UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Form
10-Q




(Mark
One)


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


For the
quarterly period ended September 30, 2009


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


For the
transition period from _______ to _______.




Commission
file number000-50903




PURE
BIOFUELS CORP.




(Exact
Name of Registrant as Specified in Its Charter)




Nevada
                (State
      of Incorporation)
              47-0930829
                (I.R.S.
      Employer Identification No.)




701
Brazos Street, Suite 1050


Austin,
TX 78707


(Address
of Principal Executive Offices) (Zip Code)




1-310-402-5916


(Registrant’s
Telephone Number, Including Area Code)




N/A


(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)




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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period than 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  ̈  (Do
      not check if a smaller reporting company)
            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 o  No x





As of
November 12, 2009, the Company had 236,387,893 outstanding shares of common
stock, par value $0.001.





PURE
BIOFUELS CORP. AND SUBSIDIARIES




TABLE OF
CONTENTS


PageNumberPART
      I.
                      FINANCIAL
      INFORMATIONItem
      1.
                      Financial
      Statements
                      
                      3Item
      2.
                      Management’s
      Discussion and Analysis or Plan of Operations
                      
                      34Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      
                      47Item
      4.
                      Controls
      and Procedures
                      
                      47PART
      II.
                      OTHER
      INFORMATION
                      
                      47Item
      1.
                      Legal
      Proceedings
                      
                      47Item
      1A.
                      Risk
      Factors
                      
                      47Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      
                      47Item
      3.
                      Defaults
      Upon Senior Securities
                      
                      48Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      
                      48Item
      5.
                      Other
      Information
                      
                      48Item
      6.
                      Exhibits
                      
                      48SIGNATURES
                      
                      49




2


Balance
Sheet




PURE
BIOFUELS CORP. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





September 30,
                                                            
                                                            
                                                            December 31,2009
                                                            
                                                            
                                                            2008(unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                                            
                                                            $
                                                            1,942,574
                                                            
                                                            
                                                            $
                                                            579,241Restricted
      cash
                                                            
                                                            
                                                            7,793,887
                                                            
                                                            
                                                            
                                                            141,775Accounts
      receivable
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            148,337Other
      receivables
                                                            
                                                            
                                                            14,908
                                                            
                                                            
                                                            
                                                            11,539Inventories
                                                            
                                                            
                                                            477,289
                                                            
                                                            
                                                            
                                                            1,192,362Deposits
      and other assets
                                                            
                                                            
                                                            6,455,502
                                                            
                                                            
                                                            
                                                            117,094TOTAL
      CURRENT ASSETS
                                                            
                                                            
                                                            16,684,160
                                                            
                                                            
                                                            
                                                            2,190,348VAT
      CREDITS
                                                            
                                                            
                                                            630,553
                                                            
                                                            
                                                            
                                                            7,368,021PROPERTY,
      PLANT AND EQUIPMENT, net
                                                            
                                                            
                                                            40,641,538
                                                            
                                                            
                                                            
                                                            37,546,422DEBT
      ISSUANCE COSTS, net
                                                            
                                                            
                                                            3,578,127
                                                            
                                                            
                                                            
                                                            3,919,311GOODWILL
                                                            
                                                            
                                                            7,733,019
                                                            
                                                            
                                                            
                                                            7,015,640DEPOSIT
      GUARANTEE
                                                            
                                                            
                                                            15,070,675
                                                            
                                                            
                                                            
                                                            -OTHER
      ASSETS
                                                            
                                                            
                                                            270,617
                                                            
                                                            
                                                            
                                                            248,133TOTAL
      ASSETS
                                                            
                                                            $
                                                            84,608,689
                                                            
                                                            
                                                            $
                                                            58,287,875LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable
                                                            
                                                            $
                                                            1,649,753
                                                            
                                                            
                                                            $
                                                            5,325,948Accrued
      expenses
                                                            
                                                            
                                                            1,191,828
                                                            
                                                            
                                                            
                                                            1,959,474Due
      to prior stockholders of Interpacific Oil
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            5,740,061Due
      to related parties
                                                            
                                                            
                                                            277,361
                                                            
                                                            
                                                            
                                                            399,780Notes
      payable-short term, net of debt discount of $266,622as
      of  December 31, 2008
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1,233,378TOTAL
      CURRENT LIABILITIES
                                                            
                                                            
                                                            3,118,942
                                                            
                                                            
                                                            
                                                            14,658,641CONVERTIBLE
      NOTES, net of debt discount of $11,362,700 and $12,770,545as
      of September 30, 2009 and December 31, 2008, respectively
                                                            
                                                            
                                                            47,825,933
                                                            
                                                            
                                                            
                                                            6,937,445ACCRUED
      DERIVATIVE LIABILITIES
                                                            
                                                            
                                                            33,653,600
                                                            
                                                            
                                                            
                                                            564,643NOTE
      PAYABLE
                                                            
                                                            
                                                            43,000,000
                                                            
                                                            
                                                            
                                                            -LINE
      OF CREDIT
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            37,346,939TOTAL  LIABILITIES
                                                            
                                                            
                                                            127,598,475
                                                            
                                                            
                                                            
                                                            59,507,668COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      DEFICITPreferred
      stock; $0.001 par value; 1,000,000 shares authorized, no shares
      issued
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Common
      stock; $0.001 par value; 750,000,000 sharesauthorized;
      236,387,893, and 172,374,699 shares issued and outstandingas
      of September 30, 2009 and December 31, 2008, respectively
                                                            
                                                            
                                                            236,388
                                                            
                                                            
                                                            
                                                            172,375Additional
      paid-in capital
                                                            
                                                            
                                                            60,378,326
                                                            
                                                            
                                                            
