UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


FORM
10-Q





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





For the
quarterly period ended September 30, 2010





 ̈ 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 preceding 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
November 15, 2010, the registrant had 72,763,620 shares of common stock, $0.001
par value, issued and outstanding.





INDEX




PART
      I. FINANCIAL INFORMATIONCautionary
      Note Regarding Forward-Looking Statements
                        3Item
      1.
                        Financial
      StatementsConsolidated
      Balance Sheets as of September 30, 2010 (Unaudited) and December 31,
      2009
                        4Consolidated
      Statements of Operations for the three and nine months ended September 30,
      2010 and 2009 (Unaudited)
                        5Consolidated
      Statement of Changes in Stockholders’ Equity for the nine months ended
      September 30, 2010 (Unaudited)
                        6Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2010 and
      2009 (Unaudited)
                        7Notes
      to Consolidated Financial Statements
                        8Item
      2.
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        32Item
      3.
                        Qualitative
      and Quantitative Disclosures About Market Risk
                        43Item
      4.
                        Controls
      and Procedures
                        43PART
      II. OTHER INFORMATIONItem
      1A.
                        Risk
      Factors
                        44Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        45Item
      6.
                        Exhibits
                        45Signatures
                        46


2


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
      disproportionately higher cost of production relative to units
      sold;


·
            our ability to fully realize the
      value of our intellectual property, which are our principal
      assets;


·
            our inability to enter into
      acceptable licensing agreements with respect to our technology or the
      inability of any licensee to successfully manufacture, market or sell
      biofuel utilizing our
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 45 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.


3





PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Balance Sheets





September
      30,
                                
                                
                                December
      31,2010
                                
                                
                                2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                216,762
                                
                                
                                $
                                567,647Restricted
      cash
                                
                                
                                14,704
                                
                                
                                
                                -Accounts
      receivable
                                
                                
                                -
                                
                                
                                
                                63,900Other
      receivables
                                
                                
                                41,406
                                
                                
                                
                                41,406Inventories
                                
                                
                                11,708
                                
                                
                                
                                11,708Prepaid
      expenses and other current assets
                                
                                
                                1,654,972
                                
                                
                                
                                237,635Total
      current assets
                                
                                
                                1,939,552
                                
                                
                                
                                922,296Property,
      plant and equipment - net
                                
                                
                                1,124,212
                                
                                
                                
                                1,120,911License
      agreement - net
                                
                                
                                5,104,840
                                
                                
                                
                                5,650,988Other
      assets - net
                                
                                
                                413,103
                                
                                
                                
                                346,073TOTAL
      ASSETS
                                
                                $
                                8,581,707
                                
                                
                                $
                                8,040,268LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                                
                                $
                                1,647,292
                                
                                
                                $
                                1,472,519Loan
      payable
                                
                                
                                -
                                
                                
                                
                                50,000Convertible
      notes payable
                                    (net of unamortized
      discount of $- and $-)
                                
                                
                                200,000
                                
                                
                                
                                -License
      agreement payable, current portion
                                    (net of unamortized
      discount of $314,746 and $375,467)
                                
                                
                                685,254
                                
                                
                                
                                624,533Accrued
      dividends on preferred stock
                                
                                
                                973,895
                                
                                
                                
                                1,078,003Common
      stock warrant liability and antidilution obligation
                                
                                
                                31,900
                                
                                
                                
                                110,874Total
      current liabilities
                                
                                
                                3,538,341
                                
                                
                                
                                3,335,929License
      agreement payable(net
      of unamortized discount of $400,152 and $622,274)
                                
                                
                                2,599,848
                                
                                
                                
                                3,377,726Deferred
      rent
                                
                                
                                170,365
                                
                                
                                
                                324,409Total
      liabilities
                                
                                
                                6,308,554
                                
                                
                                
                                7,038,064Commitments
      and contingencies
                                
                                
                                -
                                
                                
                                
                                -Stockholders'
      equity:Preferred
      stock; $0.001 par value; 9,450,000 shares authorized; no shares issued and
      outstanding at September 30, 2010 and December 31, 2009
                                
                                
                                -
                                
                                
                                
                                -Series
      A Cumulative Convertible Preferred Stock: $0.001 par value; $100 stated
      value, 300,000 shares authorized, - and 18,400 shares issued and
      outstanding as of September 30, 2010 and December 31, 2009, respectively;
      aggregate liquidation preference of $-
                                
                                
                                -
                                
                                
                                
                                710,970Series
      B Cumulative Convertible Preferred Stock: $0.001 par value; $100 stated
      value, 250,000 shares authorized, 45,785 and 45,785 shares issued and
      outstanding as of September 30, 2010 and December 31, 2009 respectively;
      aggregate liquidation preference of $5,552,424
                                
                                
                                3,094,872
                                
                                
                                
                                3,094,872Common
      stock, $0.001 par value, 100,000,000 shares authorized; 60,353,205 and
      31,711,578 shares issued and outstanding as of September 30, 2010 and
      December 31, 2009, respectively
                                
                                
                                60,353
                                
                                
                                
                                31,712Additional
      paid-in-capital
                                
                                
                                57,003,899
                                
                                
                                
                                47,593,489Accumulated
      deficit
                                
                                
                                (57,885,971
                                )
                                
                                
                                (50,428,839
                                )Total
      stockholders' equity
                                
                                
                                2,273,153
                                
                                
                                
                                1,002,204TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                
                                $
                                8,581,707
                                
                                
                                $
                                8,040,268


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


4




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statements of Operations


(Unaudited)





For
      the Three
                        Months
      Ended
                        September
      30,
                        2010
                      
                      
                      For
      the Three
                        Months
      Ended
                        September
      30,
                        2009
                      
                      
                      For
      the Nine
                        Months
      Ended
                        September
      30,
                        2010
                      
                      
                      For
      the Nine
                        Months
      Ended
                        September
      30,
                        2009Revenues:Product
                      
                      $
                      -
                      
                      
                      $
                      34,412
                      
                      
                      $
                      6,351
                      
                      
                      $
                      77,048Total
      revenue
                      
                      
                      -
                      
                      
                      
                      34,412
                      
                      
                      
                      6,351
                      
                      
                      
                      77,048Operating
      expenses:Cost
      of product revenue (including depreciation and amortization for the three
      and nine months ended September 30, 2010 and 2009 of $205,011, $178,670,
      $624,075, and $511,282, respectively)
                      
                      
                      301,699
                      
                      
                      
                      584,745
                      
                      
                      
                      1,408,925
                      
                      
                      
                      1,391,240Research
      and development expense
                      
                      
                      87,770
                      
                      
                      
                      73,126
                      
                      
                      
                      240,930
                      
                      
                      
                      363,160General
      and administrative expense
                      
                      
                      1,920,911
                      
                      
                      
                      2,279,523
                      
                      
                      
                      6,354,618
                      
                      
                      
                      6,775,806Total
      operating expenses
                      
                      
                      2,310,380
                      
                      
                      
                      2,937,394
                      
                      
                      
                      8,004,473
                      
                      
                      
                      8,530,206Loss
      from operations
                      
                      
                      (2,310,380
                      )
                      
                      
                      (2,902,982
                      )
                      
                      
                      (7,998,122
                      )
                      
                      
                      (8,453,158
                      )Interest
      income
                      
                      
                      75
                      
                      
                      
                      1,294
                      
                      
                      
                      461
                      
                      
                      
                      2,951Interest
      expense
                      
                      
                      (276,973
                      )
                      
                      
                      (119,029
                      )
                      
                      
                      (659,253
                      )
                      
                      
                      (338,692
                      )Gain
      on debt extinguishment
                      
                      
                      50,000
                      
                      
                      
                      -
                      
                      
                      
                      204,000
                      
                      
                      
                      241,500Gain
      on settlement of trade payables and lease termination
                      
                      
                      1,319,483
                      
                      
                      
                      -
                      
                      
                      
                      1,319,483
                      
                      
                      
                      -Gain
      (loss) on net change in fair value of derivative
    liabilities
                      
                      
                      65,521
                      
                      
                      
                      1,343,577
                      
                      
                      
                      60,525
                      
                      
                      
                      (1,797,071
                      )Net
      loss
                      
                      
                      (1,152,274
                      )
                      
                      
                      (1,677,140
                      )
                      
                      
                      (7,072,906
                      )
                      
                      
                      (10,344,470
                      )Dividends
      to preferred stockholders
                      
                      
                      (109,748
                      )
                      
                      
                      (167,919
                      )
                      
                      
                      (384,226
                      )
                      
                      
                      (4,549,741
                      )Net
      loss attributable to common stockholders
                      
                      $
                      (1,262,022
                      )
                      
                      $
                      (1,845,059
                      )
                      
                      $
                      (7,457,132
                      )
                      
                      $
                      (14,894,211
                      )Basic
      and diluted net loss per share
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.20
                      )
                      
                      $
                      (0.61
                      )Weighted
      average number of shares outstanding
                      
                      
                      42,962,197
                      
                      
                      
                      28,465,378
                      
                      
                      
                      37,672,085
                      
                      
                      
                      24,345,980





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


5





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statement of Changes in Stockholders’ Equity


Nine
Months ended September 30, 2010


(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, 2009
                        
                        
                        31,711,578
                        
                        
                        $
                        31,712
                        
                        
                        
                        18,400
                        
                        
                        $
                        710,970
                        
                        
                        
                        45,785
                        
                        
                        $
                        3,094,872
                        
                        
                        $
                        47,593,489
                        
                        
                        $
                        (50,428,839
                        )
                        
                        $
                        1,002,204Issuance
      of stock options and restricted stock to employees
                        
                        
                        1,169,454
                        
                        
                        
                        1,170
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,770,091
                        
                        
                        
                        -
                        
                        
                        
                        1,771,261Issuance
      of stock options to non-employees
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,318
                        
                        
                        
                        -
                        
                        
                        
                        3,318Issuance
      of common stock for prepaid consulting services
                        
                        
                        7,200,000
                        
                        
                        
                        7,200
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,778,800
                        
                        
                        
                        -
                        
                        
                        
                        1,786,000Issuance
      of common stock for note settlement and extension
                        
                        
                        5,950,000
                        
                        
                        
                        5,950
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        524,883
                        
                        
                        
                        -
                        
                        
                        
                        530,833Issuance
      of warrants in connection with convertible notes payable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        149,949
                        
                        
                        
                        -
                        
                        
                        
                        149,949Issuance
      of warrants to non-employees for deferred financing costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        38,165
                        
                        
                        
                        -
                        
                        
                        
                        38,165Issuance
      of warrants to non-employees for note extensions
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        77,117
                        
                        
                        
                        -
                        
                        
                        
                        77,117Issuance
      of common stock for payment of accounts payable and accrued
      expenses
                        
                        
                        585,000
                        
                        
                        
                        585
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        157,791
                        
                        
                        
                        -
                        
                        
                        
                        158,376Issuance
      of common stock pursuant to separation agreement
                        
                        
                        164,062
                        
                        
                        
                        164
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        104,836
                        
                        
                        
                        -
                        
                        
                        
                        105,000Issuance
      of common stock for settlement of license agreement
payable
                        
                        
                        1,100,000
                        
                        
                        
                        1,100
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        724,900
                        
                        
                        
                        -
                        
                        
                        
                        726,000Proceeds
      from the issuance of common stock and warrants, net of offering
      costs
                        
                        
                        11,808,700
                        
                        
                        
                        11,808
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,863,471
                        
                        
                        
                        -
                        
                        
                        
                        2,875,279Conversion
      of preferred stock into common stock
                        
                        
                        582,089
                        
                        
                        
                        582
                        
                        
                        
                        (18,400)
                        
                        
                        
                        (710,970)
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,198,722
                        
                        
                        
                        -
                        
                        
                        
                        488,334Antidilution
      obligation associated with issuance of common stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (40,000)
                        
                        
                        
                        -
                        
                        
                        
                        (40,000)Issuance
      of common stock for settlement of antidilution obligation associated with
      issuance of common stock
                        
                        
                        82,322
                        
                        
                        
                        82
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        58,367
                        
                        
                        
                        -
                        
                        
                        
                        58,449Preferred
      stock dividends
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (384,226
                        )
                        
                        
                        (384,226
                        )Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,072,906
                        )
                        
                        
                        (7,072,906
                        )Balance
      at September 30, 2010
                        
                        
                        60,353,205
                        
                        
                        $
                        60,353
                        
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        45,785
                        
                        
                        $
                        3,094,872
                        
                        
                        $
                        57,003,899
                        
                        
                        $
                        (57,885,971
                        )
                        
                        $
                        2,273,153





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


6


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statements of Cash Flows


(Unaudited)





For the
                          Nine Months
                          Ended September 30,
                          2010
                        
                        
                        For the
                          Nine Months
                          Ended September 30,
                          2009CASH FLOWS FROM OPERATING
      ACTIVITIES:Net
      loss
                        
                        $
                        (7,072,906
                        )
                        
                        $
                        (10,344,470
                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Bad
      debt expense
                        
                        
                        5,609
                        
                        
                        
                        -Amortization
      of prepaid consulting fee
                        
                        
                        395,089
                        
                        
                        
                        400,625Amortization
      of deferred financing costs
                        
                        
                        108,165
                        
                        
                        
                        -Depreciation
      and amortization expense
                        
                        
                        87,099
                        
                        
                        
                        68,747Loss
      on disposal of property and equipment
                        
                        
                        -
                        
                        
                        
                        70,423Amortization
      of license agreement
                        
                        
                        546,148
                        
                        
                        
                        462,354Amortization
      of discount on license agreement payable
                        
                        
                        282,843
                        
                        
                        
                        338,692Amortization
      of discount on convertible notes payable
                        
                        
                        149,949
                        
                        
                        
                        -Compensation
      expense associated with stock options and restricted stock to
      employees
                        
                        
                        1,876,261
                        
                        
                        
                        2,048,989Stock
      options issued to non-employees for services
                        
                        
                        3,318
                        
                        
                        
