UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549




FORM
10-Q





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




For the
quarterly period ended June 30, 2010




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




For the
transition period from ___________ to _____________




Commission
File No. 1-34022




NEW
GENERATION BIOFUELS HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)




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




5850
Waterloo Road, Suite 140


Columbia,
MD  21045


(Address
of principal executive offices)




(410)
480-8084


(Registrant’s
telephone number, including area code)




Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes  xNo  ̈





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




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




Large
accelerated filer   ̈    Accelerated
filer   ̈    Non-accelerated
filer   ̈     Smaller
reporting company  x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes  ̈No x




At August
13, 2010, the registrant had 38,682,361 shares of common stock, $0.001 par
value, issued and outstanding.









INDEX





PART
      I.   FINANCIAL INFORMATIONCautionary
      Note Regarding Forward-Looking Statements
            
            
            3Item
      1.
            Financial
      StatementsConsolidated
      Balance Sheets as of June 30, 2010 (Unaudited) and December 31,
      2009
            
            
            4Consolidated
      Statements of Operations for the three and six months ended June 30, 2010
      and 2009 (Unaudited)
            
            
            5Consolidated
      Statement of Changes in Stockholders’ (Deficit) Equity for the six months
      ended June 30, 2010 (Unaudited)
            
            
            6Consolidated
      Statements of Cash Flows for the six months ended June 30, 2010 and 2009
      (Unaudited)
            
            
            7Notes
      to Consolidated Financial Statements
            
            
            8Item
2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            27Item 3.
            Qualitative
      and Quantitative Disclosures About Market Risk
            
            
            36Item
      4.
            Controls
      and Procedures
            
            
            37PART II.   OTHER
      INFORMATIONItem 1A.
            Risk
      Factors
            
            
            38Item 6.
            Exhibits
            
            
            39Signatures
            
            
            40




2





CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




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




·
            our
      lack of operating history;·
            our
      dependence on additional financing to continue as a going
      concern;·
            our
      inability to generate revenues or profits from sales of our biofuel and to
      establish commercial scale production facilities;·
            the
      disproportionately higher cost of production relative to units
      sold;·
            our
      ability to fully realize the value of our intellectual property, which are
      our principal assets;·
            our
      inability to enter into acceptable licensing agreements with respect to
      our technology or the inability of any licensee to successfully
      manufacture, market or sell biofuel utilizing our
    technology;·
            market
      acceptance of our biofuel;·
            our
      inability to compete effectively in the renewable fuels
      market;·
            governmental
      regulation and oversight, including our ability to qualify our biofuel for
      certain tax credits and renewable portfolio standards;·
            our
      ability to protect our technology through intellectual property
      rights;·
            unexpected
      costs and operating deficits;·
            adverse
      results of any material legal proceedings; and·
            other
      specific risks set forth under the heading “Risk Factors” beginning on
      page 38 of this report.




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




3





PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Balance Sheets




June
      30,
              
              
              December
      31,2010
              
              
              2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              262,031
              
              
              $
              567,647Restricted
      cash
              
              
              14,702
              
              
              
              -Accounts
      receivable
              
              
              -
              
              
              
              63,900Other
      receivables
              
              
              41,406
              
              
              
              41,406Inventories
              
              
              11,708
              
              
              
              11,708Deferred
      financing costs - net
              
              
              33,652
              
              
              
              -Prepaid
      expenses and other current assets
              
              
              59,230
              
              
              
              237,635Total
      current assets
              
              
              422,729
              
              
              
              922,296Property,
      plant and equipment - net
              
              
              1,131,212
              
              
              
              1,120,911License
      agreement - net
              
              
              5,282,487
              
              
              
              5,650,988Other
      assets - net
              
              
              385,184
              
              
              
              346,073TOTAL ASSETS
              
              $
              7,221,612
              
              
              $
              8,040,268LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
      EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
              
              $
              3,113,612
              
              
              $
              1,472,519Loan
      payable
              
              
              50,000
              
              
              
              50,000Convertible
      notes payable(net
      of unamortized discount of $46,651 and $-)
              
              
              653,349
              
              
              
              -License
      agreement payable, current portion(net
      of unamortized discount of $337,353 and $375,467)
              
              
              662,647
              
              
              
              624,533Accrued
      dividends on preferred stock
              
              
              864,148
              
              
              
              1,078,003Common
      stock warrant liability and antidilution obligation
              
              
              97,421
              
              
              
              110,874Total
      current liabilities
              
              
              5,441,177
              
              
              
              3,335,929License
      agreement payable(net
      of unamortized discount of $467,974 and $622,274)
              
              
              2,532,026
              
              
              
              3,377,726Deferred
      rent
              
              
              284,137
              
              
              
              324,409Total
      liabilities
              
              
              8,257,340
              
              
              
              7,038,064Commitments
      and contingencies
              
              
              -
              
              
              
              -Stockholders'
      (deficit) equity:Preferred
      stock; $0.001 par value; 9,450,000 shares authorized; no shares issued and
      outstanding at June 30, 2010 and December 31, 2009
              
              
              -
              
              
              
              -Series
      A Cumulative Convertible Preferred Stock: $0.001 par value; $100 stated
      value, 300,000 shares authorized, - and 18,400 shares issued and
      outstanding as of June 30, 2010 and December 31, 2009, respectively;
      aggregate liquidation preference of $-
              
              
              -
              
              
              
              710,970Series
      B Cumulative Convertible Preferred Stock: $0.001 par value; $100 stated
      value, 250,000 shares authorized, 45,785 and 45,785 shares issued and
      outstanding as of June 30, 2010 and December 31, 2009 respectively;
      aggregate liquidation preference of $5,442,696
              
              
              3,094,872
              
              
              
              3,094,872Common
      stock, $0.001 par value, 100,000,000 shares authorized; 37,582,361 and
      31,711,578 shares issued and outstanding as of June 30, 2010 and December
      31, 2009, respectively
              
              
              37,582
              
              
              
              31,712Additional
      paid-in-capital
              
              
              52,455,767
              
              
              
              47,593,489Accumulated
      deficit
              
              
              (56,623,949
              )
              
              
              (50,428,839
              )Total
      stockholders' (deficit) equity
              
              
              (1,035,728)
              
              
              
              1,002,204TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)
      EQUITY
              
              $
              7,221,612
              
              
              $
              8,040,268




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




4




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statements of Operations


(Unaudited)





For
      the Three Months Ended June 30, 2010
              
              
              For
      the ThreeMonths
      Ended June 30, 2009
              
              
              For
      the Six Months Ended June 30, 2010
              
              
              For
      the Six Months Ended June 30, 2009Revenues:Product
              
              $
              -
              
              
              $
              42,637
              
              
              $
              6,477
              
              
              $
              42,637Total
      revenue
              
              
              -
              
              
              
              42,637
              
              
              
              6,477
              
              
              
              42,637Operating
      expenses:Cost
      of product revenue (including depreciation and amortization for the three
      and six months ended June 30, 2010 and 2009 of $239,612, $419,064,
      $171,758, and $332,612, respectively)
              
              
              526,404
              
              
              
              597,840
              
              
              
              1,107,352
              
              
              
              806,495Research
      and development expense
              
              
              72,302
              
              
              
              95,769
              
              
              
              153,160
              
              
              
              290,035General
      and administrative expense
              
              
              2,088,705
              
              
              
              2,601,685
              
              
              
              4,433,704
              
              
              
              4,496,284Total
      operating expenses
              
              
              2,687,411
              
              
              
              3,295,294
              
              
              
              5,694,216
              
              
              
              5,592,814Loss
      from operations
              
              
              (2,687,411
              )
              
              
              (3,252,657
              )
              
              
              (5,687,739
              )
              
              
              (5,550,177
              )Interest
      income
              
              
              71
              
              
              
              937
              
              
              
              385
              
              
              
              1,656Interest
      expense
              
              
              (280,297
              )
              
              
              (110,579
              )
              
              
              (382,281
              )
              
              
              (219,663
              )Gain
      on debt extinguishment
              
              
              -
              
              
              
              -
              
              
              
              154,000
              
              
              
              241,500Loss
      on net change in fair value of derivative liabilities
              
              
              (12,102
              )
              
              
              (2,935,039
              )
              
              
              (4,996
              )
              
              
              (3,140,648
              )Net
      loss
              
              
              (2,979,739
              )
              
              
              (6,297,338
              )
              
              
              (5,920,631
              )
              
              
              (8,667,332
              )Dividends
      to preferred stockholders
              
              
              (125,787
              )
              
              
              (170,017
              )
              
              
              (274,479
              )
              
              
              (4,381,821
              )Net
      loss attributable to common stockholders
              
              $
              (3,105,526
              )
              
              $
              (6,467,355
              )
              
              $
              (6,195,110
              )
              
              $
              (13,049,153
              )Basic
      and diluted net loss per share
              
              $
              (0.09
              )
              
              $
              (0.25
              )
              
              $
              (0.18
              )
              
              $
              (0.56
              )Weighted
      average number of shares outstanding
              
              
              36,337,173
              
              
              
              25,726,050
              
              
              
              34,983,189
              
              
              
              23,326,692




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




5




NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statement of Changes in Stockholders’ (Deficit) Equity


Six
Months ended June 30, 2010


(Unaudited)





Common
      Stock
            
            
            Preferred Stock
              Series
      A
            
            
            Preferred Stock
              Series
      B
            
            
            Additional
              Paid-In-
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalance
      at December 31, 2009
            
            
            31,711,578
            
            
            $
            31,712
            
            
            
            18,400
            
            
            $
            710,970
            
            
            
            45,785
            
            
            $
            3,094,872
            
            
            $
            47,593,489
            
            
            $
            (50,428,839
            )
            
            $
            1,002,204Issuance
      of stock options and restricted stock to employees
            
            
            940,340
            
            
            
            940
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,083,673
            
            
            
