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 June
30, 2009




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




For the
transition period from ___________ to _____________




Commission
File No. 1-34022




NEW
GENERATION BIOFUELS HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)





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




1000
Primera Boulevard, Suite 3130


Lake
Mary, Florida  32746


(Address
of principal executive offices)




(321)
363-5100


(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 during the
preceeding 12 months (or for such shorter period that the registrant was
required to submit and post such files.) Yes  ̈  No  ̈.




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





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
July 31, 2009, the registrant had 29,395,700 shares of common stock, $0.001
par value, issued and outstanding.








INDEX





PagePART
      I.   FINANCIAL INFORMATIONItem
      1.
                      
                      Financial
      Statements
                      
                      2Consolidated
      balance sheets as of June 30, 2009 (Unaudited) and December 31,
      2008
                      
                      2Consolidated
      statements of operations for the three and six months ended June 30, 2009
      (Unaudited), for the three and six months ended June 30, 2008
      (Unaudited)
                      
                      3Consolidated
      statement of stockholders’ equity for the six months ended June 30, 2009
      (Unaudited)
                      
                      4Consolidated
      statements of cash flows for the six months ended June 30, 2009
      (Unaudited), and for the six months ended June 30, 2008
      (Unaudited)
                      
                      5Notes
      to consolidated financial statements
                      
                      6Item
      2.
                      
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      17Item
      3.
                      
                      Qualitative
      and Quantitative Disclosures About Market Risk
                      
                      24Item
      4.
                      
                      Controls
      and Procedures
                      
                      24PART
      II.   OTHER INFORMATIONItem
      1A.
                      
                      Risk
      Factors
                      
                      26Item
      4.
                      
                      Submission
      of Matters to a Vote of Security Holders
                      
                      27Item
      5.
                      
                      Other
      Information
                      
                      28Item
      6.
                      
                      Exhibits
                      
                      28Signatures
                      
                      29





CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




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




·
            our lack of operating
      history;


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


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


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


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


·
              our inability to enter into
      acceptable sublicensing agreements with respect to our technology or the
      inability of any sublicensee to successfully manufacture, market or sell
      biofuel utilizing our licensed technology;·
              our
      ability to meet continued listing requirement to maintain our common stock
      listing on the Nasdaq Capital
Market;


·
            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 26 of this
      report.




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


- 1
-


PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Balance Sheets




June 30,
                                  
                                  
                                  December 31,2009
                                  
                                  
                                  2008(unaudited)ASSETSCurrent
      assets:Cash
                                  
                                  $
                                  537,857
                                  
                                  
                                  $
                                  1,476,246Accounts
      receivable
                                  
                                  
                                  39,784
                                  
                                  
                                  
                                  22,943Prepaid
      expenses
                                  
                                  
                                  478,780
                                  
                                  
                                  
                                  195,369Total
      current assets
                                  
                                  
                                  1,056,421
                                  
                                  
                                  
                                  1,694,558Property
      and equipment - net
                                  
                                  
                                  963,197
                                  
                                  
                                  
                                  378,946Other
      assets
                                  
                                  
                                  388,543
                                  
                                  
                                  
                                  392,208License
      agreement
                                  
                                  
                                  5,956,676
                                  
                                  
                                  
                                  6,267,460TOTAL ASSETS
                                  
                                  $
                                  8,364,837
                                  
                                  
                                  $
                                  8,733,172LIABILITIES AND STOCKHOLDER'S
      EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                                  
                                  $
                                  1,429,419
                                  
                                  
                                  $
                                  1,385,311Loan
      payable-related party
                                  
                                  
                                  50,000
                                  
                                  
                                  
                                  50,000License
      agreement payable-current portion (net of unamortized discount of $316,499
      and $71,270)
                                  
                                  
                                  683,501
                                  
                                  
                                  
                                  928,730Accrued
      dividend on preferred stock
                                  
                                  
                                  945,579
                                  
                                  
                                  
                                  765,369Total
      current liabilities
                                  
                                  
                                  3,108,499
                                  
                                  
                                  
                                  3,129,410License
      agreement payable (net of unamortized discount of $999,240 and
      $1,464,132)
                                  
                                  
                                  3,000,760
                                  
                                  
                                  
                                  3,535,868Common
      stock warrant liability
                                  
                                  
                                  1,606,822
                                  
                                  
                                  
                                  -Total
      Liabilities
                                  
                                  
                                  7,716,081
                                  
                                  
                                  
                                  6,665,278Stockholders'
      equity:Series
      A Cumulative Convertible Preferred Stock: $100 stated value, 300,000
      shares authorized, 18,400 and 26,400 shares issued and outstanding as of
      June 30, 2009 and December 31, 2008, respectively
                                  
                                  
                                  710,970
                                  
                                  
                                  
                                  1,020,087Series
      B Cumulative Convertible Preferred Stock: $100 stated value, 250,000
      shares authorized, 57,693 and 72,126 shares issued and outstanding as of
      June 30, 2009 and December 31, 2008, respectively
                                  
                                  
                                  3,966,717
                                  
                                  
                                  
                                  5,023,429Common
      stock, $0.001 par value, 100,000,000 shares authorized; 26,351,319 and
      19,299,168 shares issued and outstanding as of June 30, 2009 and December
      31, 2008, respectively
                                  
                                  
                                  26,352
                                  
                                  
                                  
                                  19,299Additional
      paid-in-capital
                                  
                                  
                                  39,568,035
                                  
                                  
                                  
                                  29,889,220Accumulated
      deficit
                                  
                                  
                                  (43,623,318
                                  )
                                  
                                  
                                  (33,884,141
                                  )Total
      stockholders' equity
                                  
                                  
                                  648,756
                                  
                                  
                                  
                                  2,067,894TOTAL LIABILITIES AND STOCKHOLDERS'
      EQUITY
                                  
                                  $
                                  8,364,837
                                  
                                  
                                  $
                                  8,733,172




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




- 2
-




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statements of Operations


(Unaudited)





For the Three
                          Months Ended
                          June 30, 2009
                        
                        
                        For the Three
                          Months Ended
                          June 30, 2008
                        
                        
                        For the Six
                          Months Ended
                          June 30, 2009
                        
                        
                        For the Six
                          Months Ended
                          June 30, 2008Net
      sales
                        