                        25,951Gain
      (loss) on change in fair value of warrant liability and antidilution
      obligation
                        
                        
                        (60,525)
                        
                        
                        
                        1,797,071Gain
      on debt extinguishment
                        
                        
                        (204,000)
                        
                        
                        
                        (241,500)Gain
      on settlement of trade payables and lease termination
                        
                        
                        (1,319,483)
                        
                        
                        
                        -Changes
      in operating assets and liabilities:Accounts
      receivable
                        
                        
                        58,291
                        
                        
                        
                        4,706Inventory
                        
                        
                        -
                        
                        
                        
                        (11,708)Prepaid
      expenses and other current assets
                        
                        
                        (26,426)
                        
                        
                        
                        22,619Other
      assets
                        
                        
                        (91,466
                        )
                        
                        
                        (15,180)Accounts
      payable and accrued expenses
                        
                        
                        1,595,307
                        
                        
                        
                        132,969Deferred
      rent
                        
                        
                        (90,886)
                        
                        
                        
                        -Net
      cash used in operating activities
                        
                        
                        (3,680,496
                        )
                        
                        
                        (5,239,712
                        )CASH FLOWS FROM INVESTING
      ACTIVITIES:Net
      increase in restricted cash
                        
                        
                        (14,704)
                        
                        
                        
                        -Related
      party receivables
                        
                        
                        -
                        
                        
                        
                        (77,820)Purchase
      of property and equipment
                        
                        
                        (65,964
                        )
                        
                        
                        (657,438)Payment
      for patents
                        
                        
                        -
                        
                        
                        
                        -Net
      cash used in investing activities
                        
                        
                        (80,668
                        )
                        
                        
                        (735,258
                        )CASH FLOWS FROM FINANCING
      ACTIVITIES:Payments
      for license agreement payable
                        
                        
                        (120,000)
                        
                        
                        
                        -Proceeds
      from the issuance of convertible notes payable
                        
                        
                        700,000
                        
                        
                        
                        -Payment
      of deferred financing costs
                        
                        
                        (45,000)
                        
                        
                        
                        -Proceeds
      from issuance of common stock, net
                        
                        
                        2,875,279
                        
                        
                        
                        5,799,452Net
      cash provided by financing activities
                        
                        
                        3,410,279
                        
                        
                        
                        5,799,452Decrease
      in cash and cash equivalents
                        
                        
                        (350,885
                        )
                        
                        
                        (175,518)Cash
      and cash equivalents - beginning of period
                        
                        
                        567,647
                        
                        
                        
                        1,476,246Cash
      and cash equivalents - end of period
                        
                        $
                        216,762
                        
                        
                        $
                        1,300,728Supplemental
      Disclosure of Non-Cash Operating and Financing ActivitiesAccrued
      dividends on preferred stock
                        
                        $
                        384,226
                        
                        
                        $
                        544,580Issuance
      of restricted stock to non-employees for prepaid consulting
      services
                        
                        $
                        -
                        
                        
                        $
                        117,500Issuance
      of common stock to non-employees for prepaid consulting
      services
                        
                        $
                        1,786,000
                        
                        
                        $
                        -Issuance
      of warrants to non-employees for prepaid consulting
    services
                        
                        $
                        -
                        
                        
                        $
                        483,439Common
      stock warrant liability
                        
                        $
                        -
                        
                        
                        $
                        2,214,371Reclassification
      of warrant liability in connection with waiver of antidilution
      provision
                        
                        $
                        -
                        
                        
                        $
                        4,053,043Reclassification
      of warrant liability in connection with antidilution triggering
      event
                        
                        $
                        -
                        
                        
                        $
                        158,451Cumulative
      effect of reclassification of warrants (ASC Topic 815)
                        
                        $
                        -
                        
                        
                        $
                        260,115Common
      stock issued for payment of license agreement payable
                        
                        $
                        726,000
                        
                        
                        $
                        758,500Issuance
      of common stock for payment of accounts payable and accrued
      expenses
                        
                        $
                        158,376
                        
                        
                        $
                        25,000Warrants
      issued for payment of accounts payable and accrued
expenses
                        
                        $
                        -
                        
                        
                        $
                        99,732Accrued
      preferred stock dividends converted into shares of common
      stock
                        
                        $
                        488,334
                        
                        
                        $
                        241,563Deemed
      dividend related to beneficial conversion feature on Series B Preferred
      Stock
                        
                        $
                        -
                        
                        
                        $
                        4,005,161Conversion
      of Series A preferred stock to common stock
                        
                        $
                        710,970
                        
                        
                        $
                        309,117Conversion
      of Series B preferred stock to common stock
                        
                        $
                        -
                        
                        
                        $
                        1,351,989Antidilution
      obligation associated with issuance of common stock
                        
                        $
                        40,000
                        
                        
                        $
                        102,500Common
      stock issued for settlement payment of convertible notes payable and
      accrued interest
                        
                        $
                        530,883
                        
                        
                        $
                        -Issuance
      of common stock settlement of antidilution obligation associated with
      issuance of common stock
                        
                        $
                        58,449
                        
                        
                        $
                        -Discount
      on convertible notes associated with detachable warrants
                        
                        $
                        149,949
                        
                        
                        $
                        -Warrants
      issued for settlement and extensions of convertible notes
      payable
                        
                        $
                        77,117
                        
                        
                        $
                        -Issuance
      of warrants to non-employees for deferred financing costs
                        
                        $
                        38,165
                        
                        
                        $
                        -Deferred
      financing costs included in accounts payable and accrued
      expenses
                        
                        $
                        25,000
                        
                        
                        $
                        -





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


7


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”), a Florida corporation,
through its wholly owned subsidiary, New Generation Biofuels, Inc., a Delaware
corporation, holds an exclusive license for North America, Central America and
the Caribbean (the “Master License”) 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.





During
the period from inception through March 31, 2009, the Company was considered to
be a development stage company. In the second and third quarters of 2009, the
Company placed in service its first biofuel production plant, a 5 million gallon
per year facility located in Baltimore, Maryland, and has generated revenues
from planned principal operations. The Company has therefore emerged from the
development stage as of December 31, 2009.





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 (“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, 2009, filed with the SEC on March 26,
2010.





The
Company has incurred a net loss of $7.1 million for the nine months ended
September 30, 2010 and has an accumulated deficit of $57.9 million as of
September 30, 2010. The Company is obligated to pay $4.0 million in additional
payments under the Master License, of which $1.0 million is due in March
2011.





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.





The
Company is seeking to raise additional capital through public and/or private
placement offerings and targeting strategic partners in an effort to increase
revenues. The ability of the Company to continue as a going concern is dependent
upon the success of capital offerings or alternative financing arrangements and
expansion of its operations. 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.





Material
subsequent events have been considered for disclosure and recognition through
the filing date of these consolidated financial statements.


8


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 transactions have been eliminated in
consolidation.





Reclassification





Certain
prior year amounts have been reclassified to conform to the current year
presentations.





Use of
Estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The most significant estimates and assumptions
relate to the recoverability of the purchased license intangible asset,
realization of deferred income taxes, accrued liabilities, common stock warrant
liability and antidilution obligation, and the valuation of stock-based
transactions. These estimates generally involve complex issues and require the
Company to make judgments, involve analysis of historical and the prediction of
future trends, and are subject to change from period to period. Actual results
could differ from those estimates.





Restricted
Cash





As of
September 30, 2010 and December 31, 2009, the Company had restricted cash of
$14,704 and $-0-, respectively, which serves as collateral for a surety
bond.





Other
Receivables





Other
receivables are comprised of non-trade receivables in connection with the 50
cent per gallon U.S. federal alternative fuel excise tax credit. The Company
records its alternative fuel tax credits as revenue in its consolidated
statements of operations as the credits are fully refundable and do not need to
offset income tax liabilities to be received. No fuel tax credits were earned
during the three months and nine months ended September 30, 2010 and
2009.





Deferred Financing
Costs





Deferred
financing costs represent costs incurred in connection with the issuance of the
convertible notes payable. Deferred financing costs are being amortized over the
term of the financing instrument on a straight-line basis, which approximates
the effective interest method. At September 30, 2010 and December 31, 2009, the
Company capitalized deferred financing costs of $108,165 and $-0-, respectively.
Amortization of deferred financing costs included in interest expense for the
three months and nine months ended September 30, 2010 and 2009 was $33,652,
$108,165, $-0- and $-0-, respectively .




Property, Plant and
Equipment





Property,
plant 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. Amortization of leasehold improvements is computed over the shorter of
the lease term or the estimated useful life of the related assets. Depreciation
and amortization expense for the three and nine months ended September 30, 2010
and 2009 was $20,915, $62,663, $20,853 and $51,811,
respectively.


9


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)





Property,
plant and equipment consists of the following at September 30, 2010 and December
31, 2009:





2010
                                
                                
                                2009Property
      and equipment
                                
                                $
                                1,120,092
                                
                                
                                $
                                1,109,571Construction
      in progress
                                
                                
                                127,985
                                
                                
                                
                                72,5421,248,077
                                
                                
                                
                                1,182,113Less:
      accumulated depreciation and amortization
                                
                                
                                (123,865
                                )
                                
                                
                                (61,202
                                )Property,
      plant and equipment – net
                                
                                $
                                1,124,212
                                
                                
                                $
                                1,120,911





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. Various factors including estimated
future sales growth and estimated profit margins are included in this analysis.
Management believes at this time that carrying values and useful lives continue
to be appropriate.





Convertible
Debt





Convertible
debt is accounted for under specific guidelines established in GAAP. The Company
records a beneficial conversion feature (“BCF”) related to the issuance of
convertible debt that have conversion features at fixed or adjustable rates that
are in-the-money when issued and records the fair value of warrants issued with
those instruments. The BCF for the convertible instruments is recognized and
measured by allocating a portion of the proceeds to warrants and as a reduction
to the carrying amount of the convertible instrument equal to the intrinsic
value of the conversion features, both of which are credited to paid-in-capital
or liabilities as appropriate. The Company calculates the fair value of warrants
issued with the convertible instruments using the Black-Scholes valuation
method, using the same assumptions used for valuing employee options, except
that the contractual life of the warrant is used. Upon each issuance, the
Company evaluates the variable conversion features and determines the
appropriate accounting treatment as either equity or liability, in accordance
with GAAP. The Company first allocates the value of the proceeds received to the
convertible instrument and any other detachable instruments (such as detachable
warrants) on a relative fair value basis and then determines the amount of any
BCF based on effective conversion price to measure the intrinsic value, if any,
of the embedded conversion option. Using the effective yield method, the
allocated fair value is recorded as a debt discount or premium and is amortized
over the expected term of the convertible debt to interest expense. For a
conversion price change of a convertible debt issue, the additional intrinsic
value of the debt conversion feature, calculated as the number of additional
shares issuable due to a conversion price change multiplied by the previous
conversion price, is recorded as additional debt discount and amortized over the
remaining life of the debt.





GAAP
rules specify that a contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
GAAP contingency rules. The contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement should
be separately recognized and measured in accordance with said rules, pursuant to
which a contingent obligation must be accrued only if it is more likely than not
to occur.


10


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)





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.





The
Company recognizes product revenue at the time of shipment to the customer,
provided all other revenue recognition criteria have been met. The Company
recognizes product revenues upon shipment to distributors, provided that (i) the
price is substantially fixed and determinable at the time of sale; (ii) the
distributor’s obligation to pay the Company is not contingent upon resale of the
products; (iii) title and risk of loss passes to the distributor at time of
shipment; (iv) the distributor has economic substance apart from that provided
by the Company; (v) the Company has no significant obligation to the distributor
to bring about resale of the products; and (vi) future returns can be reasonably
estimated. For any sales that do not meet all of the above criteria, revenue is
deferred until all such criteria have been met.





The
Company recognizes alternative fuel tax credits as revenue in its consolidated
statements of operations as the credits are fully refundable and do not need to
offset income tax liabilities to be received. The Company classified the tax
credits as revenue because (i) the tax credit enables the Company to reduce the
price it charges its customers for the Company's products without an actual
reduction in revenue associated with the lower prices and (ii) under current tax
law, the tax credit expired on December 31, 2009 and the Company believes
classifying the tax credit as a reduction in operating expenses would be
potentially misleading.





Computation of Net Loss 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, 2010 and 2009, there were 27,202,320 and 19,940,444, respectively,
shares of common stock equivalents including options (convertible into 8,876,418
shares of common stock as of September 30, 2010 and 8,769,845 shares of common
stock as of September 30, 2009), non-employee options (convertible into 291,000
shares of common stock as of September 30, 2010 and 1,741,000 shares of common
stock as of September 30, 2009), and warrants (convertible into 18,034,902
shares of common stock as of September 30, 2010 and 9,429,599 shares of common
stock as of September 30, 2009), all of which were excluded from the computation
of diluted earnings per share because the inclusion of such shares would have
been anti-dilutive. As of September 30, 2010 and 2009, there were -0- and 18,400
shares of Series A Convertible Preferred Stock outstanding which are convertible
into -0- and 460,000, respectively, shares of common stock that were excluded
from the computation of diluted earnings per share because the inclusion of such
shares would have been anti-dilutive. As of September 30, 2010 and 2009, there
were 45,785 and 53,660, respectively, shares of Series B Convertible Preferred
Stock outstanding which are convertible into 1,850,808 and 1,788,667,
respectively, shares of common stock that were excluded from the computation of
diluted earnings per share because the inclusion of such shares would have been
anti-dilutive.


11


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)





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.





