stock into which the Series A Preferred Stock purchased by such investor
is initially convertible. The initial exercise price of the warrants is $6.00
per share. At any time following the first anniversary of the closing date and
provided that the shares of common stock issuable upon exercise of the warrants
are not then registered for resale pursuant to an effective registration
statement under the Securities Act, the warrants may also be exercised by means
of a “cashless exercise.” The warrants had a fair value of $2,610,882 on the
date of issuance based on the Black-Scholes options pricing method.




- 15
-




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




Series B Preferred
Stock




On March
31, 2008, the Company completed the offering (the “Series B Private Placement”)
of a total 43,986 shares of the Company’s newly issued Series B Convertible
Preferred Stock, par value $0.001 per share (“Series B Preferred Stock”) at a
price of $100.00 per share to “accredited investors” under the Securities Act.
The gross proceeds from the issuance of 40,768 shares of Series B Preferred
Stock was $4,076,800. In addition, the Company issued 3,218 shares of Series B
Preferred Stock as commission in connection with the Private
Placement.




On May
13, 2008, the Company completed a second closing of the Series B Private
Placement of a total 35,419 shares of the Company’s Series B Preferred Stock.
The gross proceeds from the issuance of 35,123 shares of Series B Preferred
Stock was $3,512,300. In addition, the Company issued 296 shares of Series B
Preferred Stock as commission in connection with the Private Placement. In
summary, in the offering that was closed on March 31, 2008 and May 13, 2008, the
Company sold a total of 75,891 shares of Series B Preferred Stock and warrants
to purchase 446,413 shares of its common stock for total gross proceeds of
$7,589,100.




The
Series B Preferred Stock ranks junior to the Series A Preferred Stock and senior
to the common stock with respect to the payment of dividends and amounts payable
upon liquidation, dissolution or winding up of the Company. The Series B
Preferred Stock also is not redeemable.




At any
time prior to the third anniversary of the date of issuance, any holder of
Series B Preferred Stock may convert all or a portion of their shares into
shares of the Company’s common stock calculated by dividing the sum of the
stated value and all accrued dividends not previously paid or added to the
stated value to the date of such conversion by the Series B conversion price
then in effect. Upon the third anniversary of the initial issue date of the
Series B Preferred Stock, each share of Series B Preferred Stock will
automatically convert into the number of shares of common stock into which it is
then convertible. The initial conversion price is $4.25 per share, subject to
adjustment upon the occurrence of certain major corporate events such as
reorganizations and stock splits (the “Series B Conversion Price”).




Dividends
will be payable from the date of issuance at a rate of 8% per year when and as
declared by the board of directors. To the extent that dividends are not
declared, or cannot be paid, there will be an increase in the stated value of
the Series B Preferred Stock in the amount of 8% per year. In the event
dividends are declared by the board of directors and paid by the Company on the
common stock, holders of Series B Preferred Stock will either share ratably in
such dividends based on the number of shares of common stock into which the
Series B Preferred Stock may be converted or (to the extent that dividends are
not declared or cannot be paid), there will be a corresponding increase in the
stated value. Dividends will be paid semiannually, at the Company’s election, in
cash, in shares of Series B Preferred Stock (valued at stated value) or in
common stock valued at the market price, on September 30 and March 31 of each
year beginning on September 30, 2008 to holders of record on the 15th day of the
preceding month. If there is an increase in stated value because dividends were
not or could not be paid, that increase will occur semiannually on the dates
that dividends would have been paid. As of September 30, 2009 and December 31,
2008, accrued dividends on the Series B Preferred Stock were $659,444 and
$404,463, respectively.




The
Series B Preferred Stock was convertible into 1,868,367 shares of common stock,
at the election of the holders, at an initial conversion price of $4.25 per
share. The fair market value the beneficial conversion was calculated based
on the difference between the share price of the common stock, at the time of
issuance, and the initial conversion price. This resulted in a $2,963,995
deemed dividend related to the beneficial conversion
feature during the year ended December 31, 2008.


- 16
-




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




Upon any
liquidation of the Company, after the Company has made the required
distributions to the holders of Series A Preferred Stock (and any other
preferred stock then outstanding, if any, ranking in liquidation senior to the
Series B Preferred Stock), and before any distribution is made to the holders of
common stock (and any other stock ranking in liquidation junior to the Series B
Preferred Stock), the holders of Series B Preferred Stock will be entitled to be
paid an amount in cash equal to the aggregate liquidation value of Series B
Preferred Stock, which equals the stated value plus all accrued dividends not
previously paid or added to stated value. As of the most recent balance sheet
date, September 30, 2009, the liquidation value of the Series B Preferred Stock
was $6,011,943.