                        $
                        42,637
                        
                        
                        $
                        -
                        
                        
                        $
                        42,637
                        
                        
                        $
                        -Cost
      of sales (including depreciation and amortization of $171,759 for the
      three months ended and $332,612 for the six months ended
    2009)
                        
                        
                        597,840
                        
                        
                        
                        -
                        
                        
                        
                        806,495
                        
                        
                        
                        -Gross
      loss
                        
                        
                        (555,203
                        )
                        
                        
                        -
                        
                        
                        
                        (763,858
                        )
                        
                        
                        -Operating
      expenses:Research
      and development expenses
                        
                        
                        95,769
                        
                        
                        
                        145,931
                        
                        
                        
                        290,035
                        
                        
                        
                        342,772General
      and administrative expenses
                        
                        
                        2,601,685
                        
                        
                        
                        2,149,451
                        
                        
                        
                        4,496,284
                        
                        
                        
                        4,048,878Legal
      settlement
                        
                        
                        -
                        
                        
                        
                        359,595
                        
                        
                        
                        -
                        
                        
                        
                        359,595Total
      operating expenses
                        
                        
                        2,697,454
                        
                        
                        
                        2,654,977
                        
                        
                        
                        4,786,319
                        
                        
                        
                        4,751,245Loss
      from operations
                        
                        
                        (3,252,657
                        )
                        
                        
                        (2,654,977
                        )
                        
                        
                        (5,550,177
                        )
                        
                        
                        (4,751,245
                        )Interest
      income
                        
                        
                        937
                        
                        
                        
                        11,320
                        
                        
                        
                        1,656
                        
                        
                        
                        16,589Interest
      expense
                        
                        
                        (110,579
                        )
                        
                        
                        (132,178
                        )
                        
                        
                        (219,663
                        )
                        
                        
                        (286,620
                        )Gain
      on debt extinguishment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        241,500
                        
                        
                        
                        -Loss
      on fair value adjustment
                        
                        
                        (1,762,288
                        )
                        
                        
                        (9,765
                        )
                        
                        
                        (1,865,488
                        )
                        
                        
                        (30,169
                        )Net
      loss
                        
                        
                        (5,124,587
                        )
                        
                        
                        (2,785,600
                        )
                        
                        
                        (7,392,172
                        )
                        
                        
                        (5,051,445
                        )Preferred
      stock dividends
                        
                        
                        (170,017
                        )
                        
                        
                        (1,772,475
                        )
                        
                        
                        (4,381,821
                        )
                        
                        
                        (3,250,225
                        )Net
      loss available to common shareholders
                        
                        $
                        (5,294,604
                        )
                        
                        $
                        (4,558,075
                        )
                        
                        $
                        (11,773,993
                        )
                        
                        $
                        (8,301,670
                        )Basic
      and diluted net loss per share
                        
                        $
                        (0.21
                        )
                        
                        $
                        (0.24
                        )
                        
                        $
                        (0.50
                        )
                        
                        $
                        (0.45
                        )Weighted
      average number of shares outstanding
                        
                        
                        25,726,050
                        
                        
                        
                        18,639,757
                        
                        
                        
                        23,326,692
                        
                        
                        
                        18,434,664





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


- 3
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statement of Changes in Stockholders’ Equity


For
the Six Months ended June 30, 2009


(Unaudited)





Common Stock
                
                
                Preferred Stock
                  Series A
                
                
                Preferred Stock
                  Series B
                
                
                Additional
                    Capital
                
                
                Accumulated
                    Deficit
                
                
                TotalShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Shares
                
                
                AmountBalance
      at December  31, 2008
                
                
                19,299,168
                
                
                $
                19,299
                
                
                
                26,400
                
                
                $
                1,020,087
                
                
                
                72,126
                
                
                $
                5,023,429
                
                
                $
                29,889,220
                
                
                $
                (33,884,141
                )
                
                $
                2,067,894Cumulative
      effect of reclassification of warrants (EITF 07-05)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,242,878
                )
                
                
                2,034,816
                
                
                
                (208,062
                )Balance
      at January 1, 2009, as adjusted
                
                
                19,299,168
                
                
                
                19,299
                
                
                
                26,400
                
                
                
                1,020,087
                
                
                
                72,126
                
                
                
                5,023,429
                
                
                $
                27,646,342
                
                
                $
                (31,849,325
                )
                
                $
                1,859,832Compensation
      expense associated with options and restricted stock
                
                
                1,327,120
                
                
                
                1,328
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,459,110
                
                
                
                -
                
                
                
                1,460,438Issuance
      of options and warrants for services rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                599,390
                
                
                
                -
                
                
                
                599,390Issuance
      of common stock for services rendered
                
                
                125,000
                
                
                
                125
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                117,375
                
                
                
                -
                
                
                
                117,500Issuance
      of common stock for debt extinguishment
                
                
                925,000
                
                
                
                925
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                757,575
                
                
                
                -
                
                
                
                758,500Issuance
      of common stock and warrants in private offering
                
                
                3,957,500
                
                
                
                3,957
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,162,043
                
                
                
                -
                
                
                
                3,166,000Issuance
      of common stock – dividends on conversion of preferred
    stock
                
                
                56,842
                
                
                
                57
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                196,395
                
                
                
                -
                
                
                
                196,452Conversion
      of preferred stock into common stock
                
                
                660,689
                
                
                
                661
                
                
                
                (8,000
                )
                
                
                (309,117
                )
                
                
                (14,433
                )
                
                
                (1,056,712
                )
                
                
                1,365,168
                
                
                
                -
                
                
                
                -Record
      warrant liability associated with issuance of common stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,361,380
                )
                
                
                -
                
                
                
                (1,361,380
                )Reclassification
      of warrant liability associated with antidillution triggering
      event
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                126,730
                
                
                
                -
                
                
                
                126,730Reclassification
      of warrant liability in connection with waiver of antidillution
      provision
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,701,378
                
                
                
                -
                
                
                
                1,701,378Private
      placement costs
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (207,252
                )
                
                
                -
                
                
                
                (207,252
                )Dividend
      associated with the beneficial conversion feature of the preferred
      stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,005,161
                
                
                
                (4,005,161
                )
                
                
                -Dividends
      accrued on preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (376,660
                )
                
                
                (376,660
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (7,392,172
                )
                
                
                (7,392,172
                )Balance
      at June 30, 2009
                
                
                26,351,319
                
                
                $
                26,352
                
                
                