                                                            55,362,143Accumulated
      other comprehensive loss
                                                            
                                                            
                                                            1,163,188
                                                            
                                                            
                                                            
                                                            (564,933
                                                            )Accumulated
      deficit
                                                            
                                                            
                                                            (104,767,688
                                                            )
                                                            
                                                            
                                                            (56,189,378
                                                            )TOTAL
      STOCKHOLDERS' DEFICIT
                                                            
                                                            
                                                            (42,989,786
                                                            )
                                                            
                                                            
                                                            (1,219,793
                                                            )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                                                            
                                                            $
                                                            84,608,689
                                                            
                                                            
                                                            $
                                                            58,287,875





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





3


Statements
of Operations




PURE
BIOFUELS CORP. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS





Three Months Ended
                                    
                                    
                                    Nine Months EndedSeptember 30, 2009
                                    
                                    
                                    September 30, 2008
                                    
                                    
                                    September 30, 2009
                                    
                                    
                                    September 30, 2008(unaudited)
                                    
                                    
                                    (unaudited)
                                    
                                    
                                    (unaudited)
                                    
                                    
                                    (unaudited)REVENUE
                                    
                                    $
                                    140,752
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    1,098,485
                                    
                                    
                                    $
                                    -COST
      OF REVENUE
                                    
                                    
                                    237,013
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,127,535
                                    
                                    
                                    
                                    -GROSS
      PROFIT (LOSS)
                                    
                                    
                                    (96,261
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (29,050
                                    )
                                    
                                    
                                    -SELLING,
      GENERAL AND ADMINISTRATIVE  EXPENSES
                                    
                                    
                                    2,368,425
                                    
                                    
                                    
                                    4,622,857
                                    
                                    
                                    
                                    6,451,559
                                    
                                    
                                    
                                    9,674,843LOSS
      FROM OPERATIONS
                                    
                                    
                                    (2,464,686
                                    )
                                    
                                    
                                    (4,622,857
                                    )
                                    
                                    
                                    (6,480,609
                                    )
                                    
                                    
                                    (9,674,843
                                    )OTHER
      INCOME (EXPENSES):Interest
      and financing costs
                                    
                                    
                                    (5,184,878
                                    )
                                    
                                    
                                    (12,331,103
                                    )
                                    
                                    
                                    (19,333,681
                                    )
                                    
                                    
                                    (15,343,970
                                    )Other,
      net
                                    
                                    
                                    183,333
                                    
                                    
                                    
                                    (126,404
                                    )
                                    
                                    
                                    (200,535
                                    )
                                    
                                    
                                    (283,430
                                    )Non-cash
      expenses in connection with debt financing
                                    
                                    
                                    (15,840,078
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (15,840,078
                                    )
                                    
                                    
                                    -Gain
      (loss) on change in fair value of accrued derivative
      liabilities
                                    
                                    
                                    7,755,285
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (13,319,981
                                    )
                                    
                                    
                                    -Foreign
      currency transaction gain (loss)
                                    
                                    
                                    333,646
                                    
                                    
                                    
                                    (455,700
                                    )
                                    
                                    
                                    1,879,279
                                    
                                    
                                    
                                    (1,324,334
                                    )TOTAL
      OTHER EXPENSE, net
                                    
                                    
                                    (12,752,692
                                    )
                                    
                                    
                                    (12,913,207
                                    )
                                    
                                    
                                    (46,814,996
                                    )
                                    
                                    
                                    (16,951,734
                                    )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                                    
                                    
                                    (15,217,378
                                    )
                                    
                                    
                                    (17,536,064
                                    )
                                    
                                    
                                    (53,295,605
                                    )
                                    
                                    
                                    (26,626,577
                                    )PROVISION
      FOR INCOME TAXES
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    800NET
      LOSS
                                    
                                    $
                                    (15,217,378
                                    )
                                    
                                    $
                                    (17,536,064
                                    )
                                    
                                    $
                                    (53,295,605
                                    )
                                    
                                    $
                                    (26,627,377
                                    )OTHER
      COMPREHENSIVE GAIN (LOSS):Foreign  currency
      translation adjustment
                                    
                                    
                                    1,269,891
                                    
                                    
                                    
                                    304,750
                                    
                                    
                                    
                                    1,728,121
                                    
                                    
                                    
                                    316,129COMPREHENSIVE
      LOSS
                                    
                                    $
                                    (13,947,487
                                    )
                                    
                                    $
                                    (17,231,314
                                    )
                                    
                                    $
                                    (51,567,484
                                    )
                                    
                                    $
                                    (26,311,248
                                    )NET
      LOSS PER SHARE - BASIC AND DILUTED
                                    
                                    $
                                    (0.07
                                    )
                                    
                                    $
                                    (0.13
                                    )
                                    
                                    $
                                    (0.28
                                    )
                                    
                                    $
                                    (0.28
                                    )WEIGHTED
      AVERAGE COMMON EQUIVALENTSHARES
      OUTSTANDING - BASIC AND DILUTED
                                    
                                    
                                    216,209,821
                                    
                                    
                                    
                                    134,443,562
                                    
                                    
                                    
                                    187,146,975
                                    
                                    
                                    
                                    96,525,314





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





4


Statement
of Stockholders’ Equity




PURE
BIOFUELS CORP. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)





AccumulatedAdditional
                    
                    
                    Other
                    
                    
                    
                    
                    