            -
            
            
            
            1,084,613Issuance
      of stock options to non-employees
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,318
            
            
            
            -
            
            
            
            3,318Issuance
      of warrants in connection with convertible notes payable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            149,949
            
            
            
            -
            
            
            
            149,949Issuance
      of warrants to non-employees for deferred financing costs
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            38,165
            
            
            
            -
            
            
            
            38,165Issuance
      of common stock pursuant to separation agreement
            
            
            164,062
            
            
            
            164
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            104,836
            
            
            
            -
            
            
            
            105,000Issuance
      of common stock for settlement of license agreement
payable
            
            
            1,100,000
            
            
            
            1,100
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            724,900
            
            
            
            -
            
            
            
            726,000Proceeds
      from the issuance of common stock and warrants, net of offering
      costs
            
            
            3,001,970
            
            
            
            3,002
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,540,348
            
            
            
            -
            
            
            
            1,543,350Conversion
      of preferred stock into common stock
            
            
            582,089
            
            
            
            582
            
            
            
            (18,400)
            
            
            
            (710,970)
            
            
            
            -
            
            
            
            -
            
            
            
            1,198,722
            
            
            
            -
            
            
            
            488,334Antidilution
      obligation associated with issuance of common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (40,000)
            
            
            
            -
            
            
            
            (40,000)Issuance
      of common stock for settlement of antidilution obligation associated with
      issuance of common stock
            
            
            82,322
            
            
            
            82
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            58,367
            
            
            
            -
            
            
            
            58,449Preferred
      stock dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (274,479
            )
            
            
            (274,479
            )Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,920,631
            )
            
            
            (5,920,631
            )Balance
      at June 30, 2010
            
            
            37,582,361
            
            
            $
            37,582
            
            
            
            -
            
            
            $
            -
            
            
            
            45,785
            
            
            $
            3,094,872
            
            
            $
            52,455,767
            
            
            $
            (56,623,949
            )
            
            $
            (1,035,728)





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




6








NEW
GENERATION BIOFUELS HOLDINGS, INC.


Consolidated
Statements of Cash Flows


(Unaudited)





For
      the
                Six Months
                EndedJune 30,
                2010
              
              
              For
      the
                Six
      Months
                EndedJune 30,
                2009CASH FLOWS FROM OPERATING
      ACTIVITIES:Net
      loss
              
              $
              (5,920,631
              )
              
              $
              (8,667,332
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Bad
      debt expense
              
              
              5,609
              
              
              
              -Amortization
      of prepaid consulting fee
              
              
              71,339
              
              
              
              -Amortization
      of deferred financing costs
              
              
              74,513
              
              
              
              -Depreciation
      and amortization expense
              
              
              56,667
              
              
              
              34,623Amortization
      of license agreement
              
              
              368,501
              
              
              
              310,784Amortization
      of discount on license agreement payable
              
              
              192,414
              
              
              
              219,663Amortization
      of discount on convertible notes payable
              
              
              103,298
              
              
              
              -Issuance
      of common stock pursuant to separation agreement
              
              
              105,000
              
              
              
              -Compensation
      expense associated with stock options and restricted stock to
      employees
              
              
              1,084,613
              
              
              
              1,435,439Stock
      options issued to non-employees for services
              
              
              3,318
              
              
              
              260,121Loss
      on change in fair value of warrant liability and antidilution
      obligation
              
              
              4,996
              
              
              
              3,140,648Gain
      on debt extinguishment
              
              
              (154,000
              )
              
              
              (241,500)Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              58,291
              
              
              
              (16,841)Prepaid
      expenses and other current assets
              
              
              107,066
              
              
              
              73,627Other
      assets
              
              
              (40,739
              )
              
              
              116,735Accounts
      payable and accrued expenses
              
              
              1,591,093
              
              
              
              168,840Deferred
      rent
              
              
              (40,272)
              
              
              
              -Net
      cash used in operating activities
              
              
              (2,328,924
              )
              
              
              (3,165,193
              )CASH FLOWS FROM INVESTING
      ACTIVITIES:Net
      increase in restricted cash
              
              
              (14,702)
              
              
              
              -Purchase
      of property and equipment
              
              
              (52,048
              )
              
              
              (615,209)Payment
      for patents
              
              
              (13,292)
              
              
              
              (116,735)Net
      cash used in investing activities
              
              
              (80,042
              )
              
              
              (731,944
              )CASH FLOWS FROM FINANCING
      ACTIVITIES:Payments
      for license agreement payable
              
              
              (120,000)
              
              
              
              -Proceeds
      from the issuance of convertible notes payable
              
              
              700,000
              
              
              
              -Payment
      of deferred financing costs
              
              
              (20,000)
              
              
              
              -Proceeds
      from issuance of common stock, net
              
              
              1,543,350
              
              
              
              2,958,748Net
      cash provided by financing activities
              
              
              2,103,350
              
              
              
              2,958,748Decrease
      in cash and cash equivalents
              
              
              (305,616
              )
              
              
              (938,389)Cash
      and cash equivalents - beginning of period
              
              
              567,647
              
              
              
              1,476,246Cash
      and cash equivalents - end of period
              
              $
              262,031
              
              
              $
              537,857Supplemental
      Disclosure of Non-Cash Operating and Financing ActivitiesAccrued
      dividends on preferred stock
              
              $
              274,479
              
              
              $
              376,660Common
      stock issued for payment of license agreement payable
              
              $
              726,000
              
              
              $
              1,000,000Antidilution
      obligation associated with issuance of common stock
              
              $
              40,000
              
              
              $
              102,500Common
      stock warrant liability
              
              $
              -
              
              
              $
              2,214,371Reclassification
      of warrant liability in connection with antidilution triggering
      event
              
              $
              -
              
              
              $
              158,451Cumulative
      effect of reclassification of warrants (ASC Topic 815)
              
              $
              -
              
              
              $
              260,115Issuance
      of common stock settlement of antidilution obligation associated with
      issuance of common stock
              
              $
              58,449
              
              
              $
              -Discount
      on convertible notes associated with detachable warrants
              
              $
              149,949
              
              
              $
              -Issuance
      of warrants to non-employees for deferred financing costs
              
              $
              38,165
              
              
              $
              -Conversion
      of Series A preferred stock to common stock
              
              $
              710,970
              
              
              $
              -Accrued
      preferred stock dividends converted into shares of common
      stock
              
              $
              488,334
              
              
              $
              -Deferred
      financing costs included in accounts payable and accrued
      expenses
              
              $
              50,000
              
              
              $
              -





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




7


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


NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




The
Company




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





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




Basis of Presentation and
Going Concern




The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles in the
United States of America (“GAAP”) and the rules and regulations of the
Securities and Exchange Commission (“SEC”) for interim financial information.
Accordingly, they do not include all of the information and footnotes required
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, which are necessary
for a fair presentation of the results of the interim periods presented, have
been included. The results of the operations for the interim periods are not
necessarily indicative of results to be expected for any other interim period or
for the year as a whole. These unaudited consolidated financial statements and
footnotes thereto should be read in conjunction with the audited financial
statements and footnotes thereto contained in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009, filed with the SEC on March 26,
2010.





The
Company has incurred a net loss of $5.9 million for the six months ended June
30, 2010 and has an accumulated deficit of $56.6 million as of June 30, 2010.
The Company is obligated to pay $4.0 million in additional payments under the
Master License, of which $1.0 million is due in March 2011.




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




The
Company is seeking to raise additional capital through public and/or private
placement offerings and targeting strategic partners in an effort to increase
revenues.  The ability of the Company to continue as a going concern is
dependent upon the success of capital offerings or alternative financing
arrangements and expansion of its operations.  If the Company is
unsuccessful in raising additional capital from any of these sources, it will
defer, reduce, or eliminate certain planned expenditures.  The Company will
continue to consider other financing alternatives. There can be no assurance
that the Company will be able to obtain any sources of financing on acceptable
terms, or at all.





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





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




8


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




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





Reclassification





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





Use of
Estimates




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




Restricted
Cash





As of
June 30, 2010 and December 31, 2009, the Company had restricted cash of $14,702
and $-0-, respectively, which serves as collateral for a surety
bond.





Other
Receivables




As of
June 30, 2010 and December 31, 2009, other receivables were comprised of
non-trade receivables in connection with the 50 cent per gallon U.S. federal
alternative fuel excise tax credit.  The Company records its alternative
fuel tax credits as revenue in its consolidated statements of operations as the
credits are fully refundable and do not need to offset income tax liabilities to
be received. No fuel tax credits were earned during the three months and six
months ended June 30, 2010 and 2009.





Deferred Financing
Costs





Deferred
financing costs represent costs incurred in connection with the issuance of the
convertible notes payable. Deferred financing costs are being amortized over the
term of the financing instrument on a straight-line basis, which approximates
the effective interest method. During the six months ended June 30, 2010, the
Company capitalized deferred financing costs of $108,165. During the three
months and six months ended June 30, 2010 and 2009, the Company amortized
deferred financing costs of $74,513 and $0, respectively to interest
expense.





Property, Plant and
Equipment




Property,
plant and equipment are stated at cost and depreciated over the estimated useful
lives of the assets (generally three to fifteen years) using the straight-line
method.  Amortization of leasehold improvements is computed over the
shorter of the lease term or the estimated useful life of the related
assets.  Depreciation and amortization expense for the three and six months
ended June 30, 2010 and 2009 was $20,916, $41,747, $20,726 and $30,958,
respectively.




9


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





2010
              
              
              2009Property
      and equipment
              
              $
              1,120,092
              
              
              $
              1,109,571Construction
      in progress
              
              
              114,069
              
              
              
              72,5421,234,161
              
              
              
              1,182,113Less:
      accumulated depreciation and amortization
              
              
              (102,949
              )
              
              
              (61,202
              )Property,
      plant and equipment – net
              
              $
              1,131,212
              
              
              $
              1,120,911





Long-Lived
Assets




Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be recoverable.
Conditions that would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant change in the
extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company recognizes
an impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and fair value.  Various factors including
estimated future sales growth and estimated profit margins are included in this
analysis. Management believes at this time that carrying values and useful lives
continue to be appropriate.