                18,400
                
                
                $
                710,970
                
                
                
                57,693
                
                
                $
                3,966,717
                
                
                $
                39,568,035
                
                
                $
                (43,623,318
                )
                
                $
                648,756





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


- 4
-


NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statement of Cash Flows


(Unaudited)





For the Six Months
                    ended June 30, 2009
                
                
                For the Six Months
                    ended June 30, 2008CASH FLOWS FROM OPERATING
      ACTIVITIES:Net
      loss
                
                $
                (7,392,172
                )
                
                $
                (5,051,445
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization expense
                
                
                34,623
                
                
                
                -Amortization
      of license
                
                
                310,784
                
                
                
                -Amortization
      of discount
                
                
                219,663
                
                
                
                286,620Compensation
      expense associated with stock options, stock and restricted
      stock
                
                
                1,435,439
                
                
                
                1,201,941Issuance
      of common stock, options and warrants for services
rendered
                
                
                260,121
                
                
                
                540,648Penalty
      share expense
                
                
                -
                
                
                
                186,291Gain
      on debt extinguishment
                
                
                (241,500
                )
                
                
                -Loss
      on fair value adjustment
                
                
                1,865,488
                
                
                
                30,169Changes
      in operating assets and liabilities:Prepaid
      expenses
                
                
                73,627
                
                
                
                (453
                )Accounts
      receivable
                
                
                (16,841
                )
                
                
                -Other
      assets
                
                
                116,735
                
                
                
                -Accounts
      payable and accrued expenses
                
                
                168,840
                
                
                
                (4,563
                )Net
      cash used in operating activities
                
                
                (3,165,193
                )
                
                
                (2,810,792
                )CASH FLOWS FROM INVESTING
      ACTIVITIES:Payments
      for acquisition of property and equipment
                
                
                (615,209
                )
                
                
                -Payment
      for patents
                
                
                (116,735
                )
                
                
                -Cash
      used in investing activities
                
                
                (731,944
                )
                
                
                -CASH FLOWS FROM FINANCING
      ACTIVITIES:Payments
      for license agreement payable
                
                
                -
                
                
                
                (1,000,000
                )Proceeds
      from private offering issuances of common stock, net of
    costs
                
                
                2,958,748
                
                
                
                -Proceeds
      from private offering issuance of preferred stock, net of
      costs
                
                
                -
                
                
                
                7,187,650Proceeds
      from the exercise of warrants
                
                
                -
                
                
                
                457,080Net
      cash provided by financing activities
                
                
                2,958,748
                
                
                
                6,644,730Net
      (decrease) in cash and cash equivalents
                
                
                (938,389
                )
                
                
                3,833,938Cash
      and cash equivalents - beginning of period
                
                
                1,476,246
                
                
                
                1,644,145Cash
      and cash equivalents - end of period
                
                $
                537,857
                
                
                $
                5,478,083Supplemental
      Disclosure of Non-Cash Investing and Financing ActivitiesPreferred
      stock dividend
                
                $
                376,660
                
                
                $
                286,230Fair
      value of warrants issued in stock offering
                
                $
                1,361,380
                
                
                $
                -Issuance
      of common stock as payment for license agreement payable
                
                $
                1,000,000
                
                
                $
                -





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


- 5
-





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements





NOTE1 –
ORGANIZATION
AND GOING CONCERN





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




To date,
the Company has generated minimal revenues.  As a result, the Company
has reported net losses of $13.5 million and $8.6 million and negative cash
flows from operating activities of $6.3 million and $4.0 million for the years
ended December 31, 2008 and 2007 respectively.  For the six months
ended June 30, 2009, the Company has reported a net loss of $7.4 million and
negative cash flows from operations of $3.2 million. The Company is obligated to
pay $5.0 million in additional payments under the Master License, of which $1.0
million is due in installments in February and March 2010. These matters raise
substantial doubt about the Company’s ability to continue as a going
concern.  The Company’s consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.  Although the Company completed a public offering of
$3,197,000 in gross proceeds in July 2009, the Company will need to raise
additional financing before the end of 2009 to fund operations and long term
business objectives. The Company’s continued existence is dependent upon several
factors, including obtaining additional debt or equity financing, producing
biofuel, developing a market for its biofuel, and achieving certain levels of
sales volume and profitability from the sale of its biofuel and sublicenses of
its technology.  Management is investigating various sources of debt
or equity financing and is developing marketing and production plans for its
products.




NOTE 2–SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES




Basis of
presentation




The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles in the
United States and the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.  The interim financial statements are unaudited,
but in the opinion of management, all adjustments, consisting only of normal
recurring accruals, considered necessary for a fair statement of the results of
these interim periods have been included. The results of the Company’s
operations for any interim period are not necessarily indicative of the
operating results that may be expected for any other interim period or a full
fiscal year.




Property and
Equipment




Property
and equipment are stated at cost.  Depreciation has been calculated
over the estimated useful lives of the assets ranging from 5 to 15
years.  Depreciation expense for the six months ended June 30, 2009
and 2008 was $30,958 and $0, respectively.


6





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements




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




2009
                        
                        
                        2008Furniture
      and fixtures
                        
                        $
                        82,181
                        
                        
                        $
                        82,181Property
      and equipment
                        
                        
                        893,569
                        
                        
                        
                        54,439Construction
      in progress
                        
                        
                        25,788
                        
                        
                        
                        249,7091,001,538
                        
                        
                        
                        386,329Less
      accumulated depreciation
                        
                        
                        (38,341
                        )
                        
                        
                        (7,383
                        )Fixed
      assets, net
                        
                        $
                        963,197
                        
                        
                        $
                        378,946




Use of
Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. The Company’s most significant estimate is the value of its
exclusive license. Other significant estimates include the valuation of shares,
warrants or options issued for services and the estimated useful life of the
exclusive license.  The Company evaluates its estimates on an ongoing
basis. Actual results could differ significantly, especially as to the estimated
value of its exclusive license from those estimates under different assumptions
or conditions.