                    TotalCommon Stock
                    
                    
                    Paid-in
                    
                    
                    Comprehensive
                    
                    
                    Accumulated
                    
                    
                    Stockholders'Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Loss
                    
                    
                    Deficit
                    
                    
                    Equity (Deficit)Balance,
      December 31, 2008 as previously reported
                    
                    
                    172,374,699
                    
                    
                    $
                    172,375
                    
                    
                    $
                    55,362,143
                    
                    
                    $
                    (564,933
                    )
                    
                    $
                    (56,189,378
                    )
                    
                    $
                    (1,219,793
                    )Cumulative
      effect of reclassification of warrants and conversion
    options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (6,939,172
                    )
                    
                    
                    -
                    
                    
                    
                    4,717,295
                    
                    
                    
                    (2,221,877
                    )Balance,
      January 1, 2009 as adjusted
                    
                    
                    172,374,699
                    
                    
                    $
                    172,375
                    
                    
                    $
                    48,422,971
                    
                    
                    $
                    (564,933
                    )
                    
                    $
                    (51,472,083
                    )
                    
                    $
                    (3,441,670
                    )Stock
      compensation expense for options issued to employees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,772,324
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,772,324Reclassification
      of fair value of options from liability to equity
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,933
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,933Issuance
      of 64,013,194 shares of common stock for debt financing
                    
                    
                    64,013,194
                    
                    
                    
                    64,013
                    
                    
                    
                    10,178,098
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,242,111Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,728,121
                    
                    
                    
                    -
                    
                    
                    
                    1,728,121Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (53,295,605
                    )
                    
                    
                    (53,295,605
                    )Balance,
      September 30, 2009 (unaudited)
                    
                    
                    236,387,893
                    
                    
                    $
                    236,388
                    
                    
                    $
                    60,378,326
                    
                    
                    $
                    1,163,188
                    
                    
                    $
                    (104,767,688
                    )
                    
                    $
                    (42,989,786
                    )





Effective
August 7, 2006, the Company effected a one and one-quarter (1.25) for one (1)
forward stock split of the authorized, issued and outstanding common stock,
without change to the par value. All share amounts
have been retroactively adjusted for all periods presented.





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





5


Statements
of Cash Flows




PURE
BIOFUELS CORP. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Nine
      Months
                          
                          
                          Nine
      MonthsEnded
                          
                          
                          EndedSeptember
      30, 2009
                          
                          
                          September
      30, 2008(unaudited)
                          
                          
                          (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                          
                          $
                          (53,295,605
                          )
                          
                          $
                          (26,627,377
                          )Adjustments
      to reconcile net loss to net cash(used
      in) provided by operating activities:Depreciation
                          
                          
                          484,511
                          
                          
                          
                          61,795Stock
      compensation expense for options issued to employees
                          
                          
                          1,772,324
                          
                          
                          
                          1,841,058Fair
      value of shares issued for services
                          
                          
                          -
                          
                          
                          
                          5,850Fair
      value of shares issued for financing costs
                          
                          
                          1,819,375
                          
                          
                          
                          46,267Fair
      value of warrants and conversion options issued for financing
      costs
                          
                          
                          4,913,240
                          
                          
                          
                          573,628Financing
      costs of warrant repricing
                          
                          
                          -
                          
                          
                          
                          87,818Amortization
      of debt discounts, debt issuance costs and financing costs
                          
                          
                          6,223,959
                          
                          
                          
                          3,155,987Non-cash
      financing costs
                          
                          
                          -
                          
                          
                          
                          9,210,728Loss
      on change in fair value of accrued derivative liabilities
                          
                          
                          13,319,981
                          
                          
                          
                          -Non-cash
      expenses in connection with debt financing
                          
                          
                          15,840,078
                          
                          
                          
                          -Loss
      on write off of deposit
                          
                          
                          -
                          
                          
                          
                          207,673Non-cash
      foreign currency transaction loss (gain)
                          
                          
                          (1,627,214
                          )
                          
                          
                          1,726,401Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          152,559
                          
                          
                          
                          -Other
      receivables
                          
                          
                          (1,153
                          )
                          
                          
                          462,994Inventories
                          
                          
                          774,422
                          
                          
                          
                          (1,795,125
                          )Deposits
      and other assets
                          
                          
                          (4,197,358
                          )
                          
                          
                          (3,805,810
                          )Accounts
      payable
                          
                          
                          (4,040,265
                          )
                          
                          
                          4,667,558Accrued
      expenses
                          
                          
                          4,946,512
                          
                          
                          
                          1,522,128Due
      to related parties
                          
                          
                          (162,356
                          )
                          
                          
                          2,901Net
      cash used in operating activities
                          
                          
                          (13,076,990
                          )
                          
                          
                          (8,655,526
                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment
      on amounts due to prior stockholders of Interpacific Oil
                          
                          
                          (5,600,000
                          )
                          
                          
                          -Increase
      in deposits
                          
                          
                          -
                          
                          
                          
                          (146,463
                          )Decrease
      (Increase) in VAT credits
                          
                          
                          6,838,725
                          
                          
                          
                          (4,341,604
                          )Purchase
      of property, plant and equipment
                          
                          
                          (264,584
                          )
                          
                          
                          (19,525,157
                          )Net
      cash provided by (used in) investing activities
                          
                          
                          974,141
                          
                          
                          
                          (24,013,224
                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of convertible notes
                          
                          
                          2,200,000
                          
                          
                          
                          5,000,000Proceeds
      from issuance of notes payable - short term
                          
                          
                          1,500,000
                          
                          
                          
                          -Proceeds
      from line of credit
                          
                          
                          -
                          
                          
                          
                          20,947,091Change
      in restricted cash
                          
                          
                          (7,432,016
                          )
                          
                          
                          -Change
      in deposit guarantee
                          
                          
                          (15,070,675
                          )
                          