The
following table presents the Company’s fair value hierarchy for assets and
liabilities measured at fair value on a recurring basis as follows:





Description
                  
                  September
      30,
                      2010
                  
                  
                  Quoted
      Prices
                      in
                      Active
      Markets
                      Level
      1
                  
                  
                  Significant
                      Other
                      Observable
                      Inputs
                      Level
      2
                  
                  
                  Significant
                      Unobservable
                      Inputs
                      Level
      3Assets:Cash
      and cash equivalents
                  
                  $
                  216,762
                  
                  
                  $
                  216,762
                  
                  
                  $
                  –
                  
                  
                  $
                  –Total
      assets
                  
                  $
                  216,762
                  
                  
                  $
                  216,762
                  
                  
                  $
                  –
                  
                  
                  $
                  –Liabilities:Derivative
      - warrants
                  
                  $
                  4,400
                  
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  4,400Antidilution
      obligation
                  
                  $
                  27,500
                  
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  27,500Total
      liabilities
                  
                  $
                  31,900
                  
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  31,900




12


NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)




Description
              
              December 31,
                2009
              
              
              Quoted Prices
                  in
                  Active Markets
                  Level 1
              
              
              Significant
                  Other
                  Observable
                  Inputs
                  Level 2
              
              
              Significant
                  Unobservable
                  Inputs
                  Level 3Assets:Cash
      and cash equivalents
              
              $
              567,647
              
              
              $
              567,647
              
              
              $
              –
              
              
              $
              –Total
      assets
              
              $
              567,657
              
              
              $
              567,647
              
              
              $
              –
              
              
              $
              –Liabilities:Derivative
      - warrants
              
              $
              52,425
              
              
              $
              –
              
              
              $
              –
              
              
              $
              52,425Antidilution
      obligation
              
              $
              58,449
              
              
              $
              –
              
              
              $
              –
              
              
              $
              58,449Total
      liabilities
              
              $
              110,874
              
              
              $
              –
              
              
              $
              –
              
              
              $
              110,874





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):





Derivative –
                    warrants and
                    antidilution
                    obligationBalance
      at January 1, 2010
                  
                  $
                  110,874Transfers
      to (from) Level 3 (1)
                  
                  
                  (18,449)Adjustment
      to fair value included in earnings (2)
                  
                  
                  (7,106)Balance
      March 31, 2010
                  
                  $
                  85,319Adjustment
      to fair value included in earnings (3)
                  
                  
                  12,102Balance
      June 30, 2010
                  
                  $
                  97,421Adjustment
      to fair value included in earnings (4)
                  
                  
                  (65,521)Balance
      September 30, 2010
                  
                  $
                  31,900





(1)
            Represents
      an increase in the antidilution obligation of $40,000 in connection with
      the February 2010 Private Placement offset by $58,449 for the settlement
      of the March 2009 Private Placement antidilution obligation. The fair
      value of the antidilution obligation is calculated using an estimate of
      the number of shares to be issued to all investors in the March 2009
      Private Placement pursuant to the antidilution provisions times an
      estimated fair market value of the Company’s common
  stock.





(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. The
      fair value of the antidilution obligation is calculated using an estimate
      of the number of shares to be issued to all investors in the March 2009
      Private Placement pursuant to the antidilution provisions times and an
      estimated fair market value of the Company’s common stock. For the three
      months ended March 31, 2010, the net adjustment to fair value resulted in
      a gain of $7,106 and is included in loss on net change in fair value of
      derivative liabilities on the accompanying consolidated statements of
      operations.


13




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)




(3)
            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. The
      fair value of the antidilution obligation is calculated using a
      weighted-average probability of a subsequent financing transaction at less
      than $0.69 per share to determine an estimate of the number of shares to
      be issued to all investors in the February 2010 Private Placement pursuant
      to the antidilution provisions times and an estimated fair market value of
      the Company’s common stock. For the three months ended June 30, 2010, the
      net adjustment to fair value resulted in a loss of $12,102 and is included
      in loss on net change in fair value of derivative liabilities on the
      accompanying consolidated statements of
  operations.





(4)
            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. The
      fair value of the antidilution obligation is calculated using a
      weighted-average probability of a subsequent financing transaction at less
      than $0.69 per share to determine an estimate of the number of shares to
      be issued to all investors in the February 2010 Private Placement pursuant
      to the antidilution provisions times and an estimated fair market value of
      the Company’s common stock. For the three months ended September 30, 2010,
      the net adjustment to fair value resulted in a gain of $65,521 and is
      included in loss on net change in fair value of derivative liabilities on
      the accompanying consolidated statements of
  operations.





New Accounting
Pronouncements.





In April
2010, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2010-17, “Revenue Recognition—Milestone Method,”
which provides guidance on defining a milestone and determining when it may be
appropriate to apply the milestone method of revenue recognition for research or
development transactions. Research or development arrangements frequently
include payment provisions whereby all or a portion of the consideration is
contingent upon milestone events such as successful completion of phases in a
study or achieving a specific result from the research or development efforts.
The amendments in this ASU provide guidance on the criteria that should be met
for determining whether the milestone method of revenue recognition is
appropriate. The ASU is effective for fiscal years and interim periods within
those years beginning on or after June 15, 2010, with early adoption permitted.
This Company is currently evaluating the impact, if any, of the application of
this ASU on their financial condition and results of operations.





In July
2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed
into law. This legislation includes an exemption for companies with less than
$75 million in market capitalization from the requirement set forth in Section
404(b) of the Sarbanes-Oxley Act of 2002 to include an external auditor’s report
on the effectiveness of a registrant’s internal control over financial
reporting. As a result of the new legislation, our independent registered public
accounting firm will not be required to issue an attestation report with respect
to our internal control over financial reporting. However, the Company will
continue to be subject to the requirement of Section 404 of the Sarbanes-Oxley
Act of 2002 for their management to make an annual assessment of the
effectiveness of their internal control over financial
reporting.


14


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements


(Unaudited)





NOTE
2–OPTIONS,
RESTRICTED STOCK, STOCK AND WARRANTS





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 options 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 Incentive 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 Incentive Plan remained the same as adopted in October 2007 by the Company’s
board of directors and in November 2007 by the Company’s
shareholders.





In
February 2010, the Company’s board of directors approved an amendment to the
Incentive Plan to increase the number of shares reserved for issuance under the
Incentive Plan from 6.4 million to 10.0 million shares. In July 2010, the
shareholders approved this amendment at the annual shareholders meeting. Other
than this increase in the number of shares reserved for issuance, all other
provisions of the Incentive Plan remained 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.




Employee
Options





The fair
value of employee stock option awards for the nine months ended September 30,
2010 and 2009 was estimated using the Black-Scholes option pricing model on the
date of grant using the assumptions in the following table. The expected
volatility in this model is based on the historical volatility of the Company’s
stock. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time awards are granted, based on maturities which approximate the
expected life of the options. The Company uses the “simplified” method for
determining the expected term of its “plain vanilla” stock options. The expected
dividend rate takes into account the absence of any historical dividends paid by
the Company and management’s intention to retain all earnings for future
operations and expansion.





2010
                        
                        
                        2009Weighted
      average grant date fair value
                        
                        $
                        0.52
                        
                        
                        $
                        0.77Dividend
      yield
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %Risk
      free rate of return
                        
                        
                        2.07-2.60
                        %
                        
                        
                        1.54-3.28
                        %Expected
      life in years
                        
                        
                        5.0
                        
                        
                        
                        5.0Volatility
                        
                        
                        101
                        %
                        
                        
                        100
                        %





A summary
of the status of the Company’s employee options outstanding as of September 30,
2010 and the changes during the period ending on that date are presented
below:




15


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, 2009
                  
                  
                  8,954,845
                  
                  
                  $
                  2.35
                  
                  
                  
                  7.98Granted
                  
                  
                  909,692
                  
                  
                  $
                  0.78
                  
                  
                  
                  9.36Forfeited
      or cancelled
                  
                  
                  (988,119
                  )
                  
                  $
                  2.51
                  
                  
                  
                  8.14Options
      outstanding at September 30, 2010
                  
                  
                  8,876,418
                  
                  
                  $
                  2.18
                  
                  
                  
                  7.35Vested
      and expected to vest at September 30, 2010
                  
                  
                  7,984,314
                  
                  
                  $
                  2.30
                  
                  
                  
                  7.17
                  
                  
                  $
                  –Options
      exercisable at September 30, 2010
                  
                  
                  7,147,482
                  
                  
                  $
                  2.34
                  
                  
                  
                  7.02
                  
                  
                  $
                  –





Options
exercisable at September 30, 2010 do not include 892,104 performance based
options. The Company recognizes compensation cost for performance based options
once it is probable that the performance milestones will be achieved. 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.





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,
2010 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, 2010. This amount changes based upon
changes in the fair market value of the Company’s common stock.





The
Company recognized $225,809, $759,052, $434,931, and $1,563,307 in compensation
expense for stock options issued to employees for the three and nine months
ended September 30, 2010 and 2009, respectively, which is included in general
and administrative expense in the consolidated statements of operations. As of
September 30, 2010, there was approximately $298,000 of total unrecognized
compensation expense related to unvested employee stock options. This expense is
expected to be recognized over a weighted-average period of approximately 1
year.


Non-Employee
Options





There
were no options granted to non-employees during the nine months ended September
30, 2010. The fair value of non-employee stock option awards for the nine months
ended September 30, 2009 was estimated using Black-Scholes option pricing model
on the date of grant using the assumptions in the following table. The expected
volatility in this model is based on the historical volatility of the Company’s
stock. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time awards are granted, based on maturities which approximate the
contractual life of the options. The Company uses the contractual term as the
expected term of its non-employee stock options. The expected dividend rate
takes into account the absence of any historical dividends paid by the Company
and management’s intention to retain all earnings for future operations and
expansion.




2009Weighted
      average grant date fair value
                
                $
                0.78Dividend
      yield
                
                
                0.0
                %Risk
      free rate of return
                
                
                3.7
                %Expected
      life in years
                
                
                10Volatility
                
                
                99
                %




16


NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)




A summary
of the status of the Company’s non-employee options outstanding as of September
30, 2010 and the changes during the period ending on that date are presented
below:





Number
      of
                    Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
                    (Years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOptions
      outstanding at December 31, 2009
                  
                  
                  1,741,000
                  
                  
                  $
                  5.59
                  
                  
                  
                  7.50Granted
                  
                  
                  –
                  
                  
                  $
                  –
                  
                  
                  
                  –Forfeited
      or cancelled
                  
                  
                  1,450,000
                  
                  
                  $
                  6.00
                  
                  
                  
                  6.57Options
      outstanding at September 30, 2010
                  
                  
                  291,000
                  
                  
                  $
                  3.55
                  
                  
                  
                  7.70Vested
      and expected to vest at September 30, 2010
                  
                  
                  291,000
                  
                  
                  $
                  4.87
                  
                  
                  
                  7.36
                  
                  
                  $
                  –Options
      exercisable at September 30, 2010
                  
                  
                  291,000
                  
                  
                  $
                  4.87
                  
                  
                  
                  7.36
                  
                  
                  $
                  –





Options
exercisable at September 30, 2010 do not include 100,000 performance based
options. The Company recognizes compensation cost for performance based options
once it is probable that the performance milestones will be achieved. 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.





The
Company recognized $-0-, $3,318, $9,732, and $25,951 in compensation expense for
stock options issued to non-employees for the three and nine months ended
September 30, 2010 and 2009, respectively, which is included in general and
administrative expense in the consolidated statements of operations. As of
September 30, 2010, there was $0 of total unrecognized compensation expense
related to unvested employee stock options.


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 and 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 Incentive Plan
that has been approved by the Company's shareholders.





In March
2010, the Company granted and issued under the Equity Compensation Plan 477,452
restricted shares to certain employees based on achieving certain 2009
performance targets as determined by the Compensation Committee. The grant was
approved by the Compensation Committee. The number of restricted shares issued
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 restricted stock was granted at $0.73 per
share.





In March
2010, the Company granted and issued under the Equity Compensation Plan 522,547
restricted shares to certain employees as a special employment retainer
incentive. The grant was approved by the Compensation Committee. The number of
restricted shares issued was also determined by the Compensation Committee with
input from management. The restricted stock was granted at $0.73 per
share.




17




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


In July
2010, upon shareholder approval, the Company granted and issued under the Equity
Compensation Plan 357.605 restricted shares to the former Chairman of the Board.
Pursuant to his Separation Agreement, these restricted shares vested immediately
upon issuance.





During
the nine months ended September 30, 2010, the Company cancelled 188,150 shares
of previously issued and unvested restricted stock forfeited by several former
employees.





The
Company recognized $460,839, $1,012,209, $178,621, and $485,682 in compensation
expense for restricted stock awards issued to employees for the three and nine
months ended September 30, 2010 and 2009, respectively, which is included in
general and administrative expense in the consolidated statements of operations.
As of September 30, 2010, there was approximately $0.7 million of total
unrecognized compensation expense related to unvested employee restricted stock
awards. This expense is expected to be recognized over a weighted-average period
of approximately 1.1 years.





The
Company recognized $-0-, $9,792, $29,375, and $78,333 in compensation expense
for restricted stock awards issued to non-employees for the three and nine
months ended September 30, 2010 and 2009, which is included in general and
administrative expense in the consolidated statements of operations. As of
September 30, 2010, there was no unrecognized compensation expense related to
unvested non-employee restricted stock awards.





NOTE 3 – CONVERTIBLE
NOTES





April 2010 Private
Placement





On April
30, 2010, the Company completed a private placement of 90-day secured
convertible notes and warrants raising approximately $700,000 in gross proceeds.
The securities were issued pursuant to a Note and Warrant Purchase Agreement,
dated April 30, 2010, between the Company and accredited investors.