Loss per Common
Share




Loss per
share (“EPS”) is computed based on the weighted average number of common shares
outstanding and excludes any potential dilution. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock, which would then share in the earnings of the Company.
The shares issuable upon the exercise of stock options and warrants are excluded
from the calculation of net loss per share as their effect would be
antidilutive. As of June 30, 2009 and 2008, there were 18,509,608 and
11,041,315, respectively, shares of common stock equivalents including options
(8,362,710 shares of common stock as of June 30, 2009 and 6,005,000 shares of
common stock as of June 30, 2008), non employee options (1,741,000 shares of
common stock as of June 30, 2009 and 1,591,000 shares of common stock as of June
30, 2008), warrants (8,405,898 shares of common stock as of June 30, 2009 and
3,445,315 shares of common stock as of June 30, 2008) that could potentially
dilute EPS in the future that were not included in the computation of EPS
because to do so would have been antidilutive.  As of June 30, 2009
and 2008 there were 18,400 and 29,900, respectively, shares of Series A
Convertible Preferred Stock which are convertible into 548,510 and 747,500,
respectively, shares of common stock that were not included in the computation
of EPS because to do so would have been antidilutive as well.  As of
June 30, 2009 and 2008 there were 57,693 and 79,405, respectively, shares of
Series B Convertible Preferred Stock which are convertible into 2,112,226 and
1,868,353, respectively, shares of common stock that were not included in the
computation of EPS because to do so would have been antidilutive as
well.


7





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements




Recent Accounting
Pronouncements




Effective
January 1, 2009, the Company adopted the provisions of Emerging Issues Task
Force (EITF)EITF
07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock, (“EITF 07-05”).  EITF 07-05 applies to any
freestanding financial instruments or embedded features that have the
characteristics of a derivative, as defined by SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and to any freestanding
financial instruments that are potentially settled in an entity’s own common
stock.  As a result of adopting EITF 07-05, warrants to purchase
643,850 shares of our common stock previously treated as equity pursuant to the
derivative treatment exemption were no longer afforded equity
treatment.  The warrants had an exercise price of $6.25 and expire in
March and May 2013.  As such, effective January 1, 2009, the Company
reclassified the fair value of these warrants to purchase common stock, which
had exercise price reset features, from equity to liability status as if these
warrants were treated as a derivative liability since their date of issue in
March and May 2008.  On January 1, 2009, the Company reclassified from
additional paid-in capital, as a cumulative effect adjustment, $2,034,816 to
beginning accumulated deficit and $208,062 to common stock warrant liability to
recognize the fair value of such warrants on such date.




The
Company includes disclosures about fair value measurements pursuant to SFAS No.
157,Fair Value
Measurements (“SFAS 157”).  SFAS 157 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants.  Such transactions
to sell an asset or transfer a liability are assumed to occur in the principal
or most advantageous market for the asset or liability.  Accordingly,
fair value as described by SFAS 157 is determined based on a hypothetical
transaction at the measurement date, considered from the perspective of a market
participant.




SFAS 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value.  These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.  The following table presents information about our
assets and liabilities that are measured at fair value on a recurring basis as
of June 30, 2009:





SignificantQuoted Prices in
                    
                    
                    Significant Other
                    
                    
                    UnobservableJune 30,
                    
                    
                    Active Markets
                    
                    
                    Observable inputs
                    
                    
                    InputsDescription
                    
                    2009
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Assets:Cash
      and cash equivalents
                    
                    $
                    537,857
                    
                    
                    $
                    537,857
                    
                    
                    $
                    —
                    
                    
                    $
                    —Total
      assets
                    
                    $
                    537,857
                    
                    
                    $
                    537,857
                    
                    
                    $
                    —
                    
                    
                    $
                    —Liabilities:Common
      stock warrant liability
                    
                    $
                    1,606,822
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    1,606,822





The
following table presents information about our common stock warrant liability,
which was our only financial asset or liability measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) as defined in
SFAS 157 at June 30, 2009:


8





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements





2009Balance
      at January 1,
                  
                  $
                  208,062Transfers
      to (from) Level 3
                  
                  
                  (466,728
                  )Total
      gains/(losses) realized/ unrealized included in
    earnings
                  
                  
                  1,865,488Balance
      June 30,
                  
                  $
                  1,606,822





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 we 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.





The
Company also adopted SFAS No. 157 for non-financial assets and liabilities
in the first quarter of 2009. We had no required fair value measurements for
non-financial assets and liabilities in the six months ended 2009 and no
required additional disclosures upon adoption.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. SFAS No. 161 was effective for fiscal years beginning after
November 15, 2008. As of June 30, 2009, the Company has derivatives of
$1,606,822 related to the common stock warrant liabilities.  The
derivatives instruments were not entered into as hedging activities, and the
change in value of the liability is recorded as loss on fair value
adjustment.





In April
2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB
28-1). FSP FAS 107-1 and APB 28-1 extends the disclosure requirements of SFAS
107 to interim period financial statements, in addition to the existing
requirements for annual periods and reiterates SFAS 107’s requirement to
disclose the methods and significant assumptions used to estimate fair value.
FSP FAS 107-1 and APB 28-1 is effective for our interim and annual periods
commencing with our June 30, 2009 consolidated financial statements and will be
applied on a prospective basis. The adoption of FSP FAS 107-1 and APB 28-1 did
not have a material impact on consolidated financial position, results of
operations and cash flows.





NOTE 3 –OPTIONS, WARRANTS AND
RESTRICTED STOCK





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




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


9





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements




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 from 0 to 3 years of continuous service and have a 10 year
contractual term.




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




Weighted
      Average Exercise Price
                  
                  $
                  2.44Expected
      Life
                  
                  5
      yearsVolatility
                  
                  
                  100.0
                  %Dividend
      Yield
                  
                  
                  0
                  %Risk-free
      interest rate
                  
                  
                  1.54%
      – 3.28
                  %





Employee
Options




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




Number of
                    Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
                    (Years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOptions
      outstanding at  December 31, 2008
                  
                  
                  6,566,289
                  
                  
                  $
                  2.85
                  
                  
                  
                  8.10Granted
                  
                  
                  2,396,421
                  
                  
                  $
                  1.07
                  
                  
                  
                  9.73Forfeited
                  
                  
                  600,000
                  
                  
                  $
                  1.50
                  
                  
                  
                  7.54Options
      outstanding at June 30, 2009
                  
                  
                  8,362,710
                  
                  
                  $
                  2.44
                  
                  
                  
                  8.23Vested
      and expected to vest – June 30, 2009
                  
                  
                  6,377,606
                  
                  
                  $
                  2.57
                  
                  
                  
                  7.89
                  
                  
                  $
                  549,242Options
      exercisable at June 30, 2009
                  
                  
                  5,321,357
                  
                  
                  $
                  2.52
                  
                  
                  
                  7.44
                  
                  
                  $
                  384,180





Options
outstanding at June 30, 2009 have an exercise price of $0.90 to $10.50 per
share. Options exercisable at June 30, 2009 do not include 1,101,406 performance
based options. For the six months ended June 30, 2009 and 2008, the Company
recorded a non-cash compensation charge of $1,128,377 and $1,193,411
respectively.