Each
investor in the Series B Private Placement also received a warrant exercisable
for a number of shares of common stock equal to 25% of the number of shares of
common stock into which the Series B Preferred Stock purchased by such investor
is initially convertible. The initial exercise price of the warrants is $6.25
per share. Both the Series B Preferred Stock and the warrants include
antidilution provisions that, if triggered, could result in a reduction of the
conversion price of the Series B Preferred Stock or the exercise price of the
warrants, but not below $3.00 per share. The warrants have a fair value of
$2,032,739 based on the Black-Scholes option pricing method.




In
connection with the Series B Private Placement, the Company agreed to register
the resale of the shares of common stock issuable (i) upon conversion of the
Series B Preferred Stock, (ii) as dividends on the Series B Preferred Stock, and
(iii) upon exercise of warrants, all in accordance with registration rights
agreements among the Company and each of the investors. Under the registration
rights agreement, the Company was required to file a “resale” registration
statement with the SEC covering such shares on or before the 30th day following
the closing of the Series B Private Placement. The Company filed the
registration statement on May 30, 2008, within the required time period. Since
the registration statement was not declared effective by the SEC within 180 days
of the initial required filing date, in 2008 the Company recorded an expense of
$43,986 for 1% of the shares issued in the March 31, 2008 Series B Private
Placement. The registration statement was declared effective by the SEC on
November 24, 2008.




If at any
time prior to the first to occur of (i) the first anniversary of the
registration of the common stock underlying the Series B Preferred Stock or (ii)
18 months after the closing , the Company issues any additional shares of common
stock with a purchase price less than the conversion price of the Series B
Preferred Stock, or additional convertible securities with a conversion price
less than the conversion price of the Series B Preferred Stock, the conversion
price of the Series B Preferred Stock will be reduced to the purchase price at
which such common stock has been issued or the conversion price of such
additional convertible securities, but not below a conversion price of $3.00 per
share. The antidilution adjustments in the Series B Preferred Stock and warrants
will not apply to certain issuances of equity securities or warrants, including
those not issued in capital-raising transactions (such as to customers,
suppliers, joint venture partners or in connection with acquisitions of
property) or in connection with equity award or options granted by the Company
to employees, consultants and directors under employee benefit plans approved by
the board of directors under which options generally are granted with exercise
prices at least equal to the Company’s stock price on the grant
dates.




In
conjunction with the March 2009 Private Placement, as noted in Note 4
above, the antidilution provisions were triggered. The conversion price of the
Series B Preferred Stock and the exercise price of the warrants were reset to
$3.00 per share. Based on the number of shares of Series B Preferred Stock
outstanding on the trigger date, the Company calculated the fair market value
based on the incremental increase in convertible shares based on the change in
the conversion price before and after the price reset multiplied by the stock
price on the initial offering dates in March and May 2008. Based on this
valuation, the Company recorded a $4,005,161 deemed dividend related to the
beneficial conversion feature during the nine months ended September 30,
2009.




In
connection with the Series B Private Placement, the Company paid a commission of
$249,288, issued 3,514 shares of Series B Preferred Stock and warrants
exercisable for 197,437 shares of common stock as consideration for investors
introduced to the Company. The warrants had a fair value of $770,858 on the date
of issuance based on the Black-Scholes option pricing model. The warrants are
considered a cost directly associated with the issuance of
stock.


- 17
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)




NOTE 5 – LEASE
TERMINATION




On March
14, 2008, the Company entered into a lease agreement for office space in Lake
Mary, Florida. The lease was secured by a Letter of Credit for $175,000. In June
2009, the Company entered into negotiations with the landlord to terminate the
agreement. Accordingly, the Company did not make the June 2009 rental payment in
accordance with the terms of the agreement. As a result, the landlord drew on
the $175,000 Letter of Credit due to the lease payment default as per the terms
of the agreement. On August 31, 2009, the Company settled the early termination
of the lease agreement with the landlord. In exchange for full settlement of the
lease and release of further liabilities, the Company agreed to allow the
landlord to retain all of the remaining office furniture along with an
additional payment of $85,000. For the three months ended September 30, 2009,
the Company has recognized lease termination expenses of $155,423 which consist
of an $85,000 additional payment and $70,423 for the disposal of property and
equipment. For the nine months ended September 30, 2009, the Company has
recognized lease termination expense of $330,423 which consists of the $175,000
Letter of Credit, $85,000 additional payment, and $70,423 for the disposal of
property and equipment. These amounts are included in general and administrative
expenses.


- 18
-


ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




Overview




We are a
renewable biofuels provider that is marketing a new class of “second generation”
biofuels for use in diesel fuel applications, including power generation,
commercial and industrial heating and marine transportation. We produce our
biofuels using a proprietary blending technology that we believe is simpler,
cleaner, less expensive, and less energy intensive than the complex chemical
reaction process used to produce traditional biodiesel. We believe that this
technology gives us a competitive advantage by enabling us to produce biofuels
that are cleaner and less expensive than our competitors. Our technology also
gives us the flexibility to produce our biofuel from multiple feedstocks, which
allows us to use non-edible raw materials in our production process, when
desirable. We believe that these fuel characteristics will enable us to
customize our product to specific customer requirements and react more quickly
to trends in the biofuels market.