                          
                          -Interest
      payment deducted from restricted cash
                          
                          
                          -
                          
                          
                          
                          740,736Payment
      on notes payable - short term
                          
                          
                          (3,000,000
                          )
                          
                          
                          -Payment
      on convertible debt
                          
                          
                          (2,200,000
                          )
                          
                          
                          -Payment
      on line of credit
                          
                          
                          (3,500,000
                          )
                          
                          
                          -Payment
      of debt issuance costs
                          
                          
                          (1,480,449
                          )
                          
                          
                          (1,600,645
                          )Proceeds
      from Interbank Peru Financing
                          
                          
                          43,000,000
                          
                          
                          
                          -Proceeds
      from the issuance of common stock
                          
                          
                          -
                          
                          
                          
                          5,500,000Net
      cash provided by financing activities
                          
                          
                          14,016,860
                          
                          
                          
                          30,587,182Effect
      of exchange rate changes on cash and cash equivalents
                          
                          
                          (550,678
                          )
                          
                          
                          (785,585
                          )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                          
                          
                          1,363,333
                          
                          
                          
                          (2,867,153
                          )CASH
      AND CASH EQUIVALENTS, Beginning of period
                          
                          
                          579,241
                          
                          
                          
                          2,991,104CASH
      AND CASH EQUIVALENTS, End of period
                          
                          $
                          1,942,574
                          
                          
                          $
                          123,951





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





6





Pure
Biofuels Corp. and Subsidiaries


Notes
to Consolidated Financial Statements


September
30, 2009


(unaudited)





Note
1 – Organization and Basis of Presentation





The
unaudited consolidated financial statements have been prepared by Pure Biofuels
Corp. (the “Company”), pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Company’s Annual
Report on Form 10-K. The results for the nine months ended September 30, 2009,
are not necessarily indicative of the results to be expected for the full year
ending December 31, 2009.





Organization and Line of
Business




Pure
Biofuels Corp. (formerly Metasun Enterprises, Inc., herein the “Company”) was
incorporated in the State of Nevada on October 2, 2003, under the name Metasun
Enterprises, Inc. Pursuant to a share exchange agreement (“Share Exchange
Agreement”) dated July 26, 2006, the Company acquired 99.9% of the issued and
outstanding common stock of Pure Biofuels del Peru S.A.C. (“Peru SAC”), a
private Peruvian corporation, in consideration for the issuance of 29,999,970
common shares. The Share Exchange Agreement occurred on September 15, 2006
(“Date of Acquisition”). As of the closing date, the former shareholders of Peru
SAC held approximately 55% of the issued and outstanding common shares of the
Company. The acquisition of Peru SAC, therefore, was recorded as a reverse
acquisition for accounting purposes. Peru SAC was incorporated on May 10, 2006,
under the laws of Peru, and Peru SAC, the acquired entity, is regarded as the
predecessor entity as of the Date of Acquisition. In accordance with the
accounting rules for reverse acquisitions, the consolidated financial statements
are presented as a continuation of Peru SAC.





The
Company previously focused its business efforts on the development of software
specializing in web applications using Microsoft TMtechnologies. In contemplation of the share exchange transaction with
Peru SAC, the Company abandoned its original business plan and sold its
investment in its previous subsidiary, Metasun Software Corp. (“Metasun”), and
the related software business to two former stockholders in consideration for
the cancellation of all shares of the Company’s common stock previously owned by
them and the waiver and forgiveness of any outstanding amounts owed by the
Company to them. As of the closing date of the Share Exchange Agreement, the
Company commenced the business of the production, marketing and sale of clean
burning biofuels focusing on Latin America.





On August
7, 2006, the Company completed a merger with its wholly-owned subsidiary, Pure
Biofuels Corp., which was incorporated solely to effect the name change. As a
result, the Company changed its name from Metasun Enterprises, Inc. to Pure
Biofuels Corp. In addition, effective August 7, 2006, the Company effected a one
and one-quarter (1.25) for one (1) forward stock split of the authorized, issued
and outstanding common stock. As a result, the authorized share capital
increased from 75,000,000 shares of common stock with a par value of $0.001 to
93,750,000 shares of common stock with a par value of $0.001.  All
share amounts have been retroactively adjusted for all periods presented. In
2007, the Company also changed its fiscal year-end from January 31 to December
31.




7




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


On
December 4, 2007, the Company, Peru SAC, 99.9% owned subsidiary of the Company,
Interpacific Oil S.A.C., a Peruvian corporation (“Interpacific”), and certain
stockholders of Interpacific entered into an Agreement and Plan of Merger (the
“Merger Agreement”), pursuant to which Peru SAC acquired all of the
outstanding capital stock of Interpacific, with Peru SAC continuing as the
surviving corporation. The merger was consummated contemporaneous with the
signing and filing of the Merger Agreement as of such date with the Peruvian
Public Registry in accordance with the relevant provisions of Peruvian laws.





Development Stage
Company





The
Company was in the development stage through July 31, 2009.  During
the quarter ended September 30, 2009, the Company became fully operational and
as such is no longer considered a development stage company.  During
the period that the Company was considered a development stage company, the
Company incurred accumulated losses of approximately $105,000,000.





Going-Concern





The
Company has incurred recurring losses from the development stage and has only
recently begun principal operations. The Company has revenues from the sale of
inventory and by-products that was produced during the testing phase of the
facility. These consolidated financial statements have been prepared on a
going-concern basis, which implies the Company will continue to realize its
assets and discharge its liabilities in the normal course of business. The
Company is unlikely to pay dividends or generate significant earnings in the
immediate or foreseeable future. The continuation of the Company as a
going-concern is dependent upon its ability to generate sustainable revenue. For
the nine months ended September 30, 2009, the Company incurred a net loss of
approximately $53,296,000 and has an accumulated deficit of $104,767,688. These
consolidated financial statements do not include any adjustments to the
recoverability and classification of the recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going-concern.