Convertible
Debt





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





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




10


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





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





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





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





Computation of Net Loss per
Share




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




As of
June 30, 2010 and 2009, there were 24,000,964 and 18,509,608, respectively,
shares of common stock equivalents including options (convertible into 8,807,711
shares of common stock as of June 30, 2010 and 8,362,710 shares of common stock
as of June 30, 2009), non-employee options (convertible into 1,741,000 shares of
common stock as of June 30, 2010 and 1,741,000 shares of common stock as of June
30, 2009), and warrants (convertible into 13,452,253 shares of common stock as
of June 30, 2010 and 8,405,898 shares of common stock as of June 30, 2009), all
of which were excluded from the computation of diluted earnings per share
because the inclusion of such shares would have been anti-dilutive. As of June
30, 2010 and 2009, there were -0- and 18,400 shares of Series A Convertible
Preferred Stock outstanding which are convertible into -0- and 548,510,
respectively, shares of common stock that were excluded from the computation of
diluted earnings per share because the inclusion of such shares would have been
anti-dilutive. As of June 30, 2010 and 2009, there were 45,785 and 57,693,
respectively, shares of Series B Convertible Preferred Stock outstanding which
are convertible into 1,814,232 and 2,112,226, respectively, shares of common
stock that were excluded from the computation of diluted earnings per share
because the inclusion of such shares would have been anti-dilutive.




11


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




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





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




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





·
            Level
      2 - Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.





·
            Level
      3 - Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.




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




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




SignificantQuoted
              
              
              Other
              
              
              SignificantPrices in
              
              
              Observable
              
              
              UnobservableJune 30,
              
              
              Active Markets
              
              
              Inputs
              
              
              InputsDescription
              
              2010
              
              
              Level 1
              
              
              Level 2
              
              
              Level 3Assets:Cash
      and cash equivalents
              
              $
              262,031
              
              
              $
              262,031
              
              
              $
              –
              
              
              $
              –Total
      assets
              
              $
              262,031
              
              
              $
              262,031
              
              
              $
              –
              
              
              $
              –Liabilities:Derivative
      - warrants
              
              $
              23,421
              
              
              $
              –
              
              
              $
              –
              
              
              $
              23,421Antidilution
      obligation
              
              $
              74,000
              
              
              $
              –
              
              
              $
              –
              
              
              $
              74,000Total
      liabilities
              
              $
              97,421
              
              
              $
              –
              
              
              $
              –
              
              
              $
              97,421




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




12


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


The following table presents a reconciliation of the assets and
liabilities measured at fair value on a quarterly basis using significant
unobservable inputs (Level 3):





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





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





(2)
            The
      carrying value of the common stock warrant liability is calculated using
      the Black-Scholes option pricing model, which requires the input of highly
      subjective assumptions. These assumptions include the risk-free rate of
      interest, expected dividend yield, expected volatility, and the remaining
      contractual term of the award. The risk-free rate of interest is based on
      the U.S. Treasury rates appropriate for the expected term of the award.
      Expected dividend yield is projected at 0%, as the Company has not paid
      any dividends on its common stock since its inception and does not
      anticipate paying dividends on its common stock in the foreseeable future.
      Expected volatility is based on the Company’s historical
      volatility.  The fair value of the antidilution obligation is
      calculated using an estimate of the number of shares to be issued to all
      investors in the March 2009 Private Placement pursuant to the antidilution
      provisions times and an estimated fair market value of the Company’s
      common stock.  For the three months ended March 31, 2010, the
      net adjustment to fair value resulted in a gain of $7,106 and is included
      in loss on net change in fair value of derivative liabilities on the
      accompanying consolidated statements of
  operations.





(3)
            The
      carrying value of the common stock warrant liability is calculated using
      the Black-Scholes option pricing model, which requires the input of highly
      subjective assumptions. These assumptions include the risk-free rate of
      interest, expected dividend yield, expected volatility, and the remaining
      contractual term of the award. The risk-free rate of interest is based on
      the U.S. Treasury rates appropriate for the expected term of the award.
      Expected dividend yield is projected at 0%, as the Company has not paid
      any dividends on its common stock since its inception and does not
      anticipate paying dividends on its common stock in the foreseeable future.
      Expected volatility is based on the Company’s historical
      volatility.  The fair value of the antidilution obligation is
      calculated using a weighted-average probability of a subsequent financing
      transaction at less than $0.69 per share to determine an estimate of the
      number of shares to be issued to all investors in the February 2010
      Private Placement pursuant to the antidilution provisions times and an
      estimated fair market value of the Company’s common stock.  For
      the three months ended June 30, 2010, the net adjustment to fair value
      resulted in a loss of $12,102 and is included in loss on net change in
      fair value of derivative liabilities on the accompanying consolidated
      statements of operations.




13


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


NOTE
2–OPTIONS,
RESTRICTED STOCK, STOCK AND WARRANTS




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




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




In
February 2010, the Company’s board of directors approved an amendment to the
Incentive Plan to increase the number of shares reserved for issuance under the
Incentive Plan from 6.4 million to 10.0 million shares. In July 2010, the
shareholders approved this amendment at the annual shareholders
meeting.  Other than this increase in the number of shares reserved
for issuance, all other provisions of the Incentive Plan remained the same as
adopted in October 2007 by the Company’s board of directors and in November 2007
by the Company’s shareholders.





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




Employee
Options





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




2010
              
              
              2009Weighted
      average grant date fair value
              
              $
              0.52
              
              
              $
              0.73Dividend
      yield
              
              
              0.0
              %
              
              
              0.0
              %Risk
      free rate of return
              
              
              2.07-2.60
              %
              
              
              1.54
      – 3.28
              %Expected
      life in years
              
              
              5.0
              
              
              
              5.0Volatility
              
              
              101
              %
              
              
              100
              %




14


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


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




Number of
              Shares
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life
              (Years)
            
            
            Aggregate
              Intrinsic
              ValueOptions
      outstanding at December 31, 2009
            
            
            8,954,845
            
            
            $
            2.35
            
            
            
            7.98Granted
            
            
            700,985
            
            
            $
            0.70
            
            
            
            9.77Forfeited
      or cancelled
            
            
            (848,119
            )
            
            $
            2.83
            
            
            
            8.38Options
      outstanding at June 30, 2010
            
            
            8,807,711
            
            
            $
            2.17
            
            
            
            7.58Vested
      and expected to vest at June 30, 2010
            
            
            7,880,607
            
            
            $
            2.33
            
            
            
            7.39
            
            
            $
            –Options
      exercisable at June 30, 2010
            
            
            6,833,088
            
            
            $
            2.39
            
            
            
            7.19
            
            
            $
            –





Options
exercisable at June 30, 2010 do not include 927,104 performance based options.
The Company recognizes compensation cost for performance based options once it
is probable that the performance milestones will be achieved. The applicable
portion of the compensation costs earned to date is recognized and the remaining
unrecognized expense attributable to the milestone is recorded over the service
period.




The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing stock price on June 30, 2010
and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had vested option holders
exercised their options on June 30, 2010. This amount changes based upon changes
in the fair market value of the Company’s common stock.





The
Company recognized $212,337, $533,243, $712,756, and $1,128,377 in compensation
expense for stock options issued to employees for the three and six months ended
June 30, 2010 and 2009, respectively, which is included in general and
administrative expense in the consolidated statements of operations. As of June
30, 2010, there was approximately $545,000 of total unrecognized compensation
expense related to unvested employee stock options.  This expense is
expected to be recognized over a weighted-average period of approximately 1.0
year.





Non-Employee
Options





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





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




15


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


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




Number of
              Shares
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life
              (Years)
            
            
            Aggregate
              Intrinsic
              ValueOptions
      outstanding at December 31, 2009
            
            
            1,741,000
            
            
            $
            5.59
            
            
            
            7.50Granted
            
            
            –
            
            
            $
            –
            
            
            
            –Forfeited
      or cancelled
            
            
            –
            
            
            $
            –
            
            
            
            –Options
      outstanding at June 30, 2010
            
            
            1,741,000
            
            
            $
            5.59
            
            
            
            7.01Vested
      and expected to vest at June 30, 2010
            
            
            191,000
            
            
            $
            4.87
            
            
            
            7.61
            
            
            $
            –Options
      exercisable at June 30, 2010
            
            
            191,000
            
            
            $
            4.87
            
            
            
            7.61
            
            
            $
            –





Options
exercisable at June 30, 2010 do not include 1,550,000 performance based
options.  The Company recognizes compensation cost for performance based
options once it is probable that the performance milestones  will be
achieved. The applicable portion of the compensation costs earned to date is
recognized and the remaining unrecognized expense attributable to the milestone
is recorded over the service period.





The
Company recognized $-0-, $3,318, $9,732, and $16,220 in compensation expense for
stock options issued to non-employees for the three and six months ended June
30, 2010 and 2009, respectively, which is included in general and administrative
expense in the consolidated statements of operations. As of June 30, 2010, there
was $0 of total unrecognized compensation expense related to unvested employee
stock options.





Restricted Stock
Grants




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







In March
2010, the Company granted and issued under the Equity Compensation Plan 477,452
restricted shares to certain employees based on achieving certain 2009
performance targets as determined by the Compensation Committee. The grant was
approved by the Compensation Committee. The number of restricted shares issued
was calculated based on the dollar value of the award divided by the closing
price of the Company’s common stock on the date the grant was approved by the
Compensation Committee.  The restricted stock was granted at $0.73 per
share.




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




16


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


During
the six months ended June 30, 2010, the Company cancelled 59,659 shares of
previously issued and unvested restricted stock forfeited by several former
employees.