In
connection with the Purchase Agreement, the Company executed a Secured
Convertible Promissory Note and Security Agreement with each note purchaser
under the Purchase Agreement (the “April Notes”). The April Notes pay interest
at a rate of 10% per annum, will mature ninety (90) calendar days after their
date of issuance (or July 29, 2010) and are convertible into shares of the
Company’s common stock at a conversion price of $0.90 per share at any time
prior to the maturity date, at the election of the noteholder. In the aggregate,
the April Notes will be convertible into up to 797,222 shares of our common
stock if held to maturity, including interest. The April Notes are secured by
(1) a first-priority security interest in Company assets at the Company’s leased
Baltimore biofuel production plant and (2) a pledge of a number of shares of the
Company’s common stock held by 2020 Energy LLC, the Company’s largest
shareholder, equal to 120% of the maximum aggregate principal amount of the
April Notes divided by the consolidated closing bid price of the Company’s
common stock on the NASDAQ Capital Market immediately prior to entering into
binding agreements for this transaction. Pursuant to a Reimbursement Agreement
between the Company and 2020 Energy (the “Reimbursement Agreement”), if an event
of default occurs under the April Notes and remains uncured and the noteholders
exercise their rights against the pledged shares from 2020 Energy, the Company
has agreed to reimburse 2020 Energy by issuing to 2020 Energy a number of shares
equal to the pledged shares, to the extent permissible by NASDAQ
rules.





At any
time at the Company’s option, the Company may prepay without penalty the
outstanding principal amount of the April Notes plus unpaid accrued interest.
Upon the occurrence of an event of default, the outstanding principal and all
accrued interest on the April Notes will accelerate and automatically become
immediately due and payable. The April Note purchasers, at their option, also
have the right to accelerate payment if the Company engages in certain change of
control transactions.





In
connection with the sale of the April Notes, the Company also issued warrants to
purchase in the aggregate 388,889 shares of common stock at an exercise price of
$0.90 per share. Each purchaser of the April Notes received warrants to purchase
a number of shares of common stock equal to 50% of the note purchase price (as
defined in the Purchase Agreement) divided by $0.90. The warrants are
exercisable at any time after the six-month anniversary of their date of
issuance and will expire on the fifth anniversary of their date of
issuance.




18




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


Management
estimated the fair value of each instrument separately and allocated the
proceeds in accordance with the relative fair value method. The amount allocated
to the warrants in accordance with this method was $149,949. The convertible
notes payable have been recorded on the consolidated balance sheet net of the
discount representing the allocation of the relative fair value to the warrant.
The Company records interest in the consolidated statements of operations as the
discounted April Note is accreted to its face value through maturity, in
addition to recording the 10% interest charge. For the three and nine months
ended September 30, 2010, amortization expense related to the debt discount
totaled $46,651 and $149,949 respectively.




The
Company has determined the conversion feature does not represent an embedded
derivative as the conversion price is known and is not variable making it
conventional. Additionally, there is no beneficial conversion feature related to
the April Notes as the conversion price assigned to the April Notes is greater
than the fair market value of the Company’s common stock on the date of
issuance.





The
Company agreed to pay commissions to certain finders in connection with the
offering based on the proceeds received from the purchasers introduced by each
finder. The Company paid each finder a cash commission of 10% of the total
proceeds received at closing based on proceeds from purchasers introduced to the
Company by such finder and warrants to purchase a number of shares of common
stock equal to 10% of the same total proceeds divided by $0.90. The warrants
were valued using the Black-Scholes option pricing model. The estimated fair
value of the warrants at the date of issuance was $38,165. The Company
capitalized these commissions as deferred financing costs totaling $108,165 and
is amortizing them over the term of the notes. For the three and nine months
ended September 30, 2010 the Company incurred amortization expense of $33,652
and $108,165, respectively, which is included in interest expense in the
consolidated statements of operations.




In August
2010, the Company obtained an extension from each of the April Note holders. The
April Note holder for the $200,000 Note extended the maturity date to August 19,
2010, The April Note holder for the $500,000 Note extended the maturity date to
August 31, 2010. As part of the extension agreements each April Note
retroactively amended the rate of interest from the original date of the April
Note, April 29, 2010, from 10% to 15%.





On
September 2, 2010, the Company obtained another extension from the April Note
holder of the $200,000 Note and extended the maturity date to February 28, 2011.
As part of this extension agreement [retroactively amended] the rate of interest
was from the original date of this note, April 29, 2010, from 15% to 12% and
amended the conversion price from $0.90 to $0.255 per share. Additionally, the
Company also issued warrants to purchase in the aggregate 392,157 shares of
common stock at an exercise price of $0.33 per share. The warrants are
exercisable at any time after the six-month anniversary of their date of
issuance and will expire on the fifth anniversary of their date of issuance. The
warrants had a fair value of $49,709 on the date of issuance based on the
Black-Scholes options pricing method and were recorded in interest expense
during the three and nine months ended September 30, 2010.





On
September 26, 2010, the Company entered into a settlement agreement with the
$500,000 April Note holder and issued them 5,950,000 shares of their common
stock for outstanding principal and accrued interest due of $530,833.
Additionally, the Company also issued warrants to purchase in the aggregate
277,778 shares of common stock at an exercise price of $0.25 per share. The
warrants are exercisable at any time after the six-month anniversary of their
date of issuance and will expire on the fifth anniversary of their date of
issuance. The warrants had a fair value of $27,408 on the date of issuance based
on the Black-Scholes options pricing method and were recorded in interest
expense during the three and nine months ended September 30, 2010.





As of
September 30, 2010 accrued interest for the $200,000 April Note was $10,345,
which is included in accounts payable and accrued expenses on the consolidated
balance sheets.




19


NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)




NOTE 4 – COMMON
STOCK





March 2009 Private
Placement





In March
2009, the Company completed a private placement (the “March 2009 Private
Placement”) of 3,957,500 shares of common stock, at a price of $0.80 per share
to certain “accredited investors” as defined in Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”). The gross proceeds
from the March 2009 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 March 2009
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 “$0.90
warrants”). 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 $0.90 warrants and the March 2009 Placement Agent Warrants had a fair
value of $2,163,943 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 (see Note 5) and invested a specified amount in the March 2009 Private
Placement (the “$1.00 warrants”). Under this exchange, the Company canceled and
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 $1.00 warrants had a fair value of $50,428 on the date of
issuance based on the Black-Scholes options pricing method.





The $1.00
warrants are considered to be a derivative liability to be marked to market at
each reporting date due to their exercise price reset feature. As of December
31, 2009 the warrant liability related to the $1.00 warrants was $52,425. At
September 30, 2010 after being marked to market the balance was $4,401 with a
gain of $19,021 and $48,025, respectively, being recognized and recorded in gain
(loss) on net change in fair value of derivative liabilities on the accompanying consolidated
statements of operations for the three and nine months ended September 30, 2010.
For the three and nine months ended September 30, 2009, the net adjustment to
fair value related to the $1.00 warrants resulted in a gain of $60,455 and a
loss of $9,635, respectively, and is included in gain (loss) on net change in
fair value of derivative liabilities on the accompanying consolidated statement
of operations.





The March
2009 Private Placement contains certain antidilution provisions. If the Company
issues additional shares of common stock or convertible securities in a
financing transaction in the succeeding fifteen (15) months from the March 2009
Private Placement with a purchase price or conversion price less than $0.80 per
share, the Company will issue additional shares of its common stock to the
investors in the March 2009 Private Placement, up to a maximum cap of 82,322
additional shares. This cap ensures that the number of shares issued to all
investors in the March 2009 Private Placement 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
March 2009 Private Placement. Similarly, if the Company issues additional
warrants in a financing transaction in the succeeding fifteen (15) months from
the March 2009 Private Placement with an exercise price less than $0.90 per
share, the Company will reduce the exercise price of the warrants issued in the
March 2009 Private Placement to the price of the warrants in the subsequent
financing transaction (but the number of shares underlying the warrants will not
change). The antidilution adjustments do 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
Company has determined that the antidilution provisions in the March 2009
Private Placement are, in effect, a net share settled written put option and
that the valuation of the antidilution obligation should be classified as a
liability and marked-to-market at each balance sheet date with the change in
liability being recorded as gain/loss on fair value adjustment. The Company
estimated the fair value of the antidilution obligation to be $102,500 at the
issuance date. There was no change in fair value of this liability for the three
and nine months ended September 30, 2009. At December 31, 2009, the fair value
of the antidilution obligation of $58,449 was calculated using an estimate of
the number of shares (82,322 shares) to be issued to all investors in the March
2009 Private Placement pursuant to the antidilution provisions times an
estimated fair market value ($0.71) of the Company’s common stock. The carrying
value of the antidilution obligation requires the input of highly subjective
assumptions. For the three and nine months ended September 30, 2010, no gain or
loss was recorded because shares were issued to settle the obligation of $58,449
on March 31, 2010 at a fair market value of $0.71.




20


NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)




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 March 2009 Private Placement.





The $0.90
warrants are considered to be a derivative liability to be marked to market at
each reporting date due to their exercise price reset feature. The Company
recorded a $2,063,562 common stock warrant liability at the issuance date
related to the $0.90 warrants.





For
services rendered in connection with the March 2009 Private Placement, the
Company paid the March 2009 Placement Agent cash commissions of $122,080 and
issued warrants to purchase 190,750 shares of common stock (the “March 2009
Placement Agent Warrants”). The March 2009 Placement Agent Warrants had a fair
value of $100,381 on the date of issuance based on the Black-Scholes option
pricing model. The March 2009 Placement Agent Warrants are considered to be a
derivative liability to be marked to market at each reporting date due to their
exercise price reset feature. The Company recorded a $100,381 common stock
warrant liability at the issuance date related to the March 2009 Placement Agent
Warrants.





For the
three and nine months ended September 30, 2009, the net adjustment to fair value
related to the $0.90 warrants and March 2009 Placement Agent Warrants resulted
in a gain of $1,283,122 and loss of $1,889,100 and is included in gain (loss) on
net change in fair value of derivative liabilities on the accompanying
consolidated statements of operations.




On June
29, 2009, the Company entered into a Warrant Waiver Agreement with an investor
in the March 2009 Private Placement. The investor agreed to waive the exercise
price reset feature in the $0.90 warrants. On the effective date of this
amendment, the change in fair value from the most recent reporting date to the
effective date of the amendment was recorded in the consolidated statements of
operations and the then-current fair value of the warrants $2,648,883 was
reclassified from common stock warrant liability to additional paid-in
capital.





On
September 23, 2009, the Company entered into Warrant Waiver Agreements with the
remaining investors and the March 2009 Placement Agent in the March 2009 Private
Placement. The investors and the March 2009 Placement Agent agreed to waive the
exercise price reset feature in the remaining $0.90 warrants. On the effective
date of these amendments, the change in fair value from the most recent
reporting date to the effective date of the amendment was recorded in the
consolidated statements of operations and the then-current fair value of the
warrants $1,404,161 was reclassified from common stock warrant liability to
additional paid-in capital.





In
connection with the Warrant Waiver Agreements described in the preceding
paragraphs, the Company issued new five-year warrants to purchase 414,825 shares
of common stock at $0.90 per share. The warrants had a fair value of $405,304 on
the date of issuance based on the Black-Scholes option pricing model. The
estimated fair value of the warrants is included in additional paid-in
capital.





February 2010 Private
Placement





In
February 2010, the Company completed a private placement (the “February 2010
Private Placement”) of 1,890,858 shares of Common Stock, at a price of $0.69 per
share to certain “accredited investors” as defined in Regulation D under the
Securities Act. The gross proceeds from the February 2010 Private Placement were
$1.3 million and approximately $1.1 million in net proceeds, after deducting
finders’ fees. Each investor in the February 2010 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 $1,082,362 on
the date of issuance based on the Black-Scholes options pricing
method.




21




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


Each
investor who subscribed for units will have an option to purchase additional
units consisting of shares of common stock and warrants during an exercise
period ending 30 days after a registration statement registering shares issued
in the February 2010 Private Placement is declared effective by the SEC. The
option warrants will have the same exercise price, terms and conditions as the
other warrants issued in the February 2010 Private Placement. Subject to NASDAQ
listing approval and determination that shareholder approval is not required for
the issuance of option units, the option will permit purchases of up to the
number of units initially purchased in the 2010 February Private
Placement.





The 2010
February Private Placement also included certain antidilution provisions for the
benefit of investors. If at any time prior to six (6) months after the
registration statement is declared effective the Company issues additional
equity securities in a “financing transaction” (as defined in the transaction
documents) with a purchase price less than the unit price or issues convertible
securities with a purchase price less than the unit price, the Company is
obligated to issue additional shares of common stock to investors in the 2010
February Private Placement so that the aggregate number of shares received by
the investor is equal to the number of shares of common stock that the investor
would have received if the same dollar amount had been invested at the purchase
price of the additional equity securities. There are no anti-dilution provisions
in the warrants. The total number of shares issued to all investors in the 2010
February Private Placement and pursuant to anti-dilution provisions will not
exceed the maximum number of shares that may be issued without the Company
obtaining shareholder approval under NASDAQ listing rules.




The
Company has determined that the antidilution provisions in the February 2010
Private Placement are, in effect, a net share settled written put option and
that the valuation of the antidilution obligation should be classified as a
liability and marked-to-market at each balance sheet date with the change in
liability being recorded as gain/loss on fair value adjustment. date. The fair
value of the antidilution obligation is calculated using an estimate of the
number of shares to be issued to all investors in the February 2010 Private
Placement pursuant to the antidilution provisions times an estimated fair market
value of the Company’s common stock. The carrying value of the antidilution
obligation requires the input of highly subjective assumptions. The Company
estimated the fair value of the antidilution obligation to be $40,000 at the
issuance date. At September 30, 2010 after being marked to market the balance
was $27,500 with a gain of $46,500 and $12,500 being recognized and recorded in
gain (loss) on net change in fair value of derivative liabilities on the
accompanying consolidated statement of operations for the three and nine months
ended September 30, 2010, respectively.





The
Company agreed to take steps to allow investors to sell their shares under Rule
144 and has entered into registration rights agreements in connection with the
February 2010 Private Placement.





May 2010 Separation
Agreement





On May 7,
2010 the Company entered into a Separation Agreement with Lee Rosen, the former
Chairman of the Board. As part of the agreement, Mr. Rosen was given the right
to receive an additional $105,000 in the form of a note or by making a stock
election. On May 17, 2010 the election was made by Mr. Rosen to receive $105,000
in the form of Company stock. The number of shares awarded was 164,062 which was
calculated using the closing stock price of $0.64 on May 17, 2010.