Our
business commenced in February 2006. Our activities since inception have
included acquiring our exclusive license, conducting research and development to
improve our product, conducting test burns at power generation facilities,
launching a production facility, entering into biofuel sales agreements in both
the power generation and commercial heating markets, entering into site lease
and terminaling services agreements, entering into letters of intent regarding
sublicenses of our biofuel and raising equity capital. Our costs have consisted
mainly of research and development relating to our product, production costs and
general and administrative costs. We have incurred annual operating losses since
inception and expect to incur substantial operating losses in the future in
connection with the development of our core products. As of September 30,
2009, we had an accumulated deficit of $46.2 million.




The
operation and development of our business will require substantial additional
capital to fund our operations, payments due under the exclusive license, the
acquisition or development of manufacturing plants, research and development and
other initiatives including potentially the financing of future
acquisitions.


Our
business strategy involves the following: (1) making direct sales of our biofuel
from manufacturing plants that we may purchase, lease or build, either directly
or through joint ventures; (2) As a second potential revenue stream, collecting
royalties through sublicensing our proprietary technology where it is more
efficient for manufacturers to produce our biofuel at their own plants rather
than requiring production at our facilities. We may also sell our biofuel to
boiler operators under extended evaluation and test programs. In addition, we
have placed into service our first biofuel production plant, a 5 million gallon
per year facility located in Baltimore, Maryland. We also have commenced the
process of procuring raw materials for production of our biofuel but have not
made any significant commitments or procurements at this point. To date, we have
recognized minimal revenues, but have generated significant costs in generating
these initial revenues. Our costs have consisted mainly of research and
development relating to our product and general and administrative
costs.




Recent
Developments





Significant
recent developments in the third quarter and to date regarding our company
include the following:




§
            In
      November 2009, we entered into a definitive sales contract to replace the
      firm purchase order entered into in July 2009 to supply Fenix Energy USA,
      LLC with a minimum of 750,000 gallons of our biofuel per month for 12
      months from our Baltimore processing plant. We expect to begin deliveries
      to Fenix in the second quarter of 2010 after completing modifications to
      our Baltimore plant and obtaining government permits to expand
      capacity.




§
            In
      October 2009, we signed a Letter of Intent (“LOI”) with Ace Biofuels under
      which Ace Biofuels intends to license product formulations, manufacturing
      technology and know-how from us with the intent of constructing a biofuel
      manufacturing facility and marketing our biofuel in Puerto Rico, subject
      to completion of definitive
agreements




§
            In
      September 2009, we signed an LOI with Eden Renewable Energy (“Eden”) under
      which Eden intends to i) license product formulations, manufacturing
      technology and know-how from us with the intent of constructing a biofuel
      manufacturing facility in Atlantic, Canada and ii) earn sales commission
      on direct sales of our products, subject to completion of definitive
      agreements.




- 19
-




§
            In
      July 2009, we entered into a sales contract with Chaney Enterprises L.P.
      which will initially provide renewable biofuel for their Infern-O-Therm
      hot water boilers that will replace the standard #2 fuel oil that they
      currently use. This is our initial contract in the concrete and aggregate
      market segment.




§
            In
      July 2009, we announced that Cleaver-Brooks, a manufacturer of industrial
      and commercial boilers, had successfully conducted a series of test burns
      of our biofuel in an NTI Ultra Low NOx burner. The tests verified our
      biofuel as a compatible fuel source for Cleaver-Brooks
      boilers.




§
            In
      July 2009, David H. Goebel, Jr., our Vice President, Global Sourcing and
      Supply Chain, was promoted to the position of Chief Operating
      Officer.




Financial Operations
Overview




Revenue




We
completed construction and placed into service our 5 million gallon per year
production facility at the end of February 2009 and have signed seven sales
contracts and two distribution agreements to generate revenue. In April 2009, we
began shipping our first commercial product that was made in our Baltimore, MD
plant. We recognize revenue when legal title to the product has passed to the
customer, which is generally when the product is shipped from our Baltimore, MD
facilities. We have agreements with our customers that specify the terms of the
sale, including price.




Cost
of Revenues




Cost of
revenues consists primarily of the costs of the raw material feedstocks that go
into the formulation of our biofuel product, direct labor to run the production
plant, utilities and facility costs. We also include in cost of revenues, the
amortization of our license agreement, amortization of patents and depreciation
associated with our production facility.




Research
and Development Expenses




We have
established a research and development group, headed by our Chief Technology
Officer, Andrea Festuccia, which is based in Rome, Italy and in Baltimore,
Maryland. We have conducted additional development of the product, as well as
testing in laboratory conditions of the performance of biofuel made with our
technology.