The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing stock price on June 30, 2009
and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had vested option holders
exercised their options on June 30, 2009. This amount changes based upon changes
in the fair market value of the Company’s common stock. As of June 30, 2009,
$1,461,160 of the total unrecognized compensation costs related to stock options
is expected to be recognized over a period of approximately two years and nine
months.


10





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements




Non-Employee
Options




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




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





Non-employee
options outstanding at June 30, 2009 have an exercise price of $1.04 to $6.40
per share.  Options exercisable at June 30, 2009 do not include
1,550,000 performance based options. For the six months ended June 30, 2009 and
2008, the Company recorded a non-cash compensation charge of $16,220 and
$329,821 respectively.  As of June 30, 2009, $22,708 of the total
unrecognized compensation costs related to non-employee stock options is
expected to be recognized over a period of approximately seven
months.




Restricted Stock
Grants




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




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




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




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




In April
2009, the Company issued under the Equity Compensation Plan 555,585 restricted
shares to certain employees based on achieving certain 2008 performance targets.
The number of shares was calculated based on the dollar value of the award
divided by the closing price of the Company’s common stock on the date the grant
was approved by the Compensation Committee.


11





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements




For the
six months ended June 30, 2009 and 2008, the Company recorded a non-cash
compensation expense of $307,061 and $8,530 respectively.  As of June
30, 2009, $798,402 of the total unrecognized compensation costs related to
restricted stock grants is expected to be recognized over a period of
approximately two years and nine months.




NOTE 4–COMMON
STOCK




In March
2009, the Company completed a private placement offering (the “Private
Placement”) of 3,957,500 shares of Common Stock, at a price of $.80 per share to
accredited investors. The gross proceeds from the Private Placement were
$3,166,000.  Each investor in the Private Placement also received a
warrant exercisable for a number of shares of Common Stock equal to the number
of shares of Common Stock purchased by each investor. The exercise price of the
warrants is $0.90 per share. The warrants are exercisable at any time after the
six month anniversary of the issue date but prior to the fifth anniversary of
the issue date.  The warrants have a fair value of $2,166,062 on the
date of issuance based on the Black-Scholes options pricing
method.





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





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





The
warrants are considered to be a derivative liability to be marked to market due
to their exercise price reset feature.  The Company recorded a
$1,361,380 warrant liability at issuance and a $1,946,820 loss on fair value
adjustment for the six months ended June 30, 2009.  The Company
reclassified $1,701,378 of the Common Stock warrant liability associated with
the antidilution provision to additional paid-in-capital upon the waiver of the
antidilution provision by a warrant holder effective June 29, 2009.





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 offering.





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


12




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements




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




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




Each
share of Series A Preferred Stock will accrue cumulative dividends on a
quarterly basis at a rate of 8% per annum. All dividends will be paid in shares
of common stock having a fair market value at the time of issuance equal to the
amount of dividends to be paid, provided that to the extent the shares of common
stock to be issued are not then registered under the registration rights
agreements with the Series A Preferred Stock investors, dividends shall cumulate
but shall remain unpaid until such time as the shares are registered and
issued.  The Company may elect to pay any dividends in cash in lieu of
issuing shares of common stock.  The Series A Preferred Stock shall
also participate on an as-converted basis with all dividends paid on the shares
of common stock.  For the six months ended June 30, 2009 and 2008, the
Company accrued dividends for the Series A Preferred Stock of $95,130 and
$161,236 respectively.




Upon any
liquidation of the Company, the holders of the Series A Preferred Stock will be
entitled to be paid, prior to the common stock or any other securities that by
their terms are junior to the Series A Preferred Stock, the original issue price
of the Series A Preferred Stock plus all accrued and unpaid dividends. To the
extent the proceeds of liquidation are insufficient to pay such amounts in full,
the proceeds available will be allocated pro rata among the shares of Series A
Preferred Stock. As of the most recent balance sheet date, June 30, 2009, the
liquidation value of the Series A Preferred Stock was $2,204,702.




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


13




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements




Series B Preferred
Stock




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




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




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




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




Dividends
will be payable from the date of issuance at a rate of 8% per year when and as
declared by the board of directors. To the extent that dividends are not
declared, or cannot be paid, there will be an increase in the Stated Value of
the Series B Preferred Stock in the amount of 8% per year. In the event
dividends are declared by the Board 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. For the six months ended June 30, 2009 and 2008,
the Company accrued dividends on the Series B Preferred Stock of $281,530 and
$124,994 respectively.




The
Series B Preferred Stock was convertible into 1,868,367 shares of common stock,
at the election of the holders, at an initial conversion price of $4.25 per
share. The fair market value of this beneficial conversion was calculated based
on the difference between the share price of the common stock, at the time of
issuance, and the initial conversion price. This resulted in a Series B
Preferred Stock dividend in the amount of $2,963,995 recorded 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 the most recent balance sheet
date, June 30, 2009, the liquidation value of the Series B Preferred Stock was
$6,350,177.


14




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements




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




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




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




In
conjuction with completing a Common Stock private placement offering on March 3,
2009, as noted in Note 4 above, antidilution provisions were
triggered.  The conversion price of the Preferred Stock and the
exercise price of the Warrants was reset to $3.00 per share. Based on the number
of Preferred Stock outstanding on the trigger date, the Company calculated the
fair market value based on the incremental increase in convertible shares based
on the change in the conversion price before and after  the price
reset multiplied by the stock price on the initial offering dates in March and
May 2008. Based on this valuation, the Company recorded a beneficial conversion
dividend expense of $4,005,161 and an $81,332 gain on fair value adjustment
during the six months ended June 30, 2009.