Basis of
Presentation





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and have been consistently applied. The Company’s subsidiaries use their local
currencies, Peruvian Nuevos Soles (“PEN”); however the accompanying consolidated
financial statements have been translated and presented in United States Dollars
(“$”).





Note
2 – Summary of Significant Accounting Policies





Principles of
Consolidation





The
accompanying consolidated financial statements include the accounts of Pure
Biofuels Corp. and its subsidiaries, Pure Biofuels del Peru S.A. C. and Palma
Industrial S.A.C.  All intercompany balances and transactions have
been eliminated in consolidation.




8




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made in the preparation
of the Company’s consolidated financial statements relate to the determination
of depreciation rates for equipment, reserves for slow moving and obsolete
inventory, future tax rates used to determine future income taxes, and the
carrying values of goodwill and accrued derivative liabilities. Actual results
could differ materially from these estimates upon which the carrying values were
based.





Cash
and Cash Equivalents





Cash and
cash equivalents include cash on hand, cash in time deposits and all highly
liquid investments with original maturities of three months or
less.





Restricted
Cash





Restricted
cash consists of monies under a standby letter of credit as required by a vendor
and a deposit in guarantee.  As of September 30, 2009 and December 31,
2008, total restricted cash related to the standby letter of credit amounted to
$141,901 and $141,775, respectively.  As of September 30, 2009 and
December 31, 2008, total restricted cash related to the deposit in guarantee
amounted to $7,651,986 and $0, respectively.





Accounts
Receivable





The
Company maintains reserves for potential credit losses on accounts
receivable.  Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of the reserve.  As of September 30, 2009 and
December 31, 2008, the Company determined that no reserves for accounts
receivable were necessary.





Inventories





Inventories are stated at the lower of cost or market. Cost has
been determined by using the first-in, first-out method. The Company
periodically reviews its reserves for slow moving and obsolete inventories. As
of September 30, 2009, and December 31 2008, the Company believes that no
reserve was necessary.





Property, Plant and
Equipment





Property,
plant and equipment are stated at historical cost and are depreciated using the
straight-line method over their estimated useful lives. The useful lives and
depreciation methods are reviewed periodically to ensure that the depreciation
method and period are consistent with the anticipated pattern of future economic
benefits. Expenditures for maintenance and repairs which do not improve or
extend the respective lives of the assets are charged to operations as incurred
while renewals and betterments are capitalized. Gains and losses on disposals
are included in the results of operations.




9




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


The
estimated useful lives are as follows:





Building
      improvements
                  
                  10
      yearsFacilities
      and equipment
                  
                  10
      yearsComputer
      equipment and licenses
                  
                  4
      yearsOther
      fixed assets
                  
                  10
      years





Goodwill and
Impairment





The
Company applies Accounting Standards Codification (“ASC”) Topic 350,
“Intangibles - Goodwill and Other,” to record goodwill and intangible
assets.  In accordance with ASC 350, certain intangible assets are to
be assessed periodically for impairment using fair value measurement techniques.
Goodwill is tested for impairment on an annual basis as of the end of the
Company's fiscal year, or more frequently when impairment indicators arise. The
Company evaluates the recoverability of intangible assets periodically and takes
into account events and circumstances which indicate that impairment exists. The
Company believes that as of September 30, 2009 and December 31, 2008, there was
no significant impairment of its goodwill.





Long-Lived
Assets





The
Company applies the provisions of ASC Topic 360, “Property, Plant, and
Equipment,” which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. ASC 360 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair value of the long-lived assets. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair values are reduced for the
cost of disposal. Based on its review, the Company believes that as of September
30, 2009 and December 31, 2008, there was no significant impairment of its
long-lived assets.





Accrued Derivative
Liabilities





The
Company applies ASC Topic 815, “Derivatives and Hedging,” which provides a
two-step model to determine whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
scope exception in ASC 815-10-15-74. This standard triggers liability accounting
on all instruments and embedded features exercisable at strike prices
denominated in any currency other than the functional currency of the operating
entity in Peru.  Using the criteria in ASC 815, the Company determines
which instruments or embedded features that require liability accounting and
records the fair values as an accrued derivative liability. The changes in the
values of the accrued derivative liabilities are shown in the accompanying
consolidated statements of operations as “gain (loss) on change in fair value of
accrued derivative liabilities.”




10




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


Fair Value
Measurements





For
certain of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, accrued
liabilities and short-term debt, the carrying amounts approximate their fair
values due to their short maturities. In addition, the Company has long-term
debt with financial institutions. The carrying amounts of the line of credit and
other long-term liabilities approximate their fair values based on current rates
of interest for instruments with similar characteristics.





ASC Topic 820, “Fair Value Measurements and Disclosures,”
requires disclosure of the fair value of financial instruments held by the
Company. ASC Topic 825, “Financial Instruments,” defines fair value, and
establishes a three-level valuation hierarchy for disclosures of fair value
measurement that enhances disclosure requirements for fair value
measures.  The carrying amounts reported in the consolidated balance
sheets for receivables and current liabilities each qualify as financial
instruments and are a reasonable estimate of their fair values because of the
short period of time between the origination of such instruments and their
expected realization and their current market rate of interest. The three levels
of valuation hierarchy are defined as follows:





·
            Level
      1 inputs to the valuation methodology are quoted prices for identical
      assets or liabilities in active
markets.