Our
research and development expenses consist of costs incurred in identifying,
developing and testing our product. These expenses consist primarily of salaries
and related expenses for personnel, fees paid to professional service providers,
costs of consultants and the costs of manufacturing batches of our biofuel for
use in conducting test burns.




General
and Administrative Expenses




General
and administrative expenses consist primarily of the costs associated with our
general management, including salaries, benefits and professional fees such as
legal and accounting expenses. Continued increases will also likely result from
the additional hiring of operational, financial, accounting, marketing and
information systems personnel. We have twelve employees, all of whom are full
time.




Interest
Income (Expense), Net




Interest
income consists of interest earned on our cash and cash equivalents. Interest
expense consists of interest incurred related to the license agreement
payable.




Income
Taxes




We
have not recognized any deferred tax assets or liabilities in our financial
statements since we cannot assure their future realization. Because realization
of deferred tax assets is dependent upon future earnings, a full valuation
allowance has been recorded on the net deferred tax assets, which relate
primarily to net operating loss carry-forwards.




- 20
-




Results of
Operations




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




Net
Loss




We
incurred a net loss of $2.3 million for the three months ended September 30,
2009, as compared to $2.4 million for the three months ended September 30,
2008.




The
decrease in net loss of $0.1 million resulted primarily from:




·
            a
      $0.7 million non-cash gain on fair market value
  adjustment.




·
            a
      $0.4 decrease in research and development
  expenses.




·
            a
      $0.03 million increase in net
revenues.








·
            a
      $0.6 million in cost of revenues, which did not exist in the prior
      period.




·
            a
      $0.43 million increase in general and administrative
    expenses.




Revenue




Net
revenues for the three months ended September 30, 2009 were $34,412, versus no
net revenues for the three months ended September 30, 2008. The increase in net
revenues was due to the initiation of biofuel production and sales from our
production plant in Baltimore, Maryland.




Cost
of Revenues




Cost of
revenues was $0.6 million for the three months ended September 30, 2009, versus
no cost of net revenues for the three months ended September 30, 2008. Cost of
revenues is comprised of raw material feedstocks used in production of $0.2
million, direct facility costs of $0.2 million and amortization of license
agreement of $0.2 million. For more information on our cost of revenues, please
refer to the gross loss section in the following paragraph.




Gross
Loss




Gross
loss was $0.6 million for the three months ended September 30, 2009, versus no
gross loss for the three months ended September 30, 2008. Gross loss is
comprised of net revenues less cost of revenues. The gross loss of $0.6 million
was driven by a number of factors including: in the commercial and industrial
market we offered our product at a substantial discount to the price of
petroleum diesel fuel in order to attract “early adopter” customers and gain
product validation and performance data through their use of our product. These
discounts were partially offset by eliminating the need to perform test burns to
sign up commercial and industrial customers, thereby lowering our research and
development expenses. The Company also gained the ability to utilize these early
customers as a marketing tool, by bringing potential customers to existing sites
for real-time demonstrations of our biofuel performance in their boiler
applications. We have continued to have success in signing up customers since
discontinuing the “early adopter” discount, but may from time to time offer
volume-related or other promotional pricing discounts as warranted.




The gross
loss was also driven by a disproportionally higher cost of production relative
to units sold. We were just beginning to ramp-up production in our Baltimore
facility and were running in small batch processing which does not allow us to
purchase our feedstocks in large enough quantities to leverage volume discounts
and transportation costs. We also amortize our license agreement on a straight
line basis and pay fixed monthly lease costs on the facility. These non-volume
driven items were approximately $0.4 million of the $0.6 million gross loss. As
we ramp up our production, the amortization and direct facility costs will have
a disproportionate impact on our gross profit in relation to units sold. As we
begin fulfilling our recently awarded contracts and our production volume
increases, we believe that our per unit cost of production will decrease as we
process much larger production, though there can be no assurance that these cost
reductions will materialize.




Research
and Development Expenses




Research
and development expenses were approximately $73,000 for the three months ended
September 30, 2009, compared to approximately $498,000 for the three months
ended September 30, 2008. The decrease in research and development expenses in
2009 is primarily the result of the beginning of production of our fuel and
conducting less test burns which were used to evaluate additional customized
fuel formulations using our proprietary blending technology.




- 21
-




General
and Administrative Expenses




General
and administrative expenses were $2.3 million for the three months ended
September 30, 2009, compared to $1.7 million for the three months ended
September 30, 2008. The increase of $0.6 million in 2009 over the prior period
was primarily attributable to an increase in expenses associated with stock
options and warrants, payroll expense, and lease termination expenses partially
offset by decreases in legal fees.