The
Company recognized $388,525, $551,370, $290,000, and $297,268 in compensation
expense for restricted stock awards issued to employees for the three and six
months ended June 30, 2010 and 2009, respectively, which is included in general
and administrative expense in the consolidated statements of operations. As of
June 30, 2010, there was approximately $1,4 million of total unrecognized
compensation expense related to unvested employee restricted stock awards. 
This expense is expected to be recognized over a weighted-average period of
approximately 1.1 years.





The
Company recognized $-0-, $9,792, $29,376, and $58,752 in compensation expense
for restricted stock awards issued to non-employees for the three and six months
ended June 30, 2010 and 2009, which is included in general and administrative
expense in the consolidated statements of operations. As of June 30, 2010, there
was no unrecognized compensation expense related to unvested non-employee
restricted stock awards.





NOTE 3 – CONVERTIBLE
NOTES





April 2010 Private
Placement





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





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





As of
June 30, 2010 accrued interest for the Notes was $12,056, which is included in
accounts payable and accrued expenses in the consolidated balance
sheet.





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





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




17


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


Management
estimated the fair value of each instrument separately and allocated the
proceeds in accordance with the relative fair value method.  The
amount allocated to the warrants in accordance with this method was
$149,949.  The convertible notes payable have been recorded on the
consolidated balance sheet net of the discount representing the allocation of
the relative fair value to the warrant.  The Company records interest
in the consolidated statements of operations as the discounted Note is accreted
to its face value through maturity, in addition to recording the 10% interest
charge.   For the three and six months ended June 30, 2010,
amortization expense related to the debt discount totaled $103,298.





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





The
Company agreed to pay commissions to certain finders in connection with the
offering based on the proceeds received from the purchasers introduced by each
finder. The Company paid each finder a cash commission of 10% of the total
proceeds received at closing based on proceeds from purchasers introduced
to the Company by such finder and warrants to purchase a number of shares of
common stock equal to 10% of the same total proceeds divided by
$0.90.   The warrants were valued using the Black-Scholes option
pricing model.  The estimated fair value of the warrants at the date
of issuance was $38,165.  The Company capitalized these commissions as
deferred financing costs totaling $108,165 and is amortizing them over the term
of the notes. The Company incurred amortization expense of $74,513 during
the three and six months ended June 30, 2010 which is included in interest
expense in the consolidated statements of operations.





In August
2010 the Company obtained an extension from each of the Note
holders.  The Note holder for the $200,000 Note changed the maturity
date to August 19, 2010,  The Note holder for the $500,000 Note
changed the maturity date to August 31, 2010.   As part of the
extension agreements each Note retroactively changes the rate of interest from
the date of the Note, April 29, 2010 from 10% to 15%.  As of June 30,
2010 the additional accrued interest for the Notes would have been $6,027 (or
$12,056 would increase to $18,083).





NOTE 4
– COMMON STOCK




March 2009 Private
Placement





In March
2009, the Company completed a private placement (the “March 2009 Private
Placement”) of 3,957,500 shares of common stock, at a price of $0.80 per share
to certain “accredited investors” as defined in Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”).  The gross
proceeds from the March 2009 Private Placement were $3.2 million and net
proceeds, after deducting placement agent’s fees and estimated offering expenses
payable by the Company, were approximately $3.1 million.  Each investor in
the March 2009 Private Placement also received a warrant exercisable for a
number of shares of common stock equal to the number of shares of common stock
purchased by each investor. The exercise price of the warrants is $0.90 per
share (the “$0.90 warrants”). The warrants are exercisable at any time after the
six month anniversary of the issue date but prior to the fifth anniversary of
the issue date.  The $0.90 warrants and the March 2009 Placement Agent
Warrants had a fair value of $2,163,943 on the date of issuance based on the
Black-Scholes options pricing method.




In
addition, the Company exchanged new warrants at an exercise price of $1.00 per
share with investors that participated in the Company’s 2008 Series B Private
Placement (see Note 5) and invested a specified amount in the March 2009 Private
Placement (the “$1.00 warrants”).  Under this exchange, the Company
canceled and reissued warrants to purchase a total of 97,792 shares.  The
warrants are exercisable at any time after the six month anniversary but prior
to the fifth anniversary of the issue date, either for cash or by means of a
“cashless exercise.” The $1.00 warrants had a fair value of $50,428 on the date
of issuance based on the Black-Scholes options pricing method.




18


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


The $1.00
warrants are considered to be a derivative liability to be marked to market at
each reporting date due to their exercise price reset feature.  As of
December 31, 2009 the warrant liability related to the $1.00 warrants was
$52,425.  At June 30, 2010 after being marked to market the balance
was $23,421 with a gain of $21,898 and $29,004, respectively, being recognized
and recorded in loss on net change in fair value of derivative liabilities on
the accompanying consolidated statements of operations for the three and six
months ended June 30, 2010.  For the three and six months ended June
30, 2009, the net adjustment to fair value related to the $1.00 warrants
resulted in a loss of $63,536 and $70,090, respectively, and is included in loss
on net change in fair value of derivative liabilities on the accompanying
consolidated statement of operations.




The March
2009 Private Placement contains certain antidilution provisions.  If the
Company issues additional shares of common stock or convertible securities in a
financing transaction in the succeeding fifteen (15) months from the March 2009
Private Placement with a purchase price or conversion price less than $0.80 per
share, the Company will issue additional shares of its common stock to the
investors in the March 2009 Private Placement, up to a maximum cap of 82,322
additional shares.  This cap ensures that the number of shares issued to
all investors in the March 2009 Private Placement and pursuant to the
antidilution provisions in the aggregate will not exceed the maximum number of
shares that the Company can issue under NASDAQ rules without shareholder
approval, which is slightly less than 20% of the Company’s common stock
outstanding prior to the March 2009 Private Placement.  Similarly, if the
Company issues additional warrants in a financing transaction in the succeeding
fifteen (15) months from the March 2009 Private Placement with an exercise price
less than $0.90 per share, the Company will reduce the exercise price of the
warrants issued in the March 2009 Private Placement to the price of the warrants
in the subsequent financing transaction (but the number of shares underlying the
warrants will not change).  The antidilution adjustments do not apply to
certain excluded issuances of equity securities or warrants, such as securities
not issued in capital raising transactions (for example, to customers,
suppliers, joint venture partners or the Company's Technology licensor) or in
connection with equity awards that the Company grants to employees, consultants
and directors under employee benefit plans approved by the Company's board of
directors.





The
Company has determined that the antidilution provisions in the March 2009
Private Placement are, in effect, a net share settled written put option and
that the valuation of the antidilution obligation should be classified as a
liability and marked-to-market at each balance sheet date with the change in
liability being recorded as gain/loss on fair value adjustment.  The
Company estimated the fair value of the antidilution obligation to be $102,500
at the issuance date.  There was no change in fair value of this
liability for the three and six months ended June 30, 2009.  At December
31, 2009, the fair value of the antidilution obligation of $58,449 was
calculated using an estimate of the number of shares (82,322 shares) to be
issued to all investors in the March 2009 Private Placement pursuant to the
antidilution provisions times an estimated fair market value ($0.71) of the
Company’s common stock.  The carrying value of the antidilution obligation
requires the input of highly subjective assumptions.  For the three
and  six months ended June 30, 2010, no gain or loss was recorded
because shares were issued to settle the obligation of $58,449 on March 31, 2010
at a fair market value of $0.71.





The
Company agreed to take steps to allow investors to sell their shares under Rule
144 but did not enter into any registration rights agreements in connection with
the March 2009 Private Placement.





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





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




19


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


For the
three and six months ended June 30, 2009, the net adjustment to fair value
related to the $0.90 warrants and March 2009 Placement Agent Warrants resulted
in a loss of $2,871,503 and $3,172,222 and is included in loss on net change in
fair value of derivative liabilities on the accompanying consolidated statements
of operations.





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





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





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





February 2010 Private
Placement





In
February 2010, the Company completed a private placement (the “February 2010
Private Placement”) of 1,890,858 shares of Common Stock, at a price of $0.69 per
share to certain “accredited investors” as defined in Regulation D under the
Securities Act. The gross proceeds from the February 2010 Private Placement were
$1.3 million and approximately $1.1 million in net proceeds, after deducting
finders’ fees.  Each investor in the February 2010 Private Placement also
received a warrant exercisable for a number of shares of common stock equal to
the number of shares of common stock purchased by each investor. The exercise
price of the warrants is $0.90 per share. The warrants are exercisable at any
time after the six month anniversary of the issue date but prior to the fifth
anniversary of the issue date. The warrants have a fair value of $1,082,362 on
the date of issuance based on the Black-Scholes options pricing
method.





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





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




20


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


The
Company has determined that the antidilution provisions in the February 2010
Private Placement are, in effect, a net share settled written put option and
that the valuation of the antidilution obligation should be classified as a
liability and marked-to-market at each balance sheet date with the change in
liability being recorded as gain/loss on fair value adjustment.
date.  The fair value of the antidilution obligation is calculated
using an estimate of the number of shares to be issued to all investors in the
February 2010 Private Placement pursuant to the antidilution provisions times an
estimated fair market value of the Company’s common stock.  The
carrying value of the antidilution obligation requires the input of highly
subjective assumptions.  The Company estimated the fair value of the
antidilution obligation to be $40,000 at the issuance date.  At June
30, 2010 after being marked to market the balance was $74,000 with a loss of
$34,000 being recognized and recorded in loss on net change in fair value of
derivative liabilities on the accompanying consolidated statement of operations
for the three and six months ended June 30, 2010.





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





May 2010 Separation
Agreement





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





June 2010
Offering





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





In
connection with the transaction the Company entered into a placement agent
agreement pursuant to which the placement agent received a fee equal to 7% of
the gross proceeds of the offering and a warrant to purchase shares of common
stock equal to 5% of the number of shares of common stock sold by the Company in
the offering at an exercise price of $0.75 per share.