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


15




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Notes
to Consolidated Financial Statements





NOTE 6 –
AGREEMENTS




On March
14, 2008, the Company entered into a lease agreement for office space in Lake
Mary, Florida. The lease was secured by a Letter of Credit for $175,000.
 In June 2009, the Company entered into negotiations with the landlord to
terminate the agreement. Accordingly, the Company did not make the June 2009
rental payment in accordance with the terms of the agreement. As a result, the
landlord drew on the $175,000 Letter of Credit due to the lease payment default
as per the terms of the agreement. The Company is still negotiating the early
termination of the lease agreement with the landlord. The Company has estimated
a lease termination fee of $174,443 and accrued this amount at June 30, 2009.
This expense is recorded in general and administrative expenses.





NOTE 7 – SUBSEQUENT
EVENTS




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


16




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




Overview




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





Our business commenced in February
2006. Our activities since inception have included acquiring our exclusive
license, conducting research and development to improve our product, conducting
test burns at power generation facilities, launching a production facility,
entering into biofuel sales agreements in both the power generation and
commercial heating markets, entering into site lease and terminaling services
agreements and raising equity capital. Our costs have consisted mainly of
research and development relating to our product, production costs and general
and administrative costs. We have incurred annual operating losses since
inception and expect to incur substantial operating losses in the future in
connection with the development of our core products. As of June 30, 2009,
we had an accumulated deficit of $43.6 million.





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





Our
business strategy involves the following: (1) making direct sales of our biofuel
from manufacturing plants that we may purchase, lease or build, either directly
or through joint ventures; (2) as a second potential revenue stream, collecting
royalties through sublicensing our proprietary technology where it is more
efficient for manufacturers to produce our biofuel at their own plants rather
than requiring production at our facilities and (3) pursuing eligibility for tax
credits and other government incentives to strengthen the competitive position
of our buifuel and to take advantage of the U.S. government's encouragement of
“green” technologies. We
may also sell our biofuel to boiler operators under extended evaluation and test
programs. In addition, we have placed into service our first biofuel production
plant, a 5 million gallon per year facility located in Baltimore, Maryland. We
also have commenced the process of procuring raw materials for production of our
biofuel but have not made any significant commitments or procurements at this
point. To date, we have recognized minimal revenues, but have generated
significant costs in generating these initial revenues. Our costs have consisted
mainly of cost of sales, research and development relating to our product
and general and administrative costs.





Financial
Operations Overview




Revenue




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


17




Cost
of Sales




Cost of
sales 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 sales, the
amortization of our license agreement, also amortization of patents and
depreciation associated with our production facility.




Research
and Development Costs




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 costs consist of expenses 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 ten employees, all of whom are full
time.




Interest
and Other Income (Expense), Net




Interest
income consists of interest earned on our cash and short-term investments.
Interest expense consists of interest incurred related to the license agreement
payable.




Income
Taxes




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




Results
of Operations




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




Net
Loss




We
incurred a net loss of $5.1 million, for the three months ended June 30, 2009 as
compared to $2.8 million for the three months ended June 30, 2008.




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




·
            a
      $1.8 million increase in non-cash loss on fair market value
      adjustment.




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




·
            a
      $0.5 million increase in general and administrative
    expenses.




18




partially
offset by:




·
            a
      $0.4 decrease in legal settlement
expenses.




·
            a
      $0.1 decrease in research and development
  expenses.




Revenue




Net sales
for the three months ended June 30, 2009 were $42,637, versus no sales for the
three months ended June 30, 2008. The increase in revenue was due to the
initiation of biofuel production and sales from our production plant in
Baltimore, Maryland.




Cost
of Sales




Cost of
sales was $0.6 million for the three months ended June 30, 2009, versus was no
cost of sales for the three months ended June 30, 2008. Cost of sales is
comprised of raw material feedstocks used in production of $0.2 million, direct
facility costs of $0.2 million and amortization of license agreement of $0.2
million. For more information on our cost of sales please refer to the “Gross Loss” section
below.




Gross
Loss




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




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




Research
and Development Expenses




Research
and development expenses were approximately $96,000 for the three months ended
June 30, 2009 compared to approximately $146,000 for the three months ended June
30, 2008. The decrease in research and development expenses in 2009 is primarily
the result of the beginning of production of our fuel and conducting less test
burns which were used to evaluate additional customized fuel formulations using
our proprietary blending technology.




19




General
and Administrative Expenses


General
and administrative expenses were $2.6 million for the three months ended June
30, 2009 compared to $2.1 million for the three months ended June 30, 2008. The
increase of $0.5 million in 2009 over the prior period was primarily
attributable to an increase in expenses associated with stock options and
warrants , rent expense, lease termination expense, and professional services
expenses partially offset by decreases in legal fees, research and development
costs, penalty shares expense, and legal settlement costs.





Interest Expense


Interest
expense was approximately $111,000 for the three months ended June 30, 2009
compared to approximately $132,000 for the three months ended June 30, 2008. The
decrease is due to a reduction in the License Agreement payable balance.
Interest expense consists of interest incurred related to the License Agreement
payable.





Loss
on fair value adjustment




Loss on
fair value adjustment was approximately $1.8 million for the three months ended
June 30, 2009 compared to a loss of approximately $10,000 for the three months
ended June 30, 2008.




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




Net
Loss




We
incurred a net loss of $7.4 million for the six months ended June 30, 2009 as
compared to $5.0 million for the six months ended June 30, 2008.




The
increase in net loss of $2.4 million resulted primarily from:




·
            a
      $1.9 million increase in non-cash loss on fair market value
      adjustment.




·
            $0.8
      million in cost of sales, which did not exist in the prior
      period.




·
            a
      $0.5 million increase in general and administrative
    expenses.




partially
offset by:




·
            a
      $0.4 million decrease in legal settlement
  expenses.




·
            a
      $0.1 million decrease in interest
expense.




·
            a
      $0.2 million gain on extinguishment of
debt




Revenue




Net sales
for the six months ended June 30, 2009 were $42,637, versus no sales for the six
months ended June 30, 2008. The increase in revenue was due to the initiation of
biofuel production and sales from our production plant in Baltimore,
Maryland.




Cost
of Sales




Cost of
sales was $0.8 million for the six months ended June 30, 2009, versus no cost of
sales for the six months ended June 30, 2008. Cost of sales is comprised of raw
material feedstocks used in production of $0.2 million, direct facility costs of
$0.3 million and amortization of license agreement of $0.3 million. For more
information on our cost of sales please refer to the “Gross Loss”section
below.