Interest Expense




Interest
expense was approximately $119,000 for the three months ended September 30,
2009, compared to approximately $136,000 for the three months ended September
30, 2008. The decrease is due to a reduction in the License Agreement payable
balance. Interest expense consists of interest incurred related to the License
Agreement payable.




Gain
on change in fair value of warrant liability




Gain on
change in fair value of warrant liability was approximately $0.7 million for the
three months ended September 30, 2009, compared to zero for the three months
ended September 30, 2008. Gain was result of marking to market the common stock
warrant liability for the period.




Comparison of the nine
months ended September 30, 2009 and the nine months ended September 30,
2008




Net
Loss




We
incurred a net loss of $9.7 million for the nine months ended September 30,
2009, as compared to $7.4 million for the nine months ended September 30,
2008.




The
increase in net loss of $2.3 million resulted primarily from:




·
            a
      $1.1 million increase in non-cash loss on fair market value
      adjustment.




·
            $1.4
      million in cost of revenues, which did not exist in the prior
      period.




·
            a
      $1.0 million increase in general and administrative
    expenses.








·
            a
      $0.4 million decrease in legal settlement
  expenses.




·
            a
      $0.5 million decrease in research and development
  expenses.




·
            a
      $0.1 million decrease in interest
expense.




·
            a
      $0.2 million gain on extinguishment of
debt.




Revenue




Net
revenues for the nine months ended September 30, 2009 were $77,048, versus no
net revenues for the nine months ended September 30, 2008. The increase in net
revenues was due to the initiation of biofuel production and sales from our
production plant in Baltimore, Maryland.




Cost
of Revenues




Cost of
revenues was $1.4 million for the nine months ended September 30, 2009, versus
no cost of revenues for the nine months ended September 30, 2008. Cost of
revenues is comprised of raw material feedstocks used in production of $0.4
million, direct facility costs of $0.5 million and amortization of license
agreement of $0.5 million. For more information on our cost of revenues please
refer to the gross loss section in the following paragraph.




- 22
-




Gross
Loss




Gross
loss was $1.3 million for the nine months ended September 30, 2009, versus no
gross loss for the nine months ended September 30, 2008. Gross loss is comprised
of net revenues less cost of revenues. The gross loss of $1.3 million was driven
by a number of factors including: in the commercial and industrial market we
offered our product at a substantial discount to the price of petroleum diesel
fuel in order to attract “early adopter” customers and gain product validation
and performance data through their use of our product. These discounts were
partially offset by eliminating the need to perform test burns to sign up
commercial and industrial customers, thereby lowering our research and
development expenses. We also gained the ability to utilize these early
customers as a marketing tool, by bringing potential customers to existing sites
for real-time demonstrations of our biofuel performance in their boiler
applications. We have since signed several customers as a result and no longer
offer “early adopter” discounts. We have continued to have success in signing up
customers since discontinuing the “early adopter” discount, but may from time to
time offer volume-related or other promotional pricing discounts as
warranted.




The gross
loss was also driven by a disproportionally higher cost of production relative
to units sold. We were just beginning to ramp-up production in our Baltimore
facility and were running in small batch processing which does not allow us to
purchase our feedstocks in large enough quantities to leverage volume discounts
and transportation costs. We also amortize our license agreement on a straight
line basis and pay fixed monthly lease costs on the facility. These non-volume
driven items were approximately $1.0 million of the $1.3 million gross loss. As
we ramp up our production, the amortization and direct facility costs will have
a disproportionate impact on our gross profit in relation to units sold. As we
begin fulfilling our recently awarded contracts and our production volume
increases, we believe that our per unit cost of production will decrease as we
process much larger production runs, though there can be no assurance that these
cost reductions will materialize.




Research
and Development Expenses





Research
and development expenses were approximately $363,000 for the nine months ended
September 30, 2009, compared to approximately $841,000 for the nine months
ended September 30, 2008. The decrease in research and development expenses
in 2009 is primarily the result of the beginning of production of our fuel and
conducting less test burns which were used to evaluate additional customized
fuel formulations using our proprietary blending technology.





General
and Administrative Expenses





General
and administrative expenses were $6.8 million for the nine months ended
September 30, 2009, compared to $5.8 million for the nine months ended
September 30, 2008. The increase of $1.0 million in 2009 over the prior
period was primarily attributable to an increase in personnel expense and lease
termination expenses partially offset by decreases in legal fees.


Interest
Expense




Interest
expense was approximately $339,000 for the nine months ended September 30,
2009, compared to approximately $423,000 for the nine months ended
September 30, 2008. The decrease is due to a reduction in the License
Agreement payable balance. Interest expense consists of interest incurred
related to the License Agreement payable.





Loss
on change in fair value of warrant liability




Loss on
change in fair value of warrant liability was approximately $1.1 million for the
nine months ended September 30, 2009, and approximately $30,000 for the nine
months ended September 30, 2008.