June 2010
Offering





On June
14, 2010, the Company closed a registered direct offering with one institutional
investor under which the Company issued 1,111,112 shares of Common Stock (the
“June 2010 Offering”), and warrants to purchase 555,556 shares of common stock.
The gross proceeds from the June 2010 Offering were $500,000, and the net
proceeds, after deducting the placement agent’s fee and the estimated offering
expenses payable by the Company, were approximately $407,000. The shares and
warrants were sold such that for each share purchased, the investor received a
warrant to purchase 0.50 shares of Common Stock at an exercise price of $0.60
per share. Each share was purchased at a price of $0.45. The warrants have a
five year term from the date of issuance, are not exercisable prior to six
months after issuance and include provisions providing for cashless exercise and
for adjustments to the number of shares exercisable thereunder upon stock
dividends, stock splits and similar events. The warrants have a fair value of
$222,944 on the date of issuance based on the Black-Scholes options pricing
method.




22




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


In
connection with the transaction the Company entered into a placement agent
agreement pursuant to which the placement agent received a fee equal to 7% of
the gross proceeds of the offering and a warrant to purchase shares of common
stock equal to 5% of the number of shares of common stock sold by the Company in
the offering at an exercise price of $0.5625 per share.





Consulting
Agreements





The
Company entered into consulting agreements with several investor relations firms
during the third quarter of 2010. Under the terms of these agreements, the
Company issued an aggregate of 7,200,000 shares of the Company’s Common Stock as
compensation for their services over a twelve month period. The Common Stock was
valued based on the share price on the date of each agreement. The Company
recognized $323,750 in expense for the three and nine months ended September 30,
2010, which is included in general and administrative expense in the
consolidated statements of operations. As of September 30, 2010, there was
approximately $1,462,000 of total unrecognized compensation expense related to
this Common Stock which is included in prepaid assets and other current assets
on the consolidated balance sheets.





August 2010
Offering





On August
16, 2010, the Company closed a registered direct offering by entering into a
securities purchase agreements with institutional investors under which the
Company issued 5,000,000 shares of its common stock (the “August 2010
Offering”), and warrants to purchase 1,250,000 shares of common stock. The gross
proceeds from the August 2010 Offering were $1,000,000, and the net proceeds,
after deducting the placement agent’s fee and the estimated offering expenses
payable by the Company, were approximately $890,000. The shares and warrants
were sold such that for each share purchased, the investor received a warrant to
purchase 0.25 shares of Common Stock at an exercise price of $0.30 per share.
Each share was purchased at a price of $0.20. The warrants have a five year term
from the date of issuance, are not exercisable prior to six months after
issuance and include provisions providing for cashless exercise and for
adjustments to the number of shares exercisable thereunder upon stock dividends,
stock splits and similar events. The warrants have a fair value of $191,740 on
the date of issuance based on the Black-Scholes options pricing
method.




In
connection with the transaction the Company entered into a placement agent
agreement pursuant to which the placement agent received a fee equal to 7% of
the gross proceeds of the offering.





September 2010
Offering





On
September 22, 2010, the Company closed a registered direct offering by entering
into a securities purchase agreements with institutional investors under which
the Company issued 3,557,692 shares of its common stock (the “September 2010
Offering”), and warrants to purchase 2,668,269 shares of common stock. The gross
proceeds from the September 2010 Offering were $462,500, and the net proceeds,
after deducting the placement agent’s fee and the estimated offering expenses
payable by the Company, were approximately $442,500. The shares and warrants
were sold such that for each share purchased, the investor received a warrant to
purchase 0.75 shares of Common Stock at an exercise price of $0.15 per share.
Each share was purchased at a price of $0.13. The warrants have a five year term
from the date of issuance, are not exercisable prior to six months after
issuance and include provisions providing for cashless exercise and for
adjustments to the number of shares exercisable thereunder upon stock dividends,
stock splits and similar events. The warrants have a fair value of $286,978 on
the date of issuance based on the Black-Scholes options pricing
method.





In
connection with the transaction the Company entered into a placement agent
agreement pursuant to which the placement agent received a fee equal to 7% of
the gross proceeds of the offeringin the form of
Common Stock of the Company. Each share of Common Stock issued as compensation
to the Placement Agent was valued at $0.13 per share.




23




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


NOTE 5 – 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 certain “accredited investors” as defined in
Regulation D under 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 was $4.00, and each share of Series A Preferred Stock
was 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 automatically, and without any action on the part of the holder, converts
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.





On May 9,
2010 the third anniversary of the date of issuance, each share of Series A
Preferred Stock automatically, and without any action on the part of the holder,
converted 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.
On May 9, 2010 the conversion price of each share of Series A Preferred Stock
was $4.00. Each share of Series A Preferred Stock accrued cumulative dividends
on a quarterly basis at a rate of 8% per annum. All dividends were paid in
shares of common stock having a fair market value at the time of issuance.
Pursuant to the terms of the Securities Purchase Agreement the Company issued
582,089 shares of common stock upon the automatic conversion of the Series A
Preferred Stock. Accrued dividends for the Series A Preferred Stock were
$488,334 through the date of conversion and were $424,313 at December 31,
2009.




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 certain “accredited investors” as defined in
Regulation D 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 Series B 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 Series B 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 common stock for total gross proceeds of
$7,589,100.




24




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)




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 Preferred Stock
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, 2010 and December 31,
2009, accrued dividends on the Series B Preferred Stock were $973,895 and
$653,690, respectively.





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





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, September 30, 2010, the
liquidation value of the Series B Preferred Stock was $5,552,424.





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. The estimated fair
value of the warrants was included in additional paid-in capital.





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, during the year ended December 31, 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.




25




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


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. The Company recorded $4,005,161 as an additional deemed dividend related
to the beneficial conversion feature during the three months ended March 31,
2009. The additional beneficial conversion feature was calculated based on the
number of shares that would be received upon conversion based on the adjusted
conversion price. The Company then compared the number of shares that would be
received upon conversion based on the adjusted conversion price with the number
that would have been received prior to the occurrence of the contingent event.
The excess number of shares was multiplied by the commitment date stock price to
determine the incremental intrinsic value resulting from the resolution of the
contingency and the corresponding adjustment to the conversion
price.




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 estimated fair
value of the warrants was included in additional paid-in capital.





In
conjunction with the March 2009 Private Placement, as noted in Note 3 above, the
antidilution provisions were triggered in the Series B Private Placement common
stock purchase warrants. The exercise price of the warrants was reset to $3.00
per share. Accordingly, the change in fair value from the most recent reporting
date to the date of March 2009 Private Placement was recorded in the
consolidated statements of operations and the then-current fair value of the
warrants $158,451 was reclassified from common stock warrant liability to
additional paid-in capital.





For the
three and nine months ended September 30, 2009, the net adjustment to fair value
related to the Series B Private Placement common stock purchase warrants
resulted in a gain of $-0- and $101,664, respectively and is included in loss on
net change in fair value of derivative liabilities on the accompanying
consolidated statements of operations.





The
ability of the Company to pay dividends in the future is limited by regulatory
requirements, legal availability of funds, recent and projected financial
results, capital levels and liquidity of the Company, general business
conditions and other factors deemed relevant by the Company’s board of
directors.





NOTE 6 – GAIN ON SETTLEMENT
OF TRADE PAYABLES AND LEASE TERMINATION





The gain
on settlement of trade payables at less than recorded values results from
negotiations with various unsecured creditors for settlement and payment of the
trade payable at amounts less than the recorded liability. The gain on
settlement of lease termination results from the Company terminating their lease
agreement with Atlantic Terminaling and therefore recognizing a gain equal to
the deferred rent on the date of termination. For the three and nine months
ended September 30, 2010, the Company’s gain on settlement of trade payables was
as follows:




26




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


Net Trade
                    Payables
                    Settled
                  
                  
                  Other
                    Liabilities
                  
                  
                  Payments
                    in Cash
                  
                  
                  Payments
                    in Equity
                  
                  
                  GainTrade
      payables
                  
                  $
                  1,882,106
                  
                  
                  $
                  -
                  
                  
                  $
                  (467,405
                  )
                  
                  $
                  (158,376
                  )
                  
                  $
                  1,256,325Deferred
      rent
                  
                  
                  -
                  
                  
                  
                  63,158
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  63,158Total
                  
                  $
                  1,882,106
                  
                  
                  $
                  63,158
                  
                  
                  $
                  (467,405
                  )
                  
                  $
                  (158,376
                  )
                  
                  $
                  1,319,483





NOTE 7 – EXCLUSIVE LICENSE
AGREEMENT AND PAYABLE





On March
20, 2006 (the “Effective Date”), the Company entered into an Exclusive License
Agreement (the “Perpetual License”) with the inventor of its proprietary
technology (the “Technology”), Ferdinando Petrucci (the “Licensor”), to obtain
an exclusive Perpetual License to manufacture, use and sell the Technology in
North America, Central America and the Caribbean as well as other territories
that may be added by mutual agreement of the parties to the Perpetual
License.





On
February 19, 2010, the Perpetual License, as amended, was further amended, to
allow the Company to pay $120,000 in cash on February 19, 2010 and issue
1,100,000 shares of common stock in lieu of making the $500,000 payments due on
February 20, 2010 and March 20, 2010. The fair value of the shares issued was
$726,000, based on the fair market value on the date of issuance, or $0.66 per
share, resulting in a gain on debt extinguishment of $-0- and $154,000 for the
three and nine months ended September 30, 2010, respectively.




NOTE 8 – COMMITMENTS AND
CONTINGENCIES





On or
about January 4, 2010, the Company was notified that it was in default under its
site lease agreement with Pennington Partners, LLC (the “landlord”) and
terminaling services agreement with Atlantic Terminaling, primarily due to its
failure to pay rent in the amount of $320,000. Effective August 27, 2010, the
terminaling services agreement with Atlantic Terminaling was terminated and the
Company was released from paying all amounts due. This termination resulted in a
gain on settlement of trade payables and lease termination of $318,466,
including derecognition of deferred rent in the amount of $63,158 (see note 6).
On August 27, 2010 the Company amended the site lease agreement and successfully
negotiated a settlement of the amounts owed and restructured the remaining
obligations under the agreements. Effective August 1, 2010, the base rent was
reduced to $25,000 per month for the remainder of the initial term. Full
satisfaction of the existing defaults was met with payments of $40,000 for the
month of July 2010; $100,000 for Base Rent in advance for the period beginning
August 1, 2010 and ending November 30, 2010; $150,000 cash; and the issuance of
300,000 shares of unregistered common stock. These payments resulted in gain on
settlement of trade payables and lease termination of $255,000. As of September
30, 2010 and December 31, 2009, accrued and unpaid rent under the agreements
totaled approximately $-0- and $362,500, respectively, and is included in
accounts payable and accrued expenses on the consolidated balance
sheets.





On August
5, 2010 the Company appeared before a NASDAQ Continued Listing Hearing Panel to
present a plan to regain and sustain compliance with the NASDAQ continued
listing standards. The Company was deficient on two continued listing standards
as of June 30, 2010 when the Company reported negative stockholders equity of
approximately $1.1 million. The Company offered to the panel that closing of the
August 2010 registered direct offering coupled with the subsequent negotiated
settlement payments and the conversion of the 90-day secured convertible April
Notes results in increases in the Company’s stockholders equity. The Company
also stated that it expected to be in compliance with the stockholders equity
requirement when it files its Form 10-Q for the period ending September, 30,
2010. As of September 30, 2010 the Company was not able to complete all of the
anticipated actions and therefore was not compliant with the shareholders equity
requirement. On October 4, 2010 the Company completed a registered direct
transaction that resulted in gross proceeds of $600,000 which resulting in an
increase in shareholders equity to an amount above the requirement. The Company
is also deficient with the $1.00 bid price standard and has asked the panel for
the 180 day extension to regain compliance. The Company currently has not
reached a decision on completing a reverse stock spilt to regain compliance with
this standard which requires that the Company maintain a $1 minimum bid price
for 10 successive trading days by December 20, 2010.




27




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


NOTE 9 –
AGREEMENTS





Resignation of Lee S. Rosen
as Chairman and Separation Agreement





On May 7,
2010, the Company’s board of directors accepted the resignation of Mr. Rosen as
the Chairman of the Board and as a director. In connection with Mr. Rosen’s
resignation, the board of directors negotiated and executed a Separation
Agreement, dated May 7, 2010, between the Company and Mr. Rosen (the “Separation
Agreement”). Under the Separation Agreement, Mr. Rosen is entitled to the
following:




·
            $95,000
      in cash, less standard deductions and
  withholding;


·
            the
      right to receive an additional $105,000, at the election of Mr. Rosen, in
      the form of (i) a note issued by the Company with a maturity date of three
      years from date of issuance and an interest rate equal to the interest
      rate of a three-year United States Treasury Note plus 2.0% on the date of
      issuance and other customary terms and conditions; or (ii) a number of
      shares of the Company’s common stock equal to the amount of the cash
      election divided by the closing price of the Company’s common stock on the
      NASDAQ Capital Market on the election date. Mr. Rosen may make this
      election before one (1) business day following the Release Effective Date
      under the Separation Agreement, which will be no earlier than May 14,
      2010;


·
            accelerated
      vesting on certain time-based stock options and stock grants under Mr.
      Rosen’s previous Amended and Restated Employment Agreement with the
      Company, dated July 23, 2009 (the “Employment Agreement”), consisting of
      (1) options to purchase 104,353 shares of the Company’s common stock; and
      (2) 260,833 shares of the Company’s common
  stock;


·
            accelerated
      vesting on a certain previously granted three-year restricted stock
      grants, consisting of 226,316 shares of the Company’s common
      stock;


·
            upon
      receipt of shareholder approval to issue sufficient available shares under
      the Company’s Incentive Plan, (i) accelerated vesting on additional
      time-based options to purchase 208,707 shares of the Company’s common
      stock (the “Conditional Options”) and (ii) issuance of additional
      restricted stock grants consisting of 521,677 shares of the Company’s
      common stock less the number of shares equal to $105,000 divided by the
      closing price of the Company’s common stock on the NASDAQ Capital Market
      on the election date (the “Conditional Stock Grant”). The Conditional
      Options and Conditional Stock Grant were granted under Mr. Rosen’s
      previous Employment Agreement;


·
            18
      months of reimbursement for COBRA premiums in order to provide health and
      life insurance benefits at least equal to those provided at the time of
      separation; and


·
            other
      accrued amounts under the Employment Agreement, as of May 7,
      2010.