·
            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.





·
            Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.




The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.




The
Company’s warrant liability is carried at fair value totaling $16,465,304 and
$564,643, as of September 30, 2009 and December 31, 2008,
respectively.  The Company’s conversion option liability is carried at
fair value totaling $17,188,296 and $0 as of September 30, 2009 and December 31,
2008, respectively.  The Company used Level 2 inputs for its valuation
methodology for the warrant liability, conversion option liability and option
liability as their fair values were determined by using the Black-Scholes option
pricing model based on various assumptions.




11




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


Fair Value
                                As of
                                September 30, 2009
                              
                              Fair Value Measurements at
                                September 30, 2009
                                Using Fair Value Hierarchy(unaudited)
                              
                              Level 1
                              
                              Level 2
                              
                              Level 3LiabilitiesWarrant
      liability
                              
                              $
                              16,465,304
                              
                              
                              
                              $
                              16,465,304Conversion
      option liability
                              
                              
                              17,188,296
                              
                              
                              
                              
                              17,188,296Total
      accrued derivative liabilities
                              
                              $
                              33,653,600
                              
                              
                              
                              $
                              33,653,600




The
Company recognized a gain of $7,755,285 for the three months ended September 30,
2009 and a loss of $13,319,981 for the change in the fair value of accrued
derivative liabilities for the nine months ended September 30,
2009.  For the three and nine months ended September 30, 2008, there
was no gain or loss for the changes in the valuations of the aforementioned
liabilities.





The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented in the consolidated balance sheets at fair value in
accordance with ASC 825.





Concentration of Credit
Risk





Cash
includes cash on hand and demand deposits in accounts maintained within Peru and
the United States. Certain financial instruments, which subject the Company to
concentration of credit risk, consist of cash. The Company maintains balances at
financial institutions which, from time to time, may exceed Federal Deposit
Insurance Corporation insured limits for the banks located in the Unites States.
Balances at financial institutions within Peru are not covered by insurance. As
of September 30, 2009 and December 31, 2008, the Company had deposits in excess
of federally-insured limits of approximately $9,736,000 and $567,000,
respectively. The Company has not experienced any losses in such
accounts.





Foreign Currency
Transactions and Comprehensive Income




The
reporting currency of the Company is the U.S. dollar. The Company’s subsidiaries
use their local currencies, the PEN as their functional currencies. Assets
and liabilities are translated using the exchange rates prevailing at the
balance sheet dates. Translation adjustments resulting from this process are
included in accumulated other comprehensive income (loss) in the consolidated
statements of stockholders’ equity. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as
incurred.




Asset and
liability amounts at September 30, 2009 and December 31, 2008 were translated at
2.885 PEN to $1.00 USD and 3.142 PEN to $1.00 USD, respectively, for the
Company’s Peruvian subsidiaries. Equity accounts were stated at their historical
rates. The average translation rates applied to income statement accounts for
the nine months ended September 30, 2009 and 2008 were 3.055 PEN and 2.884 PEN
to $1.00 USD, respectively.  Cash flows are also translated at average
translation rates for the period. Therefore, amounts reported on the
consolidated statements of cash flows will not necessarily agree with changes in
the corresponding balances on the consolidated balance sheets.





Foreign Currency Transaction
Gains and Losses





Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.  Historically, the Company has not
entered into any currency trading or hedging transactions, although there is no
assurance that the Company will not enter into such transactions in the
future.




12




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


Income
Taxes





The
Company accounts for income taxes in accordance with ASC Topic 740, “Income
Taxes.” ASC 740 requires a company to use the asset and liability method of
accounting for income taxes, whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of, the
deferred tax assets will not be realized.  Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.





Under ASC
740, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no effect on the Company’s consolidated financial
statements.





Revenue
Recognition





In
accordance with the Securities and Exchange Commission’s (“SEC”) Staff
Accounting Bulletin (“SAB”) Topic 13, “Revenue Recognition,” the Company
recognizes revenue when it is realized or realizable and earned. The Company
must meet all of the following four criteria under SAB 104 to recognize
revenue:





·
            Persuasive
      evidence of an arrangement exists


·
            Delivery
      has occurred


·
            The
      sales price is fixed or
determinable


·
            Collection
      is reasonably assured





Basic and Diluted Losses Per
Share





Earnings
per share is calculated in accordance with the ASC Topic 260, “Earnings Per
Share.”  Basic earnings per share is based upon the weighted average number
of common shares outstanding.  Diluted earnings per share is based on the
assumption that all dilutive convertible shares and stock warrants were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. All warrants and convertible notes were excluded from the diluted
loss per share calculation due to the anti-dilutive effect.




13




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


Stock-Based
Compensation





The
Company records stock-based compensation in accordance with ASC Topic 718,
“Compensation – Stock Compensation.”  ASC 718 requires companies to
measure compensation cost for stock-based employee compensation at fair value at
the grant date and recognize the expense over the employee’s requisite service
period. Under ASC 718, the Company’s volatility is based on the historical
volatility of the Company’s stock or the expected volatility of similar
companies. The expected life assumption is primarily based on historical
exercise patterns and employee post-vesting termination behavior. The risk-free
interest rate for the expected term of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.





The
Company uses the Black-Scholes option-pricing model which was developed for use
in estimating the fair value of options. Option-pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes in
the subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option-pricing model may not provide an accurate measure of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with ASC 718 using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.





On April
27, 2007, the Company’s board of directors amended and restated the Company’s
stock option plan to increase the number of available options from a total of
18,000,000 to 21,000,000 options that enables it to grant options to employees,
including its officers and directors, and its subsidiaries and other persons who
contribute efforts to the Company.  The board of directors administers the
stock option plan. The stockholders approved the stock option plan on November
19, 2007.