Liquidity
and Capital Resources




Liquidity




At
September 30, 2009, we had $1.3 million in cash, compared to $0.5 million at
June 30, 2009.




- 23
-




We expect
that our available cash and interest income will be sufficient to finance
currently planned activities through December 2009, but we will need to continue
to control costs and raise additional financing to continue our operations
beyond the fourth quarter of 2009. We estimate that we will require an
additional $4.5 million to fund our operation for the next twelve months. These
estimates are based on certain assumptions, including continuing tight
management of available cash, cost controls and the timing of our increase in
production runs. These assumptions could be negatively impacted by the matters
discussed under the caption “Risk Factors” contained in our Annual Report on
Form 10-K for the year ended December 31, 2008, and in subsequent filings with
the SEC, including this Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009.





Several
existing commitments that require significant expenditures will continue to
impact our liquidity and capital resources. We incur monthly lease and other
payment obligations under our site lease and terminaling service agreements and
upfront production costs associated with manufacturing our biofuels under recent
customer contracts. We also have incurred costs associated with developing of
our biofuel production facility in Baltimore, Maryland. Under the license
agreement with the inventor of our proprietary technology, we are required to
pay $1.0 million per year over the next five years, with the next $1 million due
in two equal installments in February and March 2010. We also will continue
incurring costs to test our technology, enhance research and development, pay
our employees and sustain operations.




We are
unlikely to be able to continue our operations unless we can obtain additional
financing. We would likely seek such funding through public or private
financings or some combination of them. Additional funding may not be available
to us on acceptable terms, or at all. Even after funding our short term needs,
given our ongoing need for capital, we may raise money on an opportunistic basis
when the market makes such funding available on acceptable terms.




We have
financed our operations to date primarily through the sale of our common and
preferred stock and warrants in both private placements with accredited
investors and a registered direct public offering. If we raise capital through
the sale of equity securities, or securities convertible into equity, dilution
to our then existing shareholders would result. If we raise additional capital
through the incurrence of debt, we would likely become subject to covenants
restricting our business activities, and holders of debt instruments would
have rights and privileges senior to those of our equity investors. In addition,
servicing the interest and repayment obligations under these borrowings would
divert funds that would otherwise be available to support research and
development or commercialization activities.


Cash
Flows




Net cash
used in operating activities was approximately $5.3 million for the nine
months ended September 30, 2009, primarily reflecting our net loss of
$9.7 million, partially offset by $2.1 million in non-cash stock-based
compensation expense, approximately $0.3 million in non-cash for issuance of
stock, options and warrants for services rendered, $0.5 million in non-cash
amortization of our license, $0.3 million in non-cash amortization expense
associated with our license agreement payable, $0.2 million in non-cash gain on
extinguishment of debt and $1.1 million in non-cash loss on fair market value
adjustment of the common stock warranty liability.




Net cash
used in investing activities was approximately $0.7 million for the nine months
ended September 30, 2009, and consisted of payments for the acquisition of
property and equipment of $0.6 million.




Net cash
provided by financing activities was $5.8 million for the nine months ended
September 30, 2009, and consisted of net proceeds from the issuance of
common stock.





Capital
Requirements and Resources





Our
future capital requirements will depend on many factors, including:




·
            the level of cash flows from
      product sales or
sublicensing;


·
            conducting additional testing
      with utilities, independent power producers, commercial boiler operators
      or others, including product application testing, to gain market
      acceptance of our biofuel among customers and equipment
      manufacturers;


·
            maintaining and improving our
      production facility in Baltimore, Maryland under our terminal lease
      agreement with Pennington Partners, LLC or with others to supply our
      products initially for testing and eventually for the broader biofuels
      market;




- 24
-


·
            the scope and results of our
      research and development
efforts;


·
            developing and executing a sales
      and marketing plan for the commercial and industrial heating fuel and
      marine market segments and a technology plan that complements the
      marketing plan;


·
            entering into feedstock supply
      and transportation logistics agreements to supply our production
      facilities;


·
            developing additional strategic
      relationships to attract potential customers and sublicensees and to
      obtain the capital commitments necessary to engineer, construct and
      operate biofuel plants in our exclusive
  territory;


·
            continuing to pursue favorable
      tax incentives for our biofuel, particularly efforts to include our
      biofuel in the $1 per gallon credit afforded biodiesel and to have the
      benefit of such a change extend beyond the current expiration date of
      December 31, 2009 and to pursue obtaining EPA
    approval;


·
            recruiting additional key
      employees to expand the capabilities of our existing management team;
      and


·
            the costs of maintaining,
      expanding and protecting our intellectual property portfolio, including
      litigation costs and
liabilities.




Critical Accounting
Policies




Our
consolidated financial statements and accompanying notes have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires we make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expense. Management evaluates the accounting policies
and estimates it uses to prepare the financial statements. We base our estimates
on assumptions believedto be reasonable under current facts and circumstances.
The Company’s most significant estimates are the value of its exclusive,
perpetual life, Master License Agreement and its useful life.