The
Company has not registered, and is under no obligation to register, the stock
grants or the shares underlying the stock options provided under the Separation
Agreement.




28




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


Fenix
Energy





On May
12, 2010, the Company issued a termination notice to Fenix Energy (“Fenix”) to
terminate the Company’s biofuel contract with Fenix as a result of Fenix’s
failure to post the mandatory letter of credit equal to one month’s projected
sales that the Company requested in March 2010. The termination became effective
immediately following a 30 day cure period, which Fenix did not meet. This
contract was the Company’s largest single biofuel sales contract, under which
Fenix had agreed to purchase a minimum of 750,000 gallons of our biofuel per
month for 12 months.





NOTE 10 – PREPAID EXPENSES
AND OTHER CURRENT ASSETS





Prepaid
expenses and other current assets were:


September 30,
                                      2010
                                    
                                    
                                    December 31,
                                      2009Prepaid
      consulting fees
                                    
                                    $
                                    1,462,250
                                    
                                    
                                    $Other
      prepaid expenses and current assets
                                    
                                    
                                    192,722
                                    
                                    
                                    
                                    237,635Total
                                    
                                    $
                                    1,654,972
                                    
                                    
                                    $
                                    237,635




NOTE 11 –
SUBSEQUENT EVENTS





Resignation of Cary J.
Claiborne as Chief Executive Officer and Separation
Agreement





On
October 9, 2010, the Company’s board of directors accepted the resignation of
Mr. Claiborne as the Chief Executive Officer. In connection with Mr. Claiborne’s
resignation, the board of directors negotiated and executed a Separation
Agreement, dated October 9, 2010, between the Company and Mr. Claiborne (the
“Claiborne Separation Agreement”). Under the Claiborne Separation Agreement, Mr.
Claiborne is entitled to the following:




·
            $130,000
      in cash, less standard deductions and
  withholding;


·
            $60,000
      in cash for the 2009 accrued but unpaid
bonus;


·
            within
      21 calendar days after the separation date, the Company shall file an S-8
      Registration Statement to register all shares and options granted under
      the Company’s Omnibus Incentive
Plan;


·
            a
      grant of 1,500,000 shares of common stock , which will be registered as
      part of the aforementioned S-8 Registration
  Statement;


·
            accelerated
      vesting on certain time-based stock options and stock grants dated
      December 1, 2007, and April 9, 2009  consisting of (1) options
      to purchase 65,000 shares of the Company’s common stock; and (2) 300,000
      shares of the Company’s common stock
  respectively;


·
            accelerated
      vesting on certain performance-based stock options and stock grants dated
      December 1, 2007, and April 9, 2009  consisting of (1) options
      to purchase 125,000 shares of the Company’s common stock; and (2) 307,604
      shares of the Company’s common stock
  respectively;


·
            accelerated
      vesting on a certain previously granted three-year restricted stock
      grants, consisting of 232,026 shares of the Company’s common
      stock;


·
            reimbursement
      for up to $12,000 in documented outplacement
  services;


·
            18
      months of reimbursement for COBRA premiums in order to provide health and
      life insurance benefits at least equal to those provided at the time of
      separation; and


·
            other
      accrued amounts under the Employment Agreement, as of October 9,
      2010.


29




NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 Appointment of Chief
Executive Officer
 
 On
October 9, 2010, the Company entered into an employment agreement with Miles F.
Mahoney appointing him  as the Company’s new President and Chief
Executive Officer. Mr. Mahoney’s employment agreement with the
Company  provides for an indefinite term, but may be terminated by the
Company or Mr. Mahoney with or without cause.  The Employment
Agreement provides that Mr. Mahoney will receive base compensation of $225,000
per year and will be eligible to earn an incentive cash bonus of up to $125,000
if the Company enters into a definitive agreement with a strategic investor for
financing in the Company on or before December 31,
2010.  Additionally, the Company granted Mr. Mahoney an incentive
stock option to purchase 1,000,000 shares of the Company’s common stock and also
issued Mr. Mahoney 1,000,000 shares of restricted stock, half of which are
subject to restrictions until the first anniversary of the grant
date.
  October 2010
Offering
  On
October 4, 2010, the Company closed a registered direct offering by entering
into securities purchase agreements with several institutional investors under
which the Company issued 4,615,385 shares of its Common Stock (the “October 2010
Offering”) and warrants to purchase 1,846,154 shares of Common
Stock.  The gross proceeds from the Offering were $600,000, and the
net proceeds, after deducting the placement agent’s fee and the estimated
offering expenses payable by the Company, are expected to be approximately
$550,000.   The shares and warrants were sold such that for each
share purchased, the investor received a warrant to purchase 0.4 shares of
Common Stock at an exercise price of $0.13 per share.  Each share was
purchased at a price of $0.13. The warrants have a five year term from the date
of issuance, are not exercisable prior to six months after issuance and include
provisions providing for cashless exercise and for adjustments to the number of
shares exercisable thereunder upon stock dividends, stock splits and similar
events.  The warrants have a fair value of $154,927 on the date of
issuance based on the Black Scholes options pricing method.
 
 November 2010
Offering
 
 On
November 1, 2010 the Company completed a private placement of convertible notes
(the “November Notes”) with three accredited investors, raising $375,000 in
gross proceeds.  The Company executed a Convertible Promissory Note
with each note purchaser.  The November Notes will pay interest at a
rate of 6% per annum, will mature six months after their date of issuance and
are convertible into shares of the Company’s common stock at a conversion price
of $0.14 per share (subject to adjustment) at any time prior to repayment, at
the election of the noteholder.  In the aggregate, the November Notes
will be convertible into up to 2,758,929 shares of the Company’s common stock if
held to maturuty, including interest.  The Company may prepay at any
time and without penalty the outstanding principal amount of the November Notes
plus unpaid accrued interest.   The November Note purchasers, at
their option, also have the right to accelerate payment if the Company engages
in certain change of control transactions.
 
 The
Company has determined the conversion feature does not represent an embedded
derivative as the conversion price is known and is not variable making it
conventional. Additionally, there is no beneficial conversion feature related to
the November Notes as the conversion price assigned to the November Notes is
greater than the fair market value of the Company’s common stock on the date of
issuance.
 
 Warrant
Amendments
 
 On
November 1, 2010, the Company amended the warrant agreements entered into as
part of the August 2010 Offering, September 2010 Offering, and the October 2010
Offering to reduce the exercise price to $0.015 and made them immediately
exercisable. The total number of warrants amended were immediately exercised by
the warrant holders and the Company issued them 5,764,423 shares of common stock
for proceeds of $86,466.The amended warrants had a fair value of $489,977 on the
date of modification based on the Black-Scholes options pricing
method.  An expense of $71,959 will be recorded related to
this.
  30
  NEW
GENERATION BIOFUELS HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)
  April Note
Amendment
  On
November 1, 2010, the Company amended the $200,000 April Note extending the
maturity date to December 31, 2011. Additionally, the conversion rate was
reduced from $0.255 to $0.14 for $155,000 of the principal and interest and from
$0.255 to $0.01 for $60,000 of the principal and interest. Additionally, there
is a beneficial conversion feature related to this April Note amendment as the
conversion price assigned to $60,000 of the April Note is greater than the fair
market value of the Company’s Common Stock on the date of issuance. The
beneficial conversion feature was calculated based on the number of shares that
would be received upon conversion based on the adjusted conversion price. The
Company then compared the number of shares that would be received upon
conversion based on the adjusted conversion price with the number that would
have been received prior to this amendment. The excess number of shares was
multiplied by the commitment date stock price to determine the incremental
intrinsic value resulting from the resolution of the contingency and the
corresponding adjustment to the conversion price. A deemed dividend of $540,000
will be recorded related to this beneficial conversion feature. On November 15,
2010, the Company received a conversion notice on a $32,500 portion of the
$60,000 principal with a $0.01conversion rate. Accordingly, the Company issued
3,250,000 shares of common stock.
  31
  ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Overview
  New
Generation Biofuels Holdings, Inc. (the “Company,” “we,” “our,” or “us”) is 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 began
generating revenues in 2008.
 
 We
produce our biofuels using proprietary blending technologies 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.
 
 During
the year ended December 31, 2009, we commenced our principal business operations
and have exited the development stage.
 
 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, 2010, we had an accumulated deficit of $57.9
million.  The operation and development of our business will require
substantial additional capital to fund our operations, payments due under our
exclusive license, the acquisition or development of manufacturing plants,
research and development and other initiatives including potentially the
financing of future acquisitions.
 
 The
Company's independent registered public accounting firm has issued a going
concern opinion on the Company's financial statements for the year ended
December 31, 2009.
  Our
near-term business strategy involves the following:
 
 ·
              Direct
      Sales.We are seeking to develop a revenue stream from
      direct sales of our biofuel produced at our Baltimore production facility.
      Based on existing contracts with our customers, we are seeking to expand
      our facility over the next several months, if sufficient resources are
      available.  Our longer term strategy includes construction of
      additional plants.
  ·
              Technology
      Licensing.  As a second potential revenue stream, our
      business plan contemplates 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 are in the process of exploring various technology
      licensing relationships.
  ·
              Government Tax
      Credits.  We are also pursuing our eligibility and
      qualification for tax credits and other government incentives to
      strengthen the competitive position of our biofuel and to otherwise
      attempt to take advantage of the U.S. government’s encouragement of
      “green” technologies.
  ·
              Strategic
      Partners.  We are seeking arrangements with strategic
      partners that would provide funding and support our efforts to develop our
      production capacity and attract
customers.
  ·
              Research and
      Development.  To the extent permitted by our limited
      resources, we are developing our technology to extend it to fuels with
      additional applications.
  32
  Recent
Developments
  Significant
recent developments in the third quarter and to date regarding our company
include the following:
  ·
              On
      November 1, 2010, the Company completed a private placement of convertible
      notes with three accredited investors, raising $375,000 in gross
      proceeds.
  ·
              On
      October 29, 2010, Carl O Bauer resigned from the Company’s Board of
      Directors.  Mr. Bauer’s resignation was not related to a
      disagreement with management.
  ·
              On
      October 11, 2010, the Company announced that it learned the NASDAQ Listing
      Qualifications Panel (the "Panel") will allow the Company's securities to
      remain listed pending the Company's demonstration that it has regained
      compliance with the $1 bid price requirement and that it is able to
      sustain long term compliance with all applicable requirements for
      continued listing on The NASDAQ Capital Market, including the
      stockholders' equity requirement.  In that regard, on September 15,
      2010, the Panel rendered a determination regarding the Company's listing.
      The Panel's decision required, among other things, the Company to
      demonstrate on or before September 25, 2010, that its stockholders' equity
      was at least $2.5. million and, on or before December 20, 2010, that its
      closing bid price had been at least $1 per share for a minimum of ten
      consecutive trading days, as well as that the Company met and could
      sustain compliance with all other applicable requirements, including the
      stockholders' equity requirement.  The Company filed a Current Report
      on Form 8-K on September 27, 2010, confirming stockholders' equity of at
      least $2.5 million as of that date.  While the Company is diligently
      taking steps to regain compliance in accordance with the Panel's decision,
      there can be no assurances that the Company will be able to do so.
  As
previously disclosed, on June 23, 2010, NASDAQ notified the Company that it was
not in compliance with the minimum bid price and stockholders' equity
requirements and that the Company's securities were subject to delisting unless
the Company requested a hearing before a Panel.  The Company timely
requested a hearing and appeared before the Panel on August 5, 2010.
  ·
              On
      October 9, 2010, the Board of Directors accepted the resignation of Cary
      J. Claiborne, Chief Executive Officer, and named Miles F. Mahoney as the
      Company’s President and Chief Executive Officer.  Mr. Mahoney
      has also joined the Board of Directors.  The Board of Directors
      also executed a separation agreement with Mr. Claiborne and an employment
      agreement with Mr. Mahoney.  Additionally, Carl O. Bauer has
      joined the Company’s Board of
Directors.
  ·
              On
      October 5, 2010 we announced that we have entered into a definitive
      agreement with several institutional investors, all of which qualify
      as “accredited investors” as defined in Regulation D under the Securities
      Act, for a registered direct offering of 4,615,385 shares of previously
      unissued common stock at a price of $0.13 per share with total gross
      proceeds of $600,000.  In addition to the issuance of common stock we
      will issue to the investors warrants exercisable for two common shares for
      every five common shares purchased with an exercise price of $0.13 per
      share.  The warrants will expire 5 years from the closing date.
       The common shares sold, the warrants and the shares underlying the
      warrants are to be issued under New Generation's Form S-3 shelf
      registration statement that was previously declared effective by the
      Securities and Exchange Commission on January 27,
  2009.
  ·
              On
      September 22, 2010, we conducted a registered direct offering by entering
      into a securities purchase agreement with a small number of institutional
      investors relating to the issuance and sale of shares of our common stock
      and warrants, raising $462,500 in gross proceeds and approximately
      $442,500 in net proceeds, after deducting finders’
  fees.
  ·
              On
      September 22, 2010, Socius and Creditor entered into a Claims Purchase
      Agreement (the "Purchase Agreement") which provides for the sale by
      Creditor to Socius of Creditor's right to the Claim. As of the date of the
      Purchase Agreement, the Company was indebted to Creditor for the unpaid
      principal amount of $500,000 under the Note as well as $30,833 of accrued
      but unpaid interest thereon. The Company is a party to the Purchase
      Agreement through its execution of an acknowledgment contained
      therein.
  33
  In
connection with the purchase of the Claim and pursuant to the terms of the
Purchase Agreement, on September 24, 2010, Socius filed a complaint for damages
against the Company with the Court. On September 27, 2010, Company counsel and
counsel for Socius filed with the Court a joint ex parte  application
for court order approving stipulation for settlement of Claim. After holding a
hearing, the Court issued the Order on September 27, 2010.
  ·
              On August 27, 2010, we entered
      into an agreement to amend the lease at our Baltimore, Maryland production
      facility.  Pursuant to the agreement, we made a cash payment of
      $290,000 and also issued 300,000 shares of restricted common stock. In
      consideration of the payment, the landlord agreed to forfeit past due
      amounts under the lease agreement, terminate and forfeit minimum payments
      due for terminaling services under a separate agreement, and reduce the
      monthly lease rate to $25,000 for the remaining lease term of three
      years.  Included in the $290,000 payment was $100,000
      representing the August reduced lease payment and prepayment of the
      monthly $25,000 rent for the months of September – through November
      2010. As a result of
      the lease amendment the Company recorded a gain of approximately $255,000
      and reduced our future obligations by approximately $2.9
      million.
  ·
              On
      August 17, 2010, we conducted a registered direct offering by entering
      into a securities purchase agreement with a small number of institutional
      investors relating to the issuance and sale of shares of our common stock
      and warrants, raising $1,000,000 in gross
  proceeds.
  ·
              On
      July 21, 2010 we announced that we have filed for a patent application for
      our new pyrolysis oil based
biofuel.
 