Statement of Cash
Flows





In
accordance ASC Topic 230, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.





Reclassification





Certain
reclassifications have been made to the 2008 consolidated financial statements
to conform to the 2009 consolidated financial statement presentation. These
reclassifications had no effect on net loss or cash flows as previously
reported.





Recent
Pronouncements





On
January 1, 2009, the Company adopted ASC sub-topic 810-10 (formerly SFAS
No. 160, “Accounting and Reporting on Non-controlling Interest in
Consolidated Financial Statements, an Amendment of ARB 51”). ASC 810-10 states
that accounting and reporting for minority interests are to be recharacterized
as noncontrolling interests and classified as a component of equity. The
calculation of earnings per share continues to be based on income amounts
attributable to the parent. ASC 810-10 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but
affects only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary.  The
adoption of ASC 810-10 did not have a material impact on the Company’s
consolidated financial statements.




14


Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


During
the second quarter of 2009, the Company adopted guidance issued by the Financial
Accounting Standards Board (“FASB”) in April 2009 that is intended to
provide additional application guidance and enhance disclosures about fair value
measurements and impairments of securities and guidance that expanded the fair
value disclosures required for all financial instruments within the scope of ASC
topic 825 to interim periods. The adoption of this guidance did not materially
impact the consolidated financial statements.





In April
2009, the FASB issued an accounting standard to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard provides increased disclosure
about the credit and noncredit components of impaired debt securities that are
not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result in a
change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This standard became effective
for interim and annual periods ending after June 15, 2009. The adoption of
this standard did not have a material impact on the Company’s consolidated
financial statements.





In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.





In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company has not completed the
assessment of the impact this new standard will have on the Company’s
financial condition, results of operations or cash flows.




15




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


In
June 2009, the FASB issued guidance which amends certain ASC concepts
related to consolidation of variable interest entities (formerly SFAS
No. 167, “Amendments to FASB Interpretation No. 46(R)”). This guidance
is effective for fiscal years beginning after November 15, 2009. The
Company is currently evaluating the impact the adoption of this guidance will
have on the consolidated financial statements.





In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of the valuation techniques, as defined. This ASU is effective for
the first reporting period, including interim periods, beginning after the
issuance of this ASU. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.





Note
3 – Inventories





Inventories
consisted of the following as of September 30, 2009, and December 31,
2008:





September 30,
                            
                            
                            December 31,Description
                            
                            2009
                            
                            
                            2008(unaudited)Raw
      Material
                            
                            $
                            193,894
                            
                            
                            $
                            794,493Work-in-Process
                            
                            
                            170,118
                            
                            
                            
                            152,844Finished
      Goods
                            
                            
                            113,277
                            
                            
                            
                            245,025Inventories,
      net
                            
                            $
                            477,289
                            
                            
                            $
                            1,192,362




Note
4 – VAT Credits





At
September 30, 2009 and December 31, 2008, the Company has value added tax
(“VAT”) credit of $630,553 and $7,368,021, respectively, in Peru. VAT is charged
at a standard rate of 19% of the purchases made by the Company, and the Company
obtains income tax credits for VAT paid in connection with the purchase of
capital equipment and other goods and services employed in its operations. The
Company is entitled to use the credits against its Peruvian income tax liability
or to receive a refund against VAT payable or sales.  During the nine
months ended September 30, 2009, the Company reduced the VAT credit by
$8,170,000 as part of the financing agreement with Banco Internacional Del Peru
S.A.A. (“Interbank Peru”). As the Company does not anticipate incurring either a
Peruvian tax or a VAT liability during the next fiscal year, the credits have
been classified as non-current.




16




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


Note 5 – Property, Plant and
Equipment





Property,
plant and equipment consist of the following:





September 30
                            
                            
                            December 31,2009
                            
                            
                            2008(unaudited)Land
                            
                            $
                            3,506,868
                            
                            
                            $
                            3,220,041Plant
      under construction
                            
                            
                            4,957,792
                            
                            
                            
                            4,974,263Building
      improvements
                            
                            
                            842,346
                            
                            
                            
                            595,039Facilities
      and equipment
                            
                            
                            32,384,418
                            
                            
                            
                            29,236,036Computer
      equipment and licenses
                            
                            
                            262,163
                            
                            
                            
                            240,374Other
      fixed assets
                            
                            
                            98,172
                            
                            
                            
                            101,12442,051,759
                            
                            
                            
                            38,366,877Accumulated
      depreciation
                            
                            
                            (1,410,221
                            )
                            
                            
                            (820,455
                            )Property,
      Plant and Equipment, net
                            
                            $
                            40,641,538
                            
                            
                            $
                            37,546,422




Depreciation
expense amounted to $89,227 and $484,511, for the three and nine months
ended September 30, 2009, respectively, and $39,415 and $61,795 for the three
and nine months ended September 30, 2008, respectively.