The
Company recorded its Master License Agreement at cost in accordance with (ASC
350) SFAS 142 “Goodwill and Other Intangible Assets.” The value of the Master
License Agreement is tested for impairment in accordance with (ASC 350) SFAS 144
“Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires
a review of the value of long-lived assets on a periodic basis for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. Recoverability of assets held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted cash flows expected to be generated by the asset. If such assets
are considered impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair value of the
assets.





The
Company prepared a (ASC 350) SFAS 144 analysis of the Master License Agreement
at December 31, 2008 by utilizing the probability weighted sum of the
undiscounted cash flows method. The key variables used include various industry
biodiesel projections and management projections and applied weighted average
assumptions.





Based on
a review of the Company’s sublicensing agreement with Global Energy and other
third-party licensing agreements for various alternative fuel technologies, the
revenue base selected was projected gallons of biofuel production. Because of
the uncertainty associated with the Company’s future production, we considered
fourscenarios for a sensitivity analysis. Scenarios 1 and 2 assume the Company’s
production will equal 0.5% and 1%, respectively, of total projected U.S.
biodiesel production in each of the projected periods. Scenario 3 is based on
the Company’s then current estimate of its anticipated production. Scenario 4
assumes a minimal amount of production is achieved due to capital constraints.
We applied probabilities of 32.67% to scenarios 1 through 3 and a probability of
2% to scenario 4.





In
determining a royalty rate for the technology, we examined the royalty rates for
alternative energy related technologies, including biofuels, as well as the
Company’s sublicense with Global Energy. Based on this information, we applied a
$0.10 per gallon royalty. Taxes were estimated based upon a combined effective
total state and federal tax rate of 40%.


- 25
-


Based
upon our analysis the probability weighted sum of the undiscounted cash flows
attributable to the Master License Agreement was less than its carrying value.
Therefore, for the year ended December 31, 2008, the Company recorded a write
down of the Master License Agreement in the amount of $1,600,369.




The
useful life of the Master License Agreement was assumed to be thirteen years
based on management’s assessment of the projected duration of economically
competitive new product life in the alternative-energy industry.




Other
significant estimates include the valuation of shares, stock options and
warrants issued. Actual amounts and results could differ from these estimates
made by management.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangement or commitment that will have a current
effect on our financial condition, lead to changes in our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.




ITEM
3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK




Not
applicable to “smaller reporting companies” under Item 305(e) of Regulation
S-K.




ITEM
4. CONTROLS AND PROCEDURES




(a)
Disclosure Controls and Procedures




Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act, is accumulated and communicated to management,
including our Chief Executive Officer/Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.




As
required by Rule 13a-15 under the Exchange Act, we are required to evaluate the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. This evaluation
was carried out under the supervision of our Chief Executive Officer/Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer/Chief
Financial Officer concluded that our disclosure controls and procedures are
effective at the reasonable assurance level such that the information relating
to us and our consolidated subsidiary required to be disclosed in our Exchange
Act reports (i) is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and (ii) is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.




(b)
Changes in Internal Control over Financial Reporting




During
the quarter ended September 30, 2009, there were no significant changes in our
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.


- 26
-




PART
II. OTHER INFORMATION




ITEM
1A. Risk Factors





An
investment in our common stock involves a high degree of risk. In addition
to the risk factors below and other information set forth in this report, you
should carefully consider the factors discussed in Part I, “Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended December
31, 2008, as filed with the SEC on March 31, 2009, and in subsequent filings
with the SEC. If any of these risks actually occur, our business, results of
operations and financial condition would likely suffer. In these
circumstances, the market price of our common stock could decline, and you may
lose all or part of your investment.




Our
existing financial resources will only provide financing until the end of 2009
and we will need to raise additional capital to continue our business, which
could be particularly challenging in the near term under current financial
market conditions.





Based on
our current estimates, we anticipate that our existing financial resources will
be adequate to permit us to continue to conduct our business until the end of
2009, and we will need to control costs and raise additional capital to continue
our business beyond 2009. Accordingly, we will need to complete a financing in
the fourth quarter. For the nine months ended September 30, 2009, we have
incurred a net loss of $9.7 million and negative cash flows from operating
activities of $5.3 million. As of September 30, 2009, we had approximately $1.3
million of available cash and approximately $1.4 million of accounts payable and
accrued expenses. In addition, under the license agreement with the inventor of
our proprietary technology, we are required to pay $1.0 million per year over
the next five years, with the next $1 million due in two equal installments in
February and March 2010. If we are unable to raise additional capital, we will
not be able to continue our business. We cannot ensure that additional funding
will be available or, if it is available, that it can be obtained on terms and
conditions we will deem acceptable. Any additional funding derived from the sale
of equity securities is likely to result in significant dilution to our existing
shareholders. Our ability to continue as a going concern is discussed in “Note 1
– Organization and Summary of Significant Accounting Policies” to the unaudited
consolidated financial statements included in this Quarterly Report on Form 10-Q
and in the opinion of our independent accountants with respect to our audited
financial statements for the year ended December 31, 2008.