NOTE 5 – PREFERRED
STOCK





Series A Preferred
Stock




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




21


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


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





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





Series B Preferred
Stock




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




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




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




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




22


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


Dividends
will be payable from the date of issuance at a rate of 8% per year when and as
declared by the board of directors. To the extent that dividends are not
declared, or cannot be paid, there will be an increase in the stated value of
the Series B Preferred Stock in the amount of 8% per year. In the event
dividends are declared by the board of directors and paid by the Company on the
common stock, holders of Series B Preferred Stock will either share ratably in
such dividends based on the number of shares of common stock into which the
Series B Preferred Stock may be converted or (to the extent that dividends are
not declared or cannot be paid), there will be a corresponding increase in the
stated value. Dividends will be paid semiannually, at the Company’s election, in
cash, in shares of Series B Preferred Stock (valued at stated value) or in
common stock valued at the market price, on September 30 and March 31 of each
year beginning on September 30, 2008 to holders of record on the 15th day of the
preceding month. If there is an increase in stated value because dividends were
not or could not be paid, that increase will occur semiannually on the dates
that dividends would have been paid. As of June 30, 2010 and December 31, 2009,
accrued dividends on the Series B Preferred Stock were $864,148 and $653,690,
respectively.




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





Upon any
liquidation of the Company, after the Company has made the required
distributions to the holders of Series A Preferred Stock (and any other
preferred stock then outstanding, if any, ranking in liquidation senior to the
Series B Preferred Stock), and before any distribution is made to the holders of
common stock (and any other stock ranking in liquidation junior to the Series B
Preferred Stock), the holders of Series B Preferred Stock will be entitled to be
paid an amount in cash equal to the aggregate liquidation value of Series B
Preferred Stock, which equals the stated value plus all accrued dividends not
previously paid or added to stated value. As of, June 30, 2010, the liquidation
value of the Series B Preferred Stock was $5,442,696.




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




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




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.




23


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


In
conjunction with the March 2009 Private Placement, as noted in Note 4 above, the
antidilution provisions were triggered. The conversion price of the Series B
Preferred Stock and the exercise price of the warrants were reset to $3.00 per
share. The Company recorded $4,005,161 as an additional deemed dividend related
to the beneficial conversion feature during the three months ended March 31,
2009. The additional beneficial conversion feature was calculated based on the
number of shares that would be received upon conversion based on the adjusted
conversion price.  The Company then compared the number of shares that
would be received upon conversion based on the adjusted conversion price with
the number that would have been received prior to the occurrence of the
contingent event.  The excess number of shares was multiplied by the
commitment date stock price to determine the incremental intrinsic value
resulting from the resolution of the contingency and the corresponding
adjustment to the conversion price.




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




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





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





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





NOTE 6 – EXCLUSIVE LICENSE
AGREEMENT AND PAYABLE





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





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




24


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


NOTE 7 – COMMITMENTS AND
CONTINGENCIES





On or
about January 4, 2010, the Company was notified that it was in default under its
site lease agreement with Pennington Partners, LLC (the “landlord”) and
terminaling services agreement with an affiliate of the landlord, primarily due
to its failure to pay rent in the amount of $320,000.  The Company is
seeking to negotiate a settlement of the amounts owed and to restructure the
remaining obligations under the agreements.  There can be no assurance that
the Company will be successful in negotiating a settlement with the landlord,
and the landlord may terminate the lease as a result of the Company’s default
and, among other potential remedies, accelerate the Company’s obligations due
under the agreements.  As of June 30, 2010 and December 31, 2009, accrued
and unpaid rent under the agreements totaled approximately $702,108 and
$362,500, respectively, and is included in accounts payable and accrued expenses
on the consolidated balance sheets.  Please see Note 9 for information
on resolution of the settlement negotiations with the landlord.





NOTE 8 –
AGREEMENTS





Resignation of Lee S. Rosen
as Chairman and Separation Agreement





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




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


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


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


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


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


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


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





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




25


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


Fenix
Energy





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





NOTE
9–
SUBSEQUENT EVENTS




On August
17, 2010 the Company closed a registered direct offering with several
institutional investors under which the Company issued 5,000,000 shares of its
common stock.  The sale price was $0.20 per share and the Company
received gross proceeds of $1,000,000 and net proceeds of approximately $915,000
after deducting fees and offering expenses. The investors also received one
warrant for each four shares of common stock purchased.  The shares
and warrants were issued of an active registration statement.  The
warrants are exercisable after six months and have a 5-year term at an exercise
price of $0.30 and can only be exercised for cash while registered.
  On August
5, 2010 the Company appeared before a NASDAQ Continued Listing Hearing Panel to
present a plan to regain and sustain compliance with the NASDAQ continued
listing standards. The Company was deficient on two continued listing standards
as of June 30, 2010 when we reported negative stockholders equity of
approximately $1.1 million.  The Company offered to the panel that
closing of the August 2010 registered direct offering coupled with the
subsequent negotiated settlement payments and the conversion of the 90-day
secured convertible Notes results in increases in the Company’s stockholders
equity.  The Company also stated that it expected to be in compliance
with the stockholders equity requirement when it files its Form 10-Q for the
period ending September 30, 2010.  Based on the proceeds received in
the August registered direct, the Company will need to raise additional equity
capital beyond the recent transaction to meet this statement and to fund the
negotiated settlement agreements.  The Company is also deficient with
the $1.00 bid price standard and has asked the panel for the 180 day extension
to regain compliance.  The Company believes it has the catalysts in
place for share price appreciation and long term continued listing standard
compliance. With working capital the Company anticipates executing on the short
term objectives of reinitiating production activities, shipping fuel out of
Baltimore and signing additional sales contracts over the next couple of
months.  The Company also intends to continue work towards completing
the potential Regent Trend Investment Ltd., or Milestone, joint venture
agreement and also to continue pursuit of power generation
opportunities.
  In April
the Company issued two Convertible Secured Promissory Notes (Notes) with July
29, 2010 maturity dates.  The Company extended the maturity dates of
the Notes. Under two separate extension agreements and the maturity dates are
now August 31, 2010 ($500,000 note) and August 19, 2010 ($200,000 note),
respectively. The Company has a 10 business day cure period if it fails to
pay  the Notes or the investor does not convert upon the maturity
date.
  In
consideration of the extension the Company amended the terms of the Note to
increase the Note interest rate from 10% to 15% retroactive to the Note
inception.  As a result of this rate change, the Company will record
additional interest expense of $6,027.  The Company is in discussions
with the holders of the Notes to convert the balance of the Notes plus accrued
interest into shares of common stock.  There can be no assurance that
the Company will reach an agreement with the holders to convert the
notes.


26




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, that began
generating revenues in 2008.





We
produce our biofuels using proprietary blending technologies that we believe is
simpler, cleaner, less expensive, and less energy intensive than the complex
chemical reaction process used to produce traditional biodiesel. We believe that
this technology gives us a competitive advantage by enabling us to produce
biofuels that are cleaner and less expensive than our competitors. Our
technology also gives us the flexibility to produce our biofuel from multiple
feedstocks, which allows us to use non-edible raw materials in our production
process, when desirable. We believe that these fuel characteristics will enable
us to customize our product to specific customer requirements and react more
quickly to trends in the biofuels market.




During
the year ended December 31, 2009, we commenced our principal business operations
and have exited the development stage.





We have
incurred annual operating losses since inception and expect to incur substantial
operating losses in the future in connection with the development of our core
products. As of June 30, 2010, we had an accumulated deficit of $56.6
million.  The operation and development of our business will require
substantial additional capital to fund our operations, payments due under
our exclusive license, the acquisition or development of manufacturing plants,
research and development and other initiatives including potentially the
financing of future acquisitions.





The
Company's independent registered public accounting firm has issued a going
concern opinion on the Company's financial statements for the year ended
December 31, 2009.





Our
near-term business strategy involves the following:





·
            Direct
      Sales.We are seeking to develop a revenue stream from
      direct sales of our biofuel produced at our Baltimore production facility.
      Based on existing contracts with our customers, we are seeking to expand
      our facility over the next several months, if sufficient resources are
      available.  Our longer term strategy would include construction
      of additional plants.


·
            Technology
      Licensing.  As a second potential revenue stream, our
      business plan contemplates collecting royalties through sublicensing our
      proprietary technology where it is more efficient for manufacturers to
      produce our biofuel at their own plants rather than requiring production
      at our facilities. We are in the process of exploring various technology
      licensing relationships.


·
            Government Tax
      Credits.  We are also pursuing our eligibility and
      qualification for tax credits and other government incentives to
      strengthen the competitive position of our biofuel and to otherwise
      attempt to take advantage of the U.S. government’s encouragement of
      “green” technologies.


·
            Strategic
      Partners.  We are seeking arrangements with strategic
      partners who would both provide funding and support our efforts to develop
      our production capacity and attract
customers.


·
            Research and
      Development.  To the extent permitted by our limited
      resources, we are continuing to develop our technology and extend it to
      fuels with additional applications.




27





Recent
Developments





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





·
            On
      July 21, 2010 we announced that we have filed for a patent application for
      our new pyrolysis oil based
biofuel.





·
            On
      July 14, 2010, we announced that we and Burmeister and Wain Energy A/S
      ("BWE") an engineering organization located in Lyngby, Denmark have
      entered into a Memorandum of Understanding (MOU) to cooperatively expand
      the use of NGBF’s renewable biofuels technology with BWE's engineering
      expertise in power generation and green renewable applications. The two
      companies believe there are substantial mutual benefits that can arise
      from the collaborations of BWE's expertise in combustion systems and our
      biofuel production know-how and proprietary technology. The companies
      intend to explore business opportunities to provide renewable energy
      solutions to BWE's existing customers.