 ·
              On
      July 14, 2010, we announced that we and Burmeister and Wain Energy A/S
      ("BWE") an engineering organization located in Lyngby, Denmark have
      entered into a Memorandum of Understanding (MOU) to cooperatively expand
      the use of the Company’s renewable biofuels technology with BWE's
      engineering expertise in power generation and green renewable
      applications. The two companies believe there are substantial mutual
      benefits that can arise from the collaborations of BWE's expertise in
      combustion systems and our biofuel production know-how and proprietary
      technology. The companies intend to explore business opportunities to
      provide renewable energy solutions to BWE's existing customers.
 
 ·
              On
      June 24, 2010, we announced that the Baltimore City Board of School
      Commissioners has approved a long term boiler test and evaluation of our
      proprietary biofuel in two of Baltimore City's public schools over a one
      year period. The maximum volume for the program is capped at 1,000,000
      gallons, but can be increased up to 2,000,000 gallons if both parties
      agree.
 
 ·
              On
      June 23, 2010, we received a letter from The NASDAQ Stock Market notifying
      us that a Staff determination has been made to delist our securities from
      The NASDAQ Capital Market due to our non-compliance with the NASDAQ
      Listing Rule 5550(a)(2) which requires our common stock to maintain a
      minimum bid price of $1.00 per share and our inability to regain
      compliance with the rule within the 180 calendar days given to us in
      accordance with Listing Rule 5810(c)(3)(A). In addition, our inability to
      comply with the minimum stockholders’ equity requirement of $2.5 million
      or to meet the alternative minimum market value of listed securities or
      minimum net income from continuing operations as of the period ending
      March 31, 2010 serves as an additional basis for delisting our
      securities.
 
 Pursuant
to the procedures set forth in the NASDAQ Listing Rules, we have appealed the
Staff determination to a NASDAQ Listing Qualifications Panel (the “Panel”) by
requesting a hearing, and our common stock would remain listed on the NASDAQ
Capital Market pending a final determination by the Panel.  Our
hearing was held on August 5, 2010. We are currently awaiting a response from
the Panel. If successful, the Panel could grant up to an additional 180 calendar
days, or until December 20, 2010, for us to regain compliance with the NASDAQ
Listing Rules. There is no assurance that we will be successful in our appeal
and will remain listed on NASDAQ.
  34
  ·
              On
      June 10, 2010, we completed a private placement of our common stock and
      warrants, raising $500,000 in gross proceeds and approximately $407,000 in
      net proceeds, after deducting finders’
fees
  ·
              On
      June 3, 2010, we and Regent Trend Investment Ltd. (soon to be Milestone
      Biofuels Limited) (“Milestone”) announced an amendment to our non-binding
      MOU, dated March 12, 2010 to extend the due diligence period an additional
      90 days to August 25, 2010 to more fully explore the opportunities
      available for both parties. As previously disclosed, the MOU contemplates
      a strategic relationship between Milestone and us, including a $20 million
      direct equity investment in us and collaboration with Milestone to fund a
      joint venture to develop and operate biofuel production plants in the
      continental United States with a production capacity of 250 million
      gallons per year. In addition to satisfactory completion of due diligence,
      any transaction also remains subject to negotiation and execution of
      definitive agreements and board approval by both parties.  The
      transaction obtained shareholder approval as required under NASDAQ listing
      rules, at our annual shareholders’ meeting on July 8,
      2010.  There can be no assurance that the transaction will be
      completed, either on the proposed terms and within the timeframe currently
      anticipated, or at all.
  ·
              On
      May 27, 2010 we announced we have filed a patent application on our new
      glycerin-based biofuel.
  ·
              On
      May 12, 2010, we issued a termination notice to Fenix Energy (“Fenix”) to
      terminate our biofuel contract with Fenix as a result of Fenix’s failure
      to post the mandatory letter of credit equal to one month’s projected
      sales that we requested in March 2010. The termination is effective
      immediately, although Fenix had a 30 day cure period, which they did not
      meet.  The contract is now fully terminated.  This
      contract was our largest single biofuel sales contract, under which Fenix
      had agreed to purchase a minimum of 750,000 gallons of our biofuel per
      month for 12 months.
  ·
              On
      May 7, 2010, the Company’s board of directors appointed John E. Mack, our
      current audit committee chairman, as non-executive Chairman of the Board;
      appointed David H. Goebel, our Chief Operating Officer, as a director; and
      accepted the resignation of Lee S. Rosen as Chairman of the Board and as a
      director and approved and executed a separation agreement with Mr.
      Rosen.
  ·
              On
      April 30, 2010, we completed a private placement of 90-day secured
      convertible notes and warrants to two investors, raising $700,000 in gross
      proceeds and $630,000 in net proceeds, after deducting finders’ fees. In
      August the investors agreed to extend the maturity dates of the notes to
      August 31, 2010 ($500,000 note) and August 19, 2010 ($200,000 note)
      respectively. We have a 10 business day cure period if we fail to
      payoff  the notes or the investor does not convert upon the
      maturity date.
  Critical
Accounting Policies
  Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosures. On an ongoing basis, we evaluate these
estimates, including those related to revenue recognition, long-lived assets,
accrued liabilities, income taxes, common stock warrant liabilities and
antidilution obligations, and share-based compensation. These estimates are
based on historical experience, 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.
 
 For a
description of our critical accounting policies which affect the significant
judgments and estimates used in the preparation of our consolidated financial
statements, please refer to Management’s Discussion and Analysis of Financial
Condition and Results of Operation in our Annual Report on Form 10-K for the
year ended December 31, 2009 under the caption “Critical Accounting
Policies.”  No changes have been made to these policies during the
nine months ended September 30, 2010.
  35
  Financial
Operations Overview
  Revenue
 
 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, Maryland
facilities. We have agreements with our customers that specify the terms of the
sale, including price.
  Cost
of Product 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 10 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
and convertible notes and amortization of the discount on the convertible notes
and deferred financing costs.
  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.
  Results
of Operations
  Comparison of the three
months ended September 30, 2010 and the three months ended September 30,
2009
 
 Net
Loss
 
 We
incurred a net loss of $1.2 million for the three months ended September 30,
2010, as compared to $1.7 million for the three months ended September 30,
2009.
 
 The
decrease in net loss of $0.5 million resulted primarily from:
  36
  ·
              a $0.3 million decrease in cost
      of product revenues.
 
 ·
              a
      $0.4 million decrease in general and administrative
    expenses
 
 ·
              a
      $1.3 million increase in gain on settlement of trade payables and lease
      termination.
 
 partially
offset by:
 
 ·
              a
      $0.2 million increase in interest
expense.
 
 ·
              a $1.3 million decrease in gain
      on net change in fair value
adjustment.
  Revenue
  Total
revenues for the three months ended September 30, 2010 were $-0-, versus $34,412
total revenues for the three months ended September 30, 2009. The decrease in
total revenues was due to no sales during the third quarter of
2010.
  Due to
working capital constraints the production facility in Baltimore has been
utilized primarily to make fuel for prospective customer testing and for R&D
activities including testing new processes. We plan on producing and selling a
limited quantity of fuel until we have secured additional working
capital.
  Cost
of Product Revenues
 
 Cost of
product revenues was $0.3 million for the three months ended September 30, 2010,
versus $0.6 million for the three months ended September 30, 2009. Cost of
product revenues is primarily comprised, of direct facility costs of $0.1
million and amortization of license agreement costs of $0.2
million.
  The cost
of product revenue was driven by a disproportionately higher cost of production
relative to units sold. To date, we have run only 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 make up the majority of the $0.3 million
costs of product revenue. If our production volume increases, we believe that
our per unit cost of production will decrease as we process much larger volumes,
though there can be no assurance that these cost reductions will
materialize.
 
 Research
and Development Expenses
 
 Research
and development expenses were approximately $88,000 for the three months ended
September 30, 2010, compared to approximately $73,000 for the three months ended
September 30, 2009. The decrease in research and development expenses in 2010 is
primarily the result of lower finished product testing, driven by our production
decrease during the third quarter.  The salaries of our Chief
Technology Officer and Lab Assistant represent approximately $60,000 of the
three months ended total costs in both 2010 and 2009.  The lack of
production led to less batches being tested during the third quarter of 2010,
leading to the overall decrease in research and development
expenses.
 
 General
and Administrative Expenses
 
 General
and administrative expenses were $1.9 million for the three months ended
September 30, 2010, compared to $2.3 million for the three months ended
September 30, 2009. The decrease of $0.4 million in 2010 over the prior period
was primarily the result of decreases in the following:
 
 ·
              a
      $0.2 million decrease in non cash compensation
  expense.
  37
  ·
              a
      $0.1 million decrease in non cash compensation expense for warrants
      related to grants to non-employees for services performed.  The
      service period ended in January 2010.  No expenses remain to be
      recognized.
 
 ·
              a
      $0.2 million decrease in lease termination expenses as we recognized
      expense during the three months ended June, 30 2009 for our Lake Mary
      office but had no such expenses during the three months ended June
      30,  2010.
 
 ·
              a
      $0.1 million decrease in professional
expenses.
 
 ·
              a
      $0.1 million decrease in business travel
  expenses.
 
 ·
              a
      $0.1 million decrease in shareholder service
  expenses.
 
 ·
              a
      $0.1 million decrease in legal
fees.
 
 ·
              a
      $0.1 million decrease in investment banking expenses, accounting fees, and
      administaff service fees among
others.
  partially
offset by:
 
 ·
              a
      $0.6 million increase innon cash
      compensation expense  for a restricted stock vesting pursuant to
      the resignation of our former, Chairman of the Board in May
      2010.  In accordance with his severance agreement a number of
      restricted stock grants immediately vested and the related expense was
      recognized.  Additionally, the increase is related to new grants
      for 2009 performance incentive compensation which was recorded during the
      first quarter of 2010.
  Interest Expense
  Interest
expense was approximately $277,000 for the three months ended September 30,
2010, compared to approximately $119,000 for the three months ended September
30, 2009. Interest expense consists of interest incurred related to the license
agreement payable and the convertible notes.  The increase is due to
the recording of interest expense on the convertible notes, amortization of
deferred financing costs associated with the convertible notes, as well as the
amortization of the convertible notes discount.  The increase is
partially offset by a reduction in the license agreement payable balance
resulting in less interest expense from that instrument.
  Gain
(Loss) on Fair Value Adjustment
 
 Gain on
change in fair value of warrant liability was nominal for the three months ended
September 30, 2010, compared to a $1.3 million gain for the three months ended
September 30, 2009.  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.
  Gain
on debt extinguishment
  Gain on
debt extinguishment was approximately $50,000 for the three months ended
September 30, 2010, compared to $-0- for the three months ended September 30,
2009.
  38
  Gain
on settlement of trade payables and lease termination
  Gain on
settlement of trade payables and lease termination was approximately $1.3
million for the three months ended September 30, 2010.  Gains
consisted of the negotiated settlement of various past due liabilities with
vendors in the third quarter.  Payment of the settlement agreements
was made in cash and with cash and stock in several instances.
  Comparison of the nine
months ended September 30, 2010 and the nine months ended September 30,
2009
  Net
Loss
  We
incurred a net loss of $7.1 million for the nine months ended September 30,
2010, as compared to $10.3 million for the nine months ended September 30,
2009.
 
 The
decrease in net loss of $3.2 million resulted primarily from:
 
 ·
              a $0.1 million decrease in
      research and development
expenses.
 
 ·
              a $0.4 million decrease in
      general and administrative
expenses.
 
 ·
              a
      $1.8 million decrease in gain (loss) on net change in fair value
      adjustment
 
 ·
              a
      $1.3 million increase in gain on settlement of accounts payable and lease
      termination.
  partially
offset by:
  ·
              a
      $0.4 million increase in interest
expense.
 