If
we do not meet Nasdaq requirements for continued listing, our common stock may
be delisted which could negatively impact our stock’s liquidity.





Under
Nasdaq listing rules, our common stock could be delisted from Nasdaq if we do
not meet certain standards regarding our financial condition and operating
results (including, among other factors, maintaining adequate stockholders’
equity, minimum $1.00 bid price and market capitalization), the distribution of
our publicly held securities and compliance with Nasdaq listing agreements and
SEC rules and regulations. For example, Nasdaq requires a minimum stockholders’
equity of $2.5 million or, alternatively, a market value of listed securities of
at least $35 million. We received a communication from Nasdaq when we reported
in August 2009 that our stockholders’ equity equaled $648,756 at June 30, 2009.
At September 30, 2009, our stockholders’ equity barely exceeded the minimum
requirement of $2.5 million, though we have not yet received confirmation
from Nasdaq that we are back in compliance. As another example, Nasdaq
reinstated the minimum $1.00 bid requirement on August 3, 2009. Listed companies
whose securities fall below this requirement for 30 consecutive business days
can be subject to delisting.




In the
future, however, due to factors such as loses from operations and the volatility
of our stock price, we may not be able to meet the Nasdaq continued listing
requirements. If we are unable to satisfy the Nasdaq criteria for maintaining
listing, our common stock may be subject to delisting. Trading, if any, of our
securities would thereafter be conducted in the over-the-counter market, in the
so-called “pink sheets” or on the OTC Bulletin Board. As a consequence of any
such delisting, our shareholders would likely find it more difficult to dispose
of, or to obtain accurate quotations as to the prices of our common
stock.




- 27
-




ITEM
5. OTHER INFORMATION




Corporate Governance
Update




In
October 2009, a vacancy occurred on our board of directors due to
the death of Phillip E. Pearce, a director of the Company since November
2006. He was also chairman of the Compensation Committee and a member of the
Audit and Nominating Committees.  We appreciate Mr. Pearce's service
on the board and his contributions to the Company. The board has appointed
J. Robert Sheppard, Jr. to succeed Mr. Pearce as chairman of the Compensation
Committee.




ITEM
6. EXHIBITS




The
following exhibits, which are furnished with this Quarterly Report or
incorporated herein by reference, are filed as part of this Quarterly
Report.




Exhibit Number
              
              Exhibit Description3.1
              
              Amended
      and Restated Articles of Incorporation (incorporated by reference to
      Exhibit 3.1 to the Current Report on Form 8-K, filed March 31,
      2008).3.2
              
              Articles
      of Amendment to the Articles of Incorporation relating to our Series B
      Cumulative Convertible Preferred Stock (incorporated by reference to
      Exhibit 3.2 to the Current Report on Form 8-K, filed March 31,
      2008).3.3
              
              Amended
      and Restated Bylaws, dated March 5, 2008 (incorporated by reference to
      Exhibit 3.3 to the Annual Report on Form 10-K for the year ended December
      31, 2007, filed March 31, 2008).31.1
              
              Certification
      pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (includes both
      Principal Executive Officer and Principal Financial
    Officer).*32.1
              
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (includes
      both Principal Executive Officer and Principal Financial
      Officer).*




* Filed
herewith.


- 28
-




SIGNATURES




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





Date:
      November 16, 2009
              By:
              /s/Cary J.
      ClaiborneCary
      J. ClaibornePresident,
      Chief Executive Officer & Chief
                Financial
      Officer (principal executive officer,
                principal
      financial and accounting
officer)









EXHIBIT
INDEX





Exhibit Number
              
              Exhibit
      Description3.1
              
              Amended
      and Restated Articles of Incorporation (incorporated by reference to
      Exhibit 3.1 to the Current Report on Form 8-K, filed March 31,
      2008).3.2
              
              Articles
      of Amendment to the Articles of Incorporation relating to our Series B
      Cumulative Convertible Preferred Stock (incorporated by reference to
      Exhibit 3.2 to the Current Report on Form 8-K, filed March 31,
      2008).3.3
              
              Amended
      and Restated Bylaws, dated March 5, 2008 (incorporated by reference to
      Exhibit 3.3 to the Annual Report on Form 10-K for the year ended December
      31, 2007, filed March 31, 2008).31.1
              
              Certification
      pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (includes both
      Principal Executive Officer and Principal Financial
    Officer).*32.1
              
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (includes
      both Principal Executive Officer and Principal Financial
      Officer).*




* Filed
herewith.