20




Gross
Loss




Gross
loss was $0.8 million for the six months ended June 30, 2009, versus no gross
loss for the six months ended June 30, 2008. Gross loss is comprised of revenue
less cost of sales. The gross loss of $0.8 million was driven by a number of
factors including: in the commercial and industrial market we offered our
product at a substantial discount to the price of petroleum diesel fuel in order
to attract “early adopter” customers and gain product validation and performance
data through their use of our product. These discounts were partially offset by
eliminating the need to perform test burns to sign up commercial and industrial
customers, thereby lowering our research and development costs. We also gained
the ability to utilize these early customers as a marketing tool, by bringing
potential customers to existing sites for real-time demonstrations of our
biofuel performance in their boiler applications. We have since signed several
customers as a result and no longer offer “early adopter” discounts. We have
continued to have success in signing up customers since discontinuing the “early
adopter” discount, but may from time to time offer volume-related or other
promotional pricing discounts as warranted.




The gross
loss was also driven by a disproportionally higher cost of production relative
to units sold. We were just beginning to ramp-up production in our Baltimore
facility and were running in small batch processing which does not allow us to
purchase our feedstocks in large enough quantities to leverage volume discounts
and transportation costs. We also amortize our license agreement on a straight
line basis and pay fixed monthly lease costs on the facility. These non-volume
driven items were approximately $0.6 million of the $0.8 million gross loss. As
we ramp up our production, the amortization and direct facility costs will have
a disproportionate impact on our gross profit in relation to units sold. As we
begin fulfilling our recently awarded contracts and our production volume
increases, we believe that our per unit cost of production will decrease as we
process much larger production runs, though there can be no assurance that these
cost reductions will materialize.




Research
and Development Expenses





Research
and development expenses were approximately $290,000 for the six months ended
June 30, 2009 compared to approximately $343,000 for the six months ended
June 30, 2008. The decrease in research and development expenses in 2009 is
primarily the result of the beginning of production of our fuel and conducting
less test burns which were used to evaluate additional customized fuel
formulations using our proprietary blending technology.





General
and Administrative Expenses





General
and administrative expenses were $4.5 million for the six months ended
June 30, 2009 compared to $4.0 million for the six months ended
June 30, 2008. The increase of $0.5 million in 2009 over the prior period
was primarily attributable to a increase in personnel expense, rent expense,
consulting expenses, lease termination expense and investor relation expenses,
partially offset by decreases in legal fees, research and development costs, and
legal settlement costs.




Interest
Expense




Interest
expense was approximately $220,000 for the six months ended June 30, 2009
compared to approximately $287,000 for the six months ended June 30, 2008.
The decrease is due to a reduction in the License Agreement payable balance.
Interest expense consists of interest incurred related to the License Agreement
payable.





Loss
on fair value adjustment




Loss on
fair value adjustment was approximately $1.9 million for the six months ended
June 30, 2009 and approximately $30,000 for the six months ended June 30,
2008.


21




Liquidity
and Capital Resources




Liquidity




At June
30, 2009, we had $0.5 million in cash, compared to $2.6 million at March 31,
2009.




Although
we completed a registered offering in July 2009 of $3.2 million in gross
proceeds, and approximately $2.7 million in net proceeds, we will need to
continue to control costs and raise additional financing to continue our
operations beyond the fourth quarter of 2009.  We expect that our available
cash and interest income will be sufficient to finance currently planned
activities through December 2009.  We estimate that we will require an
additional $3.5 million
to fund our operations for the next twelve months. These estimates are based on
certain assumptions, including continuing tight management of available cash and
commencing fuel deliveries under our Fenix Energy purchase order no earlier than
December 2009. These assumptions could be negatively impacted by the matters
discussed under the caption “Risk Factors” contained in the our Annual Report on
Form 10-K for the year ended December 31, 2008 and in subsequent filings with
the SEC, including this Quarterly Report on Form 10-Q for the quarter ended June
30, 2009.





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





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




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





Cash
Flows




Net cash
used in operating activities was approximately $3.2 million for the six
months ended June 30, 2009 primarily reflecting our net loss of
$7.4 million, partially offset by $1.4 million in non-cash stock-based
compensation expense, approximately $0.3 million in non-cash for issuance of
stock, options and warrants for services rendered, $0.3 million in non-cash
amortization of our license, $0.2 million in non-cash amortization expense
associated with our license agreement payable, $0.2 million in non-cash gain on
extinguishment of debt and $1.9 million in non-cash loss on fair market value
adjustment of the common stock warranty liability.




Net cash
used in investing activities was approximately $0.7 million for the six months
ended June 30, 2009 and consisted of payments for the acquisition of
property and equipment of $0.6 million and payments for patent of $0.1
million.




Net cash
provided by financing activities was $3.0 million for the six months ended
June 30, 2009, and consisted of net proceeds from the issuance of common
stock.


22




Capital
Requirements and Resources




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




·
            the level of cash flows from
      product sales;




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




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




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




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




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




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




Critical
Accounting Policies




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




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





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




23





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





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




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




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




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





Off-Balance
Sheet Arrangements




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





ITEM
3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK




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




ITEM
4. CONTROLS AND PROCEDURES




(a)
Disclosure Controls and Procedures




Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act, is accumulated and communicated to management,
including our Chief Executive Officer 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 Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective at the reasonable assurance level such that the information
relating to us and our consolidated subsidiary required to be disclosed in our
Exchange Act reports (i) is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and (ii) is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.




24




(b)
Changes in Internal Control over Financial Reporting




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




25




PART
II. OTHER INFORMATION




ITEM
1A. Risk Factors





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





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





Based on
our current estimates, we anticipate that our existing financial resources will
be adequate to permit us to continue to conduct our business until the end of
2009 and we will need to control costs and raise additional capital to continue
our business beyond 2009. For the six months ended June 30, 2009, we have
incurred a net loss of $7.4 million and negative cash flows from operating
activities of $3.2 million. As of June 30, 2009, we had approximately $0.5
million of available cash and approximately $1.4 million of accounts payable and
accrued expenses. In addition, under the license agreement with the inventor of
our proprietary technology, we are required to pay $1.0 million per year over
the next five years. If we are unable to raise additional capital, we will not
be able to continue our business. We cannot ensure that additional funding will
be available or, if it is available, that it can be obtained on terms and
conditions we will deem acceptable. Any additional funding derived from the sale
of equity securities is likely to result in significant dilution to our existing
stockholders. Our ability to continue as a going concern is discussed in “Note 1
– Organization and Going Concern” to the unaudited consolidated financial
statements included in this Quarterly Report on Form 10-Q and in the opinion of
our independent accountants with respect to our audited financial statements for
the year ended December 31, 2008.