 Revenue
  Total
revenues for the nine months ended September 30, 2010 were $6,351, versus
$77,048 total revenues for the nine months ended September 30, 2009. The
decrease in total revenues was due to minimal sales during the first quarter of
2010 and no sales during the second and third quarters of 2010.
  Due to
working capital constraints the production facility in Baltimore has been
utilized primarily to make fuel for prospective customer testing and for R&D
activities including testing new processes.  We plan on producing and
selling a limited quantity of fuel until we have secured additional working
capital.
  Cost
of Product Revenues
  Cost of
product revenues was $1.4 million for the nine months ended September 30, 2010,
and $1.4 million for the nine months ended September 30, 2009. Cost of product
revenues is comprised of raw material feedstocks used in production of $0.2
million, direct facility costs of $0.7 million and amortization of license
agreement costs of $0.5 million.
  The cost
of product revenue was driven by a disproportionately higher cost of production
relative to units sold. To date, we have run only 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 make up the majority of the $1.4 million
of the cost of product revenue. If 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. If our production volume increases, we believe
that our per unit cost of production will decrease as we process much larger
volumes, though there can be no assurance that these cost reductions will
materialize.
  39
  Research
and Development Expenses
  Research
and development expenses were approximately $241,000 for the nine months ended
September 30, 2010, compared to approximately $363,000 for the nine months ended
September 30, 2009. The decrease in research and development expenses in 2010 is
primarily the result of lower finished product testing, driven by our production
decrease during the second and third quarters.  The salaries of our
Chief Technology Officer and Lab Assistant represent approximately $180,000 of
year to date costs in both 2010 and 2009.  The lack of production led
to less batches being tested during 2010 leading to the overall decrease in
research and development expenses.
  General
and Administrative Expenses
  General
and administrative expenses were $6.4 million for the nine months ended
September 30, 2010, compared to $6.8 million for the nine months ended September
30, 2009.  The decrease of $0.4 million was primarily the result of
decreases in the following:
 
 ·
              a
      $0.8 million decrease in non cash compensation
  expense.
 
 ·
              a
      $0.3 million decrease in non cash compensation expense for warrants
      granted to non-employees for services performed.  The service
      period ended in January 2010.  No expenses remained to be
      recognized.
 
 ·
              a
      $0.3 million decrease in lease termination expenses as we recognized
      expense in the nine months ended September 30, 2009 for our Lake Mary
      office but had no such expenses during the nine months ended September
      30,  2010.
 
 ·
              a
      $0.1 million decrease in general insurance
  expenses.
 
 ·
              a
      $0.1 million decrease in board
fees.
 
 ·
              a
      $0.1 million decrease in business travel
  expenses.
 
 ·
              a
      $0.1 million decrease in investor relation
  expenses.
 
 ·
              a
      $0.1 million decrease in professional
expenses.
 
 partially
offset by:
 
 ·
              a
      $0.1 million increase in incentive compensation expenses related to the
      recording of 2010 retention bonuses for all
  employees.
 
 ·
              a
      $0.1 million increase in severance expenses related to the resignation of
      our former Chairman of the Board.
 
 ·
              a
      $0.8 million increase innon cash
      compensation expense  for restricted stock vesting pursuant to
      the resignation of our former Chairman of the Board in May
      2010.  In accordance with his severance agreement, a number of
      restricted stock grants immediately vested and the related expense was
      recognized.  Additionally, the increase can be related to new
      grants for 2009 performance bonuses which was recorded during the first
      quarter of 2010.
  ·
              a
      $0.1 million increase in wages due to salary increases and personnel
      changes.
 
 ·
              a
      $0.1 million increase in recruiting fees related to the hiring of an
      executive.
 
 ·
              a $0.3 million increase in legal
      expenses was the result of diligence activities associated with the
      potential Milestone joint venture, other potential transactions and one
      time activities.
  40
  Interest Expense
  Interest
expense was approximately $659,000 for the nine months ended September 30, 2010,
compared to approximately $339,000 for the nine months ended September 30,
2009.  Interest expense consists of interest incurred related to the
license agreement payable and the convertible notes.  The increase is
due to the recording of interest expense on the convertible notes, amortization
of deferred financing costs associated with the convertible notes, as well as
the amortization of the convertible notes discount.  The increase is
partially offset by a reduction in the license agreement payable balance
resulting in less interest expense from that instrument.
 
 Gain
(Loss) on Fair Value Adjustment
 
 Gain on
change in fair value of warrant liability was nominal for the nine months ended
September 30, 2010, compared to $1.8 million loss for the nine months ended
September 30, 2009.  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 we have not paid any
dividends on our common stock since our inception and do not anticipate paying
dividends on our common stock in the foreseeable future. Expected volatility is
based on our historical volatility and the historical volatilities of the common
stock of comparable publicly traded companies.
  Gain
on debt extinguishment
  Gain on
debt extinguishment was approximately $0.2 million for the nine months ended
September 30, 2010, compared to $0.24 million for the nine months ended
September 30, 2009.
 
 Gain
on settlement of trade payables and lease termination
 
 Gain on
settlement of trade payable and lease termination was approximately $1.3 million
for the nine months ended September 30, 2010.  Gains consisted of the
negotiated settlement of various past due liabilities with vendors in the third
quarter.  Payment of the settlement agreements was made in cash and
with cash and stock in several instances.
  Liquidity
and Capital Resources
  Liquidity
  At
September 30, 2010, we had $0.2 million in cash, compared to $0.6 million at
December 31, 2009.
  We have
financed our operations to date primarily through the sale of our common and
preferred stock, secured convertible notes and warrants in private placements
with accredited investors and registered direct offerings. To date we have
raised approximately $4.9 million in gross proceeds from the issuance of common
stock and warrants, convertible notes and the exercise of warrants.
 
 Although
we have received these funds this year and we have taken steps to reduce costs
we will need to raise additional funding to continue our
operations.  We expect that our available cash and interest income
will be sufficient to finance currently planned activities through December 31,
2010. We estimate that we will require a minimum of $5.5 million to fund our
operations for the next 12 months with limited fuel production. These estimates
are based on certain assumptions, which could be negatively impacted by the
matters discussed under “Risk Factors.”
 
 We
negotiated settlement agreements with several of our vendors that substantially
reduced our liabilities during this quarter.  We will continue to work
with our creditors to reduce the cash required to settle our accrued obligations
and will also work with our vendors to reduce our cash expenditures going
forward.
  41
  Several
existing commitments that require significant expenditures will continue to
impact our liquidity and capital resources. We have monthly lease obligations
under our production  facility site lease agreement. We also have
incurred costs associated with developing, upgrading and expanding the capacity
of our biofuel production facility in Baltimore, Maryland. Under the license
agreement with the inventor of our proprietary technology, we also are required
to pay $1.0 million per year over the next four years. We will continue
incurring costs to test and optimize our fuels, 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 likely will 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.
 
 If we
continue to 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 $3.7 million for the nine months
ended September 30, 2010, reflecting our net loss of $7.1 million and $1.6
million non-cash gains. These items were partially offset by approximately $2.4
million of non-cash expenses, $1.4 million in favorable changes in operating
assets and liabilities and $1.2 million in depreciation &
amortization.  Included in the non-cash expenses are $1.9 million in
stock-based compensation expense and approximately $0.5 million for stock,
options and warrants issued for services rendered.
  Net cash
provided by financing activities was $3.4 million for the nine months ended
September 30, 2010, and consisted of net proceeds from the issuance of common
stock and proceeds from convertible notes offset by payment of $0.1 for license
payable.
  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;
 ·
              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 and $0.50 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;
  42
 ·
              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.
  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 and 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 and our
Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded as of the end of the period covered by
this report 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, 2010, 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.
  43
  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, 2009, as filed with the SEC on March 26, 2010, 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 through December 2010,
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.
 
 The
report of our independent registered public accounting firm for the year ended
December 31, 2009 contains an explanatory paragraph which states that we have
incurred negative cash flows from operations since inception and are dependent
upon future financing and, based on our operating plan and existing working
capital deficit, this raises substantial doubt about our ability to continue as
a going concern. Based on our current estimates, we anticipate that our existing
financial resources will be adequate to permit us to continue to conduct our
business through December 2010, and we will need to control costs and raise
additional capital to continue our business beyond December 2010. Accordingly,
we will need to raise additional capital before the end of the year or in the
first quarter of 2011. As of the nine months ended September 30, 2010, we have
incurred a net loss of $7.1 million and negative cash flows from operating
activities of $3.7 million. As of September 30, 2010, we had approximately $0.2
million of available cash and approximately $1.6 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 four years, with the next $1.0 million due in March
2011.  We cannot ensure that additional funding will be available or,
if 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 and may
require shareholder approval, which cannot be assured.
  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. On March 26, 2010, we filed our annual report on Form 10-K
for the year ended December 31, 2009, in which we reported shareholders equity
of $1,002,204.  In early April 2010, we received notice from NASDAQ
that our shareholders equity did not meet the minimum continued listing
requirement of $2.5 million, based on our balance sheet as of December 31,
2009.  As of June 30, 2010, we also did not meet the alternative
listing requirements of at least $35 million in market value of listed
securities or at least $500,000 in net income from continuing
operations.  Further, listed companies whose securities fall below the
minimum $1.00 bid requirement for continued listing for 30 consecutive business
days can be subject to delisting. In December 2009, we received a notice from
NASDAQ that we were not in compliance with the minimum bid requirement for 30
consecutive business days and had until June 2010 to regain
compliance.  Our common stock has not traded above $1.00 on NASDAQ
since December 2009. On June 23, 2010, we received a letter from the NASDAQ
Stock Market notifying us that a Staff determination has been made to delist our
securities from the NASDAQ Capital Market due to our non-compliance with the
NASDAQ Listing Rule 5550(a)(2) which requires our common stock to maintain a
minimum bid price of $1.00 per share and our inability to regain compliance with
the rule within the 180 calendar days given to us in accordance with Listing
Rule 5810(c)(3)(A).
In addition, our inability to comply with the minimum stockholders’ equity
requirement of $2.5 million or to meet the alternative minimum market value of
listed securities or minimum net income from continuing
operations as of the period ending March 31, 2010 serves as an additional basis
for delisting our securities.
 
 44
  Pursuant
to the procedures set forth in the NASDAQ Listing Rules, we have appealed the
Staff determination to a NASDAQ Listing Qualifications Panel (the “Panel”) by
requesting a hearing, and our common stock would remain listed on the NASDAQ
Capital Market pending a final determination by the Panel Our hearing was held
on August 5, 2010.  In October we announced that the NASDAQ Listing
Qualifications Panel will allow the Company’s securities to remain listed
pending our demonstration that it has regained compliance with the $1 bid price
requirement and that it is able to sustain long term compliance with all
applicable requirements for continued listing on The NASDAQ Capital Market,
including the stockholders’ equity requirement.  In that regard, on
September 15, 2010, the Panel rendered a determination regarding the Company’s
listing. The Panel’s decision required, among other things, we demonstrate on or
before September 25, 2010, that our stockholders’ equity was at least $2.5.
million and, on or before December 20, 2010, that our closing bid price had been
at least $1 per share for a minimum of ten consecutive trading days, as well as
that we met and could sustain compliance with all other applicable
requirements,  including the stockholders’ equity
requirement.  We filed a form 8-K on September 27, 2010, confirming
stockholders’ equity of at least $2.5 million as of that date.  As of
September 30, 2010 the Company was not able to complete all of the anticipated
actions and therefore was not compliant with the shareholders equity
requirement.  On October 4, 2010 the Company completed a registered
direct transaction that resulted in gross proceeds of $600,000 which resulting
in an increase in shareholders equity to an amount above the requirement. While
we are diligently taking steps to regain compliance in accordance with the
Panel’s decision, there can be no assurances that we will be able to do
so.
  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, on the
OTC Bulletin Board or on the so-called “pink sheets”. 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.
  ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  There
were no sales of unregistered equity securities during the quarter ended
September 30, 2010, that have not been previously disclosed in Current Reports
on Form 8-K.
  The
issuance of securities on August 27, 2010, to Pennington Partners, LLC
(“Pennington”) was conducted pursuant to the exemption from registration
provided by Rule 506 of Regulation D of the Securities Act, as we did not engage
in general soliciting or advertising and Pennington is an accredited
investor.
  ITEM
6. EXHIBITS
  The
exhibits required to be filed as part of this Quarterly Report on Form 10-Q are
listed in the Exhibit Index attached hereto and are incorporated herein by
reference.
  45
  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.
 New Generation Biofuels Holdings,
      Inc.Date:
      November 19, 2010
                            By:
                            /s/
      Miles F. MahoneyMiles
      F. MahoneyPresident
      & Chief Executive Officer(principal
      executive officer)By:
                            /s/
      Dane R. SaglioDane
      R. SaglioChief
      Financial Officer(principal
      financial officerand principalaccounting
    officer)
  46
  EXHIBIT
INDEX
 
 Exhibit
      Number
                    
                    Exhibit
      Description10.1
                    
                    Form
      of Securities Purchase Agreement dated as of August 16, 2010 (incorporated
      by reference to Exhibit 10.5 to the Current Report on Form 8-K filed
      August 17, 2010).10.2
                    
                    Amendment
      to Lease Agreement and Termination of Terminaling Services
      Agreementdated
      as of August 27, 2010 (incorporated by reference to Exhibit 10.6 to the
      Current Report on Form 8-K filed September 2,
      2010).10.3
                    
                    Form
      of Securities Purchase Agreement dated as of September 22, 2010
      (incorporated by reference to Exhibit 10.7 to the Current Report on Form
      8-K filed September 24, 2010).10.4
                    
                    Separation
      Agreement dated as of May 7, 2010 between Lee S. Rosen and the Company
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed May 13, 2010).10.5
                    
                    Separation
      Agreement dated as of October 9, 2010 between Cary J. Claiborne and the
      Company*10.6
                    
                    Employment
      Agreement dated as of October 9, 2010 between Miles Mahoney. and the
      Company*10.7
                    
                    Employment
      Agreement dated as of October 9, 2010 between David H. Goebel, Jr. and the
      Company*10.8
                    
                    Amendment
      to Separation Agreement dated as of October 10, 2010 between Cary J.
      Claiborne and the Company*31.1
                    
                    Certification
      pursuant to Section 302 of Sarbanes-Oxley Act of
      2002*31.2
                    
                    Certification
      pursuant to Section 302 of Sarbanes-Oxley Act of
      2002*32.1
                    
                    Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002*32.2
                    
                    Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002*
  * Filed
herewith.
  47