·
            On
      June 24, 2010, we announced that the Baltimore City Board of School
      Commissioners has approved a long term boiler test and evaluation of our
      proprietary biofuel in two of Baltimore City's public schools over a one
      year period. The maximum volume for the program is capped at 1,000,000
      gallons, but can be increased up to 2,000,000 gallons if both parties
      agree.





·
            On
      June 23, 2010, we received a letter from The NASDAQ Stock Market notifying
      us that a Staff determination has been made to delist our securities from
      The NASDAQ Capital Market due to our non-compliance with the NASDAQ
      Listing Rule 5550(a)(2) which requires our common stock to maintain a
      minimum bid price of $1.00 per share and our inability to regain
      compliance with the rule within the 180 calendar days given to us in
      accordance with Listing Rule 5810(c)(3)(A). In addition, our inability to
      comply with the minimum stockholders’ equity requirement of $2.5 million
      or to meet the alternative minimum market value of listed securities or
      minimum net income from continuing operations as of the period ending
      March 31, 2010 serves as an additional basis for delisting our
      securities.





Pursuant
to the procedures set forth in the NASDAQ Listing Rules, we have appealed the
Staff determination to a NASDAQ Listing Qualifications Panel (the “Panel”) by
requesting a hearing, and our common stock would remain listed on the NASDAQ
Capital Market pending a final determination by the Panel.  Our
hearing was held on August 5, 2010. We are currently awaiting a response from
the Panel. If successful, the Panel could grant up to an additional 180 calendar
days, or until December 20, 2010, for us to regain compliance with the NASDAQ
Listing Rules. There is no assurance that we will be successful in our appeal
and will remain listed on NASDAQ.




·
            On
      June 10, 2010, we completed a private placement of our common stock and
      warrants, raising $500,000 in gross proceeds and approximately $407,000 in
      net proceeds, after deducting finders’ fees


·
            On
      June 3, 2010, we and Regent Trend Investment Ltd. (soon to be Milestone
      Biofuels Limited) (“Milestone”) announced an amendment to our non-binding
      MOU, dated March 12, 2010 to extend the due diligence period an additional
      90 days to August 25, 2010 to more fully explore the opportunities
      available for both parties. As previously disclosed, the MOU contemplates
      a strategic relationship between Milestone and us, including a $20 million
      direct equity investment in us and collaboration with Milestone to fund a
      joint venture to develop and operate biofuel production plants in the
      continental United States with a production capacity of 250 million
      gallons per year. In addition to satisfactory completion of due diligence,
      any transaction also remains subject to negotiation and execution of
      definitive agreements and board approval by both parties.  The
      transaction obtained shareholder approval as required under NASDAQ listing
      rules, at our annual shareholders’ meeting on July 8,
      2010.  There can be no assurance that the transaction will be
      completed, either on the proposed terms and within the timeframe currently
      anticipated, or at all.




28




·
            On
      May 27, 2010 we announced we have filed a patent application on our new
      glycerin-based biofuel.


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


·
            On
      May 7, 2010, the Company’s board of directors appointed John E. Mack, our
      current audit committee chairman, as non-executive Chairman of the Board;
      appointed David H. Goebel, our Chief Operating Officer, as a director; and
      accepted the resignation of Lee S. Rosen as Chairman of the Board and as a
      director and approved and executed a separation agreement with Mr.
      Rosen.


·
            On
      April 30, 2010, we completed a private placement of 90-day secured
      convertible notes and warrants to two investors, raising $700,000 in gross
      proceeds and $630,000 in net proceeds, after deducting finders’ fees. In
      August the investors agreed to extend the maturity dates of the notes to
      August 31, 2010 ($500,000 note) and August 19, 2010, ($200,000 note)
      respectively. We have a 10 business day cure period if we fail to
      payoff  the notes or the investor does not convert upon the
      maturity date.





Critical
Accounting Policies




Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosures. On an ongoing basis, we evaluate these
estimates, including those related to revenue recognition, long-lived assets,
accrued liabilities, income taxes, common stock warrant liabilities and
antidilution obligations, and share-based compensation. These estimates are
based on historical experience, information received from third parties, and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.





For a
description of our critical accounting policies which affect the significant
judgments and estimates used in the preparation of our consolidated financial
statements, please refer to Management’s Discussion and Analysis of Financial
Condition and Results of Operation in our Annual Report on Form 10-K for the
year ended December 31, 2009 under the caption “Critical Accounting
Policies.”  No changes have been made to these policies during the six
months ended June 30, 2010.





Financial Operations Overview




Revenue




We
recognize revenue when legal title to the product has passed to the customer,
which is generally when the product is shipped from our Baltimore, Maryland
facilities. We have agreements with our customers that specify the terms of the
sale, including price.




Cost
of Product Revenues




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




29




Research
and Development Expenses





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




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




General
and Administrative Expenses




General
and administrative expenses consist primarily of the costs associated with our
general management, including salaries, benefits and professional fees such as
legal and accounting expenses. Continued increases will also likely result from
the additional hiring of operational, financial, accounting, marketing and
information systems personnel. We have 11 employees, all of whom are full
time.




Interest
Income (Expense), Net




Interest
income consists of interest earned on our cash and cash equivalents. Interest
expense consists of interest incurred related to the license agreement payable
and convertible notes and amortization of the discount on the convertible notes
and deferred financing costs.




Income
Taxes




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





Results
of Operations




Comparison of the three
months ended June 30, 2010 and the three months ended June 30,
2009




Net
Loss




We
incurred a net loss of $3.0 million for the three months ended June 30, 2010, as
compared to $6.3 million for the three months ended June 30, 2009.




The
decrease in net loss of $3.3 million resulted primarily from:




·
            a
      $0.1 million decrease in cost of product
  revenues.




·
            a
      $0.5 million decrease in general and administrative
    expenses




·
            a
      $2.9 million decrease in loss on net change in fair value
      adjustment




partially
offset by:




·
            a
      $0.2 million increase in interest
expense.




30





Revenue




Total
revenues for the three months ended June 30, 2010 were $-0-, versus $42,637
total revenues for the three months ended June 30, 2009. The decrease in total
revenues was due to no sales during the second quarter of 2010.





Due to
working capital constraints the production facility in Baltimore has been
utilized primarily to make fuel for prospective customer testing and for R&D
activities including testing new processes.    We do not
expect to produce or sell additional fuel until we have secured additional
working capital.




Cost
of Product Revenues




Cost of
product revenues was $0.5 million for the three months ended June 30, 2010,
versus $0.6 million for the three months ended June 30, 2009. Cost of product
revenues is primarily comprised, of direct facility costs of $0.3 million and
amortization of license agreement costs of $0.2 million.




The cost
of product revenue was driven by a disproportionately higher cost of production
relative to units sold. To date, we have run only small batch processing which
does not allow us to purchase our feedstocks in large enough quantities to
leverage volume discounts and transportation costs. We also amortize our license
agreement on a straight line basis and pay fixed monthly lease costs on the
facility. These non-volume driven items make up the majority of the $0.5 million
costs of product revenue. If our production volume increases, we believe that
our per unit cost of production will decrease as we process much larger volumes,
though there can be no assurance that these cost reductions will
materialize.




Research
and Development Expenses




Research
and development expenses were approximately $72,000 for the three months ended
June 30, 2010, compared to approximately $96,000 for the three months ended June
30, 2009. The decrease in research and development expenses in 2010 is primarily
the result of lower finished product testing, driven by our production decrease
during the second quarter.  The salaries of our Chief Technology
Officer and Lab Assistant represent approximately $60,000 of the three months
ended total costs in both 2010 and 2009.  The lack of production led
to less batches being tested during the second quarter of 2010, leading to the
overall decrease in research and development expenses.




General
and Administrative Expenses





General
and administrative expenses were $2.1 million for the three months ended June
30, 2010, compared to $2.6 million for the three months ended June 30, 2009. The
decrease of $0.5 million in 2010 over the prior period was primarily the result
of decreases in the following:





·
            a
      $0.5 million decrease in non cash compensation
  expense.




·
            a
      $0.2 million decrease in non cash compensation expense for warrants
      related to grants to non-employees for services performed.  The
      service period ended in January 2010.  No expenses remain to be
      recognized.





·
            a
      $0.2 million decrease in lease termination expenses as we recognized
      expense during the three months ended June, 30 2009 for our Lake Mary
      office but had no such expenses during the three months ended June
      30,  2010.





·
            a
      $0.1 million decrease in investor relations
  expenses.





·
            a
      $0.1 million decrease in incentive compensation expenses resulting from a
      bonus to an executive.





31




partially
offset by:





·
            a
      $0.2 million increase in severance pay expense for our  former
      Chairman of the Board, who resigned and signed a separation agreement
      resulting in severance expense of $0.2
million.





·
            a
      $0.2 million increase innon cash
      compensation expense  for a restricted stock vesting pursuant to
      the resignation of our former Chairman of the Board in May
      2010.  In accordance with his severance agreement a number of
      restricted stock grants immediately vested and the related expense was
      recognized.  Additionally, the increase is related to new grants
      for 2009 performance incentive compensation which was recorded during the
      first quarter of 2010.





·
            a
      $0.1 million increase in wages due to salary increases and personnel
      changes.





·
            a
      $0.1 million increase in legal expenses primarily related to of diligence
      activities associated with the potential Milestone joint venture, other
      potential transactions and one time
activities.





Interest Expense




Interest
expense was approximately $280,000 for the three months ended June 30, 2010,
compared to approximately $111,000 for the three months ended June 30, 2009.
Interest expense consists of interest incurred related to the license agreement
payable and the convertible notes.  The increase is due to the
recording of interest expense on the convertible notes, amortization of deferred
financing costs associated with the convertible notes, as well as the
amortization of the convertible notes discount.  The increase is
partially offset by a reduction in the license agreement payable balance
resulting in less interest expense from that instrument.