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





Under
Nasdaq listing rules, our common stock could be delisted from Nasdaq if we do
not meet certain standards regarding our financial condition and operating
results (including, among other factors, maintaining adequate stockholders’
equity, minimum $1.00 bid price and market capitalization), the distribution of
our publicly held securities and compliance with Nasdaq listing agreements and
SEC rules and regulations. For example, Nasdaq requires a minimum stockholders’
equity of $2.5 million or, alternatively, a market value of listed securities of
at least $35 million. We received a communication from Nasdaq when we reported
in March 2009 that our stockholders’ equity equaled $2.1 million at December 31,
2008. We have since received a letter from Nasdaq stating that we had regained
compliance with Nasdaq rules. At June 30, 2009, our stockholders’ equity was
below the minimum stockholders’ equity requirement of $2.5 million. However, at
June 30, 2009, our market value of listed securities exceeded the minimum $35
million for continued listing. As another example, Nasdaq reinstated the minimum
$1.00 bid requirement on August 3, 2009. Listed companies whose securities fall
below this requirement for 30 consecutive business days can be subject to
delisting.





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


26





We
are subject to Sarbanes-Oxley requirements and also have to correct internal
control weaknesses, and in particular may need to retain additional support in
the accounting area.





As a
public company, we have significant requirements for enhanced financial
reporting and internal accounting controls. Among other regulatory requirements,
we are required to document and test our internal control procedures in order to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which
requires annual management assessments of the effectiveness of our internal
controls over financial reporting and we will need a report by our independent
registered public accounting firm addressing our internal control over financial
reporting. We cannot assure you that we will be able to comply with regulatory
requirements in the timeframe and in the manner required by applicable
regulations, and our failure to do so could cause us to fail to meet our
reporting obligations, subject us to regulatory scrutiny and sanction, and cause
investors to lose confidence in our reported financial information. In addition,
we are aware that following the resignation of our prior chief executive officer
and promotion of our chief financial officer Cary J. Claiborne to serve as chief
executive officer, we may need additional accounting support, although this
issue has been at least partially addressed by the promotion of David H. Goebel,
Jr. to Chief Operating Officer to handle some of the operational matters
previously performed by Mr. Claiborne and the hiring of a staff accountant to
assist the corporate controller and Mr. Claiborne.





ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





At our
Annual Meeting of Shareholders held on May 27, 2009, four proposals were
submitted to a vote of our shareholders.




1. 
Election of Directors
—Six directors were elected to serve on our Board of Directors for a term that
ends at the next Annual Meeting. The number of votes cast in favor and withheld
for each nominee were as follows:




NOMINEE
                      
                      IN FAVOR
                      
                      WITHHELDLee
      S. Rosen
                      
                      
                      24,484,049
                      
                      20,450Cary
      J. Claiborne
                      
                      
                      24,484,049
                      
                      20,450Phillip
      E. Pearce
                      
                      
                      24,473,149
                      
                      31,350John
      E. Mack
                      
                      
                      24,484,049
                      
                      20,450James
      R. Sheppard, Jr.
                      
                      
                      24,484,049
                      
                      20,450Steven
      F. Gilliland
                      
                      
                      24,484,049
                      
                      20,450




2. 
Ratification of
Auditors — The shareholders ratified the appointment of Imowitz
Koenig & Co., LLP as our independent registered public accounting firm for
2009. The number of votes cast in favor and against the proposal, as well as the
number of abstentions were as follows:




IN
      FAVOR
              
              AGAINST
              
              ABSTAINED
              
              BROKER
      NON-VOTE24,263,244
              
              2,238
              
              239,016
              
              0





3. 
Ratification of share increase
to the Omnibus Incentive Plan— The shareholders ratified the
increase of the issuance of shares available under the plan from 2.7 million to
6.4 million.. The number of votes cast in favor and against the proposal, as
well as the number of abstentions were as follows:




IN
      FAVOR
              
              AGAINST
              
              ABSTAINED
              
              BROKER
      NON-VOTE12,809,660
              
              192,272
              
              7,384,101
              
              0




27




4. 
Ratification of the
authorization to issue 8 million shares of common stock— The
shareholders ratified issuance of 8 million shares of common stock or
convertible securities for aggregate consideration of not more than $30 million
in cash at a price not less than 80% of the market price at the time of issuance
in accordance with Nasdaq Marketplace Rule 5635(d). The number of votes cast in
favor and against the proposal, as well as the number of abstentions were as
follows:




IN
      FAVOR
              
              AGAINST
              
              ABSTAINED
              
              BROKER
      NON-VOTE20,057,168
              
              316,779
              
              12,806
              
              0




ITEM
5. OTHER INFORMATION





The
Company filed a Current Report on Form 8-K on July 29, 2009, disclosing the
employment agreement and compensation arrangement for Lee S. Rosen, Chairman of
the Board. The vesting dates of the equity grants were incorrectly listed and
the following information corrects the information set forth in the Form
8-K and does not reflect any events that may have occurred after the
original filing date.





The
employment agreement, dated July 23, 2009, between the Company and Mr. Rosen
included a grant of options to purchase 932,500 shares of the Company's common
stock at an exercise price of $1.05 per share, which vest as
follows:




·
            150,000
      options to vest immediately, 104,353 time-based options that vest on July
      23, 2010 and July 23, 2011, 104,354 time-based options that vest on July
      23, 2012; and




·
            156,480
      performance-based options that vest equally over three years beginning on
      December 31, 2009.




The
employment agreement also included a grant of 782,500 shares of the Company’s
common stock, of which 260,833 shares vest on each of July 23, 2010 and July 23,
2011 and 260,483 vest on July 23, 2012.




ITEM
6. EXHIBITS




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




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





* Filed
herewith.


28




SIGNATURES




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




Date:  August
      14, 2009
              By:
              /s/Cary J.
      ClaiborneCary
      J. ClaibornePresident,
      Chief Executive Officer & Chief
                Financial
      Officer (principal executive officer,
                principal
      financial and accounting
officer)









EXHIBIT
INDEX




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




* Filed
herewith.