(Loss)
Gain on Fair Value Adjustment




Gain on
change in fair value of warrant liability was nominal for the three months ended
June 30, 2010, compared to a $2.9 million loss for the three months ended June
30, 2009.  The carrying value of the common stock warrant liability is
calculated using the Black-Scholes option pricing model, which requires the
input of highly subjective assumptions. These assumptions include the risk-free
rate of interest, expected dividend yield, expected volatility, and the
remaining contractual term of the award. The risk-free rate of interest is based
on the U.S. Treasury rates appropriate for the expected term of the award.
Expected dividend yield is projected at 0%, as the Company has not paid any
dividends on its common stock since its inception and does not anticipate paying
dividends on its common stock in the foreseeable future. Expected volatility is
based on the Company’s historical volatility and the historical volatilities of
the common stock of comparable publicly traded companies.





Comparison of the six months
ended June 30, 2010 and the six months ended June 30, 2009




Net
Loss




We
incurred a net loss of $5.9 million for the six months ended June 30, 2010, as
compared to $8.7 million for the six months ended June 30, 2009.




The
decrease in net loss of $2.8 million resulted primarily from:




·
            a
      $0.1 million decrease in gain on debt
  extinguishment.




·
            a
      $3.1 million decrease in loss on net change in fair value
      adjustment.




32





partially
offset by:




·
            a
      $0.3 million increase in cost of product
  revenues.




·
            a
      $0.1 million increase in interest
expense.





Revenue




Total
revenues for the six months ended June 30, 2010 were $6,477, versus $42,637
total revenues for the six months ended June 30, 2009. The decrease in total
revenues was due to minimal sales during the first quarter of 2010 and no sales
during the second quarter of 2010.





Due to
working capital constraints the production facility in Baltimore has been
utilized primarily to make fuel for prospective customer testing and for R&D
activities including testing new processes.    We do not
expect to produce or sell additional fuel until we have secured additional
working capital.





Cost
of Product Revenues




Cost of
product revenues was $1.1 million for the six months ended June 30, 2010, versus
$0.8 million for the six months ended June 30, 2009. Cost of product revenues is
comprised of raw material feedstocks used in production of $0.1 million, direct
facility costs of $0.6 million and amortization of license agreement costs of
$0.4 million. The additional $0.3 million year over year can be attributed
primarily to the direct facility costs as the Baltimore plant lease expenses
began getting charged to cost of goods sold when the plant became operational in
March 2009.  Prior to March 2009 lease expenses were recorded as part
of general and administrative expenses.




The cost
of product revenue was driven by a disproportionately higher cost of production
relative to units sold. To date, we have run only small batch processing which
does not allow us to purchase our feedstocks in large enough quantities to
leverage volume discounts and transportation costs. We also amortize our license
agreement on a straight line basis and pay fixed monthly lease costs on the
facility. These non-volume driven items make up the $1.0 million the $1.1
million of the cost of product revenue. If we ramp up our production, the
amortization and direct facility costs will have a disproportionate impact on
our gross profit in relation to units sold. If our production volume increases,
we believe that our per unit cost of production will decrease as we process much
larger volumes, though there can be no assurance that these cost reductions will
materialize.





Research
and Development Expenses




Research
and development expenses were approximately $153,000 for the six months ended
June 30, 2010, compared to approximately $290,000 for the six months ended June
30, 2009. The decrease in research and development expenses in 2010 is primarily
the result of lower finished product testing, driven by our production decrease
during the second quarter.  The salaries of our Chief Technology
Officer and Lab Assistant represent approximately $120,000 of year to date costs
in both 2010 and 2009.  The lack of production led to less batches
being tested during 2010 leading to the overall decrease in research and
development expenses.




33




General
and Administrative Expenses




General
and administrative expenses were $4.4 million for the six months ended June 30,
2010, compared to $4.5 million for the six months ended June 30,
2009.  The decrease of $0.1 million was primarily the result of
decreases in the following:





·
            a
      $0.6 million decrease in non cash compensation
  expense.





·
            a
      $0.2 million decrease in non cash compensation expense for warrants
      granted to non-employees for services performed.  The service
      period ended in January 2010.  No expenses remain to be
      recognized.





·
            a
      $0.2 million decrease in lease termination expenses as we recognized
      expense in the six months ended June 30, 2009 for our Lake Mary office but
      had no such expenses during the six months ended June
      30,  2010.





·
            a
      $0.1 million decrease in terminal site lease expenses as we began to
      recognize these expenses in Cost of Product Revenue when the Plant became
      operation in March 2009.





·
            a
      $0.1 million decrease in investor relations
  expenses.





partially
offset by:





·
            a
      $0.2 million increase in incentive compensation expenses related to the
      recording of 2010 retention bonuses for all
  employees.





·
            a
      $0.2 million increase innon cash
      compensation expense  for restricted stock vesting pursuant to
      the resignation of our former Chairman of the Board in May
      2010.  In accordance with his severance agreement, a number of
      restricted stock grants immediately vested and the related expense was
      recognized.  Additionally, the increase can be related to new
      grants for 2009 performance bonuses which was recorded during the first
      quarter of 2010.





·
            a
      $0.1 million increase in wages due to salary increases and personnel
      changes.





·
            a
      $0.1 million increase in recruiting fees related to the hiring of an
      executive.





·
            a $0.4 million increase in legal
      expenses was the result of diligence activities associated with the
      potential Milestone joint venture, other potential transactions and one
      time activities.





·
            a
      $0.1 million increase in consulting expenses resulting primarily from a
      one time expense for consulting services related
      to  the  potential Milestone joint
      venture.





Interest Expense




Interest
expense was approximately $382,000 for the six months ended June 30, 2010,
compared to approximately $220,000 for the six months ended June 30,
2009.  Interest expense consists of interest incurred related to the
license agreement payable and the convertible notes.  The increase is
due to the recording of interest expense on the convertible notes, amortization
of deferred financing costs associated with the convertible notes, as well as
the amortization of the convertible notes discount.  The increase is
partially offset by a reduction in the license agreement payable balance
resulting in less interest expense from that instrument.




34





(Loss)
Gain on Fair Value Adjustment




Gain on
change in fair value of warrant liability was nominal for the six months ended
June 30, 2010, compared to $3.1 million loss for the six months ended June 30,
2009.  The carrying value of the common stock warrant liability
is calculated using the Black-Scholes option pricing model, which requires the
input of highly subjective assumptions. These assumptions include the risk-free
rate of interest, expected dividend yield, expected volatility, and the
remaining contractual term of the award. The risk-free rate of interest is based
on the U.S. Treasury rates appropriate for the expected term of the award.
Expected dividend yield is projected at 0%, as we have not paid any dividends on
our common stock since our inception and do not anticipate paying dividends on
our common stock in the foreseeable future. Expected volatility is based on our
historical volatility and the historical volatilities of the common stock of
comparable publicly traded companies.




Liquidity
and Capital Resources




Liquidity




At June
30, 2010, we had $0.3 million in cash, compared to $0.6 million at December 31,
2009.
  We have
financed our operations to date primarily through the sale of our common and
preferred stock, secured convertible notes and warrants in private placements
with accredited investors and registered direct offerings. In February 2010, we
raised $1,305,000 in gross proceeds from the sale of shares of common stock at a
purchase price of $0.69 per share and warrants with an exercise price of $0.90
per share.  In April 2010, we raised $700,000 in gross proceeds from
the issuance of secured convertible notes and warrants and in June 2010, we
raised $500,000 in gross proceeds from the sale of shares of common stock at a
purchase price of $0.45 per share and warrants with an exercise price of $0.60
per share.  In August we completed a registered direct offering
raising $1,000,000 in gross proceeds from the sales of common stock at $0.20 and
warrants exercisable at $0.30 per share. We expect net proceeds to be
approximately $915,000 after deducting fees and offering expenses.
 
 Although
we have received these funds this year, we will need to reduce costs and raise
additional funding to continue our operations.  We expect that our
available cash and interest income will be sufficient to finance currently
planned activities through October  2010. We estimate that we
will require an additional $5.5 million to fund our operations for the next 12
months. These estimates are based on certain assumptions, which could be
negatively impacted by the matters discussed under “Risk Factors.”
 
 We have
negotiated settlement agreements with several of our vendors that would
substantially reduce our liabilities once the agreed upon settlement amounts
have been paid. We did not raise sufficient capital to pay all of the agreed
upon amounts and therefore will not be able to resolve all of the liabilities
anticipated, until such time that we raise additional capital.  We
will continue to work with our creditors to reduce the cash required to settle
our accrued obligations and will also work with our vendors to reduce our cash
expenditures going forward.
 
 Several
existing commitments that require significant expenditures will continue to
impact our liquidity and capital resources. We have monthly lease and other
outstanding payment obligations under our production facility site
lease and terminaling service agreement for past production. We also have
incurred costs associated with developing, upgrading and expanding the capacity
of our biofuel production facility in Baltimore, Maryland. Under the license
agreement with the inventor of our proprietary technology, we also are required
to pay $1.0 million per year over the next four years. We will continue
incurring costs to test and optimize our fuels, enhance research and
development, pay our employees and sustain operations.
 
 We are
unlikely to be able to continue our operations unless we can obtain additional
financing. We likely will seek such funding through public or private financings
or some combination of them. Additional funding may not be available to us on
acceptable terms, or at all. Even after funding our short term needs, given our
ongoing need for capital, we may raise money on an opportunistic basis when the
market makes such funding available on acceptable terms.
  If we
continue to raise capital through the sale of equity securities, or securities
convertible into equity, dilution to our then existing shareholders would
result. If we raise additional capital through the incurrence of debt, we would
likely become subject to covenants restricting our business activities, and
holders of debt instruments would have rights and privileges senior to those of
our equity investors. In addition, servicing the interest and repayment
obligations under these borrowings would divert funds that would otherwise be
available to support research and development or commercialization
activities.




35





Cash
Flows




Net cash
used in operating activities was approximately $2.3 million for the six months
ended June 30, 2010, reflecting our net loss of $5.9 million and a
$0.2 million non-cash gain on extinguishment of debt. These items were partially
offset by approximately $1.3 million of non-cash expenses, $1.7 million in
favorable changes in operating assets and liabilities and $0.8 million in
depreciation & amortization.  Included in the non-cash expenses
are $1.2 million in stock-based compensation expense  and
approximately $0.1 million for stock, options and warrants issued for services
rendered,.




Net cash
provided by financing activities was $2.1 million for the six months ended
June 30, 2010, and consisted of net proceeds from the issuance of common
stock and proceeds from convertible notes offset by payment of $0.1 for license
payable.





Capital
Requirements and Resources





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




·
            the
      level of cash flows from product sales or sublicensing;·
            conducting
      additional testing with utilities, independent power producers, commercial
      boiler operators or others, including product application testing, to gain
      market acceptance of our biofuel among customers and equipment
      manufacturers;·
            maintaining
      and improving our production facility in Baltimore, Maryland under our
      terminal lease agreement with Pennington Partners, LLC or with others to
      supply our products initially for testing and eventually for the broader
      biofuels market;·
            the
      scope and results of our research and development
  efforts;·
            developing
      and executing a sales and marketing plan for the commercial and industrial
      heating fuel and marine market segments and a technology plan that
      complements the marketing plan;·
            entering
      into feedstock supply and transportation logistics agreements to supply
      our production facilities;·
            developing
      additional strategic relationships to attract potential customers and
      sublicensees and to obtain the capital commitments necessary to engineer,
      construct and operate biofuel plants in our exclusive
      territory;·
            continuing
      to pursue favorable tax incentives for our biofuel, particularly efforts
      to include our biofuel in the $1 per gallon and $0.50 credit afforded
      biodiesel and to have the benefit of such a change extend beyond the
      current expiration date of December 31, 2009 and to pursue obtaining EPA
      approval;·
            recruiting
      additional key employees to expand the capabilities of our existing
      management team; and·
            the
      costs of maintaining, expanding and protecting our intellectual property
      portfolio, including litigation costs and
  liabilities.




Off-Balance
Sheet Arrangements





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





ITEM
3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK




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




36





ITEM
4. CONTROLS AND PROCEDURES




(a)
Disclosure Controls and Procedures




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




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




(b)
Changes in Internal Control over Financial Reporting




During
the quarter ended June 30, 2010, there were no significant changes in our
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




37




PART
II.  OTHER INFORMATION




ITEM
1A. Risk Factors





An
investment in our common stock involves a high degree of risk. In addition
to the risk factors below and other information set forth in this report, you
should carefully consider the factors discussed in Part I, “Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009, as filed with the SEC on March 26, 2010, and in subsequent filings
with the SEC. If any of these risks actually occur, our business, results of
operations and financial condition would likely suffer. In these
circumstances, the market price of our common stock could decline, and you may
lose all or part of your investment.




Our
existing financial resources will only provide financing through October 2010,
and we will need to raise additional capital to continue our business, which
could be particularly challenging in the near term under current financial
market conditions.





The
report of our independent registered public accounting firm for the year ended
December 31, 2009 contains an explanatory paragraph which states that we have
incurred negative cash flows from operations since inception and are dependent
upon future financing and, based on our operating plan and existing working
capital deficit, this raises substantial doubt about our ability to continue as
a going concern. Based on our current estimates, we anticipate that our existing
financial resources will be adequate to permit us to continue to conduct our
business through October 2010, and we will need to control costs and raise
additional capital to continue our business beyond October  2010.
Accordingly, we will need to raise additional capital in the third quarter of
2010. For the six months ended June 30, 2010, we have incurred a net
loss of $5.9 million and negative cash flows from operating activities of $2.3
million. As of June 30, 2010, we had approximately $0.3 million of available
cash and approximately $3.1 million of accounts payable and accrued
expenses.  We have negotiated settlements with several of our vendors
that are contingent on us raising sufficient capital to pay the agreed upon
amounts.  These settlements should be successful and fully completing
will reduce our liabilities by $2.5 million.  In addition, under the
license agreement with the inventor of our proprietary technology, we are
required to pay $1.0 million per year over the next four years, with the next
$1.0 million due in March 2011. We also may owe certain lease payments under our
site lease and terminaling services agreement for our Baltimore production
facility and are negotiating to settle various issues by reducing rent payments
and modifying certain terms of the agreements in return for making certain
payments. 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 available, that it can be obtained on terms and conditions we
will deem acceptable. Any additional funding derived from the sale of equity
securities is likely to result in significant dilution to our existing
shareholders and may require shareholder approval, which cannot be
assured.





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




Under
NASDAQ listing rules, our common stock could be delisted from NASDAQ if we do
not meet certain standards regarding our financial condition and operating
results (including, among other factors, maintaining adequate stockholders’
equity, minimum $1.00 bid price and market capitalization), the distribution of
our publicly held securities and compliance with NASDAQ listing agreements and
SEC rules and regulations. For example, NASDAQ requires a minimum stockholders’
equity of $2.5 million or, alternatively, a market value of listed securities of
at least $35 million. On March 26, 2010, we filed our annual report on Form 10-K
for the year ended December 31, 2009, in which we reported shareholders equity
of $1,002,204.  In early April 2010, we received notice from NASDAQ
that our shareholders equity did not meet the minimum continued listing
requirement of $2.5 million, based on our balance sheet as of December 31,
2009.  As of June 30, 2010, we also did not meet the alternative
listing requirements of at least $35 million in market value of listed
securities or at least $500,000 in net income from continuing operations. 
Further, listed companies whose securities fall below the minimum $1.00 bid
requirement for continued listing for 30 consecutive business days can be
subject to delisting. In December 2009, we received a notice from NASDAQ that we
were not in compliance with the minimum bid requirement for 30 consecutive
business days and had until June 2010 to regain compliance.  Our
common stock has not traded above $1.00 on NASDAQ since December 2009. On June
23, 2010, we received a letter from The NASDAQ Stock Market notifying us that a
Staff determination has been made to delist our securities from The NASDAQ
Capital Market due to our non-compliance with the Nasdaq Listing Rule 5550(a)(2)
which requires our common stock to maintain a minimum bid price of $1.00 per
share and our inability to regain compliance with the rule within the 180
calendar days given to us in accordance with Listing Rule 5810(c)(3)(A). In
addition, our inability to comply with the minimum stockholders’ equity
requirement of $2.5 million or to meet the alternative minimum market value of
listed securities or minimum net income from continuing operations as of the
period ending March 31, 2010 serves as an additional basis for delisting our
securities.




38





Pursuant
to the procedures set forth in the NASDAQ Listing Rules, we have appealed the
Staff determination to a NASDAQ Listing Qualifications Panel (the “Panel”) by
requesting a hearing, and our common stock would remain listed on the NASDAQ
Capital Market pending a final determination by the Panel. Our hearing was held
on August 5, 2010. We are currently awaiting a response from the Panel. If
successful, the Panel could grant up to an additional 180 calendar days, or
until December 20, 2010, for us to regain compliance with the NASDAQ Listing
Rules. There is no assurance that we will be successful in our appeal and will
remain listed on NASDAQ.




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.





ITEM
6. EXHIBITS




The
exhibits required to be filed as part of this Quarterly Report on Form 10-Q are
listed in the Exhibit Index attached hereto and are incorporated herein by
reference.




39




SIGNATURES




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




New Generation
      Biofuels Holdings, Inc.Date:
      August 23, 2010
              By:
              /s/
      Cary J. ClaiborneCary
      J. ClaibornePresident
      & Chief Executive Officer(principal
      executive officer)
 By:
              /s/
      Dane R. SaglioDane
      R. SaglioChief
      Financial Officer(principal
      financial officerandprincipalaccounting
    officer)




40





EXHIBIT
INDEX





ExhibitNumber
            
            Exhibit
      Description4.1
            
            Form
      of Secured Convertible Promissory Note and Security Agreement
      (incorporated by reference to Exhibit 4.1 to the Current Report on Form
      8-K filed May 6, 2010).4.2
            
            Form
      of Warrant (incorporated by reference to Exhibit 4.2 to the Current Report
      on Form 8-K filed May 6, 2010).4.3
            
            Form of Warrant (incorporated by reference to
      Exhibit 4.1 to the Current Report on Form 8-K filed June 14,
      2010).10.1
            
            Form
      Note and Warrant Purchase Agreement (incorporated by reference to Exhibit
      10.1 to the Current Report on Form 8-K filed May 6,
  2010).10.2
            
            Reimbursement
      Agreement dated as of April 30, 2010 between 2020 Energy LLC and the
      Company (incorporated by reference to Exhibit 10.1 to the Current Report
      on Form 8-K filed May 6, 2010).10.3
            
            Employment
      Agreement dated as of March 29, 2010 between Dane R. Saglio and the
      Company (incorporated by reference to Exhibit 10.1 to the Current Report
      on Form 8-K filed April 2, 2010).10.4
            
            Form of Securities Purchase Agreement dated as of
      June 10, 2010 (incorporated by reference to Exhibit 10.1 to the Current
      Report on Form 8-K filed June 14, 2010).10.5
            
            Separation Agreement dated as of May 7, 2010
      between Lee S. Rosen and the Company (incorporated by reference to Exhibit
      10.1 to the Current Report on Form 8-K filed May 13,
      2010).31.1
            
            Certification pursuant to Section 302 of
      Sarbanes-Oxley Act of 2002*31.2
            
            Certification
      pursuant to Section 302 of Sarbanes-Oxley Act of 2002*32.1
            
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002*32.2
            
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002*





* Filed
herewith.