Note
6 – Performance Bond





On March
27, 2009, the Company entered into a performance bond agreement (the “Bond
Agreement”), with FDS Corporation (“FDS”).  Under the Bond Agreement,
FDS agreed to open a financial bond (the “FDS Bond”) in the amount of up to
$2,500,000 required by the Peruvian Authorities to provide the regulatory and
other permits necessary to commercialize the Callao Facility as a terminal and
bonded warehouse under the laws of Peru for a term of up to twelve months,
subject to the Company’s option to extend the term for up to two additional
twelve month periods.  The Bond Agreement accrues interest on a
monthly basis in the amount of $31,250. As additional consideration for the
placement of the Bond Agreement, the Company issued to FDS seven year cashless
warrants (the “FDS Bond Warrants”) to purchase 62,500,000 shares of common stock
by which FDS will have the right to purchase one share of common stock at an
exercise price of $0.05 per share for every warrant issued. FDS may exchange all
or any FDS Bond Warrants at any time after the Effective Date and on or prior to
March 31, 2016, for a number of shares of common stock equal to the number of
shares that would have been issued upon the exercise of the FDS Bond Warrants
pursuant to Section 4 of the Bond Agreement divided by 1.2.  FDS may
withdraw the FDS Bond at any time and terminate this Agreement if there is an
event of default and Plainfield accelerates the obligations in connection with
such event of default under the Loan Agreement dated as of September 12,
2007.




17




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


In
accordance with ASC 815, the Company determined that the FDS Bond Warrants
should be classified as a liability at fair value on the date the FDS Bond
Warrants were issued.  The Company determined the fair value of the
FDS Bond Warrants to be $4,085,589 using the Black-Scholes option pricing model
with the following assumptions:  (1) expected life of 7 years; (2)
volatility of 130%; (3) risk free interest rate of 2.28% and (4) dividend rate
of 0%.  The fair value of $4,085,589 was recorded as a prepaid asset
and warrant liability in the consolidated balance sheets.  The Company
will amortize the $4,085,589 over one year.  The amortization expense
for the three and nine months ended September 30, 2009 was $1,029,793, and
$2,093,165, respectively, and is included in “interest and financing costs” in
the accompanying consolidated statements of operations.





Note
7 – Notes Payable – Short Term





FDS Notes and
Warrants





On
December 4, 2008, the Company executed a Promissory Note (the “FDS Note”)
promising to pay to FDS, the principal amount of $1,000,000.  The
Company was to pay FDS the principal amount in one installment of $1,000,000 on
the earlier of (a) January 15, 2009 or (b) the date the Company enters into an
agreement with Interbank Peru pursuant to which Interbank Peru will provide the
Company with term loan financing, in a principal amount of not less than
$40,330,000. The FDS Note is a non-interest bearing note.





In
partial consideration for FDS executing the FDS Note with the Company, the
Company agreed to issue to FDS seven-year warrants to purchase 6,666,666 shares
of the Company’s common stock, par value $.001 per share, at an exercise price
of $0.30 per share of common stock (the “FDS Warrants”).  The FDS
Warrants may be exercised beginning December 4, 2008 through December 4,
2015.




Due to
the non-payment by the Company when required, the Company was required to issue
to FDS seven-year warrants to purchase an additional 26,666,666 shares of the
Company’s common stock at an exercise price of $0.30 per share (the “FDS
Additional Warrants”). The FDS Additional Warrants are to be substantially in
the form of the original FDS Warrants issued with the FDS Note.




In
addition to the issuance of the FDS Additional Warrants, the FDS Note shall be
converted at FDS’ option into either (i) a note evidencing a three-month term
loan bearing an interest rate of 15% per annum to be paid in debt securities
having identical terms and conditions to such three-month term loan or (ii) the
number of duly authorized and validly issued shares of common stock equal to the
total amount of principal outstanding on the FDS Note divided by a conversion
price of $0.30; such an amount of principal outstanding is to be measured on the
date of such event of default.





In
accordance with ASC 815, the Company determined that the FDS Additional Warrants
should be classified as a liability at fair value on the date the FDS Additional
Warrants were to be issued.  The Company did not issue the FDS
Additional Warrants until April 8, 2009; however, the Company valued the
warrants as of the date of default to determine the liability that should be
recorded.  The Company determined the fair value of the FDS Additional
Warrants at January 15, 2009 to be $1,576,763 using the Black-Scholes option
pricing model with the following assumptions:  (1) expected life of 7
years; (2) volatility of 130%; (3) risk free interest of 2.28% and (4) dividend
rate of 0%.  The fair value of $1,576,763 was recorded as “accrued
derivative liabilities” in the accompanying consolidated balance sheets and
included in “interest and financing costs” in the consolidated statements of
operations at the date of default.




18




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


On April
28, 2009, and June 18, 2009, the Company signed promissory notes (“FDS 2009
Notes”) to borrow from FDS $500,000 and $250,000, respectively. The FDS 2009
Notes provide that the Company will pay the principal amount together with
accrued and unpaid interest on the entire principal amount of the FDS 2009 Notes
at 5% of the principal amount to FDS in one (1) installment of $525,000 and
$262,500 on the earlier of (a) May 30, 2009 and June 30, 2009 (“Maturity
Dates”), respectively, and (b) the date the Company enters into an agreement
with Interbank Peru pursuant to which Interbank Peru will provide term loan
financing for the Company and/or one or more of its majority-owned subsidiaries,
in a principal amount of not less than $40,330,000.  Any accrued
interest shall be added to the principal sum then owed by the Company to FDS and
paid on the Maturity Dates.





The FDS
2009 Notes provide for certain events of default with various
remedies.  Pursuant to the default provisions, the Company issued to
FDS seven-year cashless warrants (“FDS 2009 Warrants”) to purchase 12,500,000
and 6,250,000 shares of the Company’s common stock at an exercise price of $0.04
per share of common stock for the $525,000 and the $262,500 principal and
interest balances, respectively.  FDS may at its sole option exchange
all or any FDS 2009 Warrants at any time after the date of the event of default
and during the exercise period for a number of shares of common stock equal to
the number of shares that would have been issued upon the exercise of the FDS
2009 Warrants divided by 1.2.





In
accordance ASC 815, the Company determined that the FDS 2009 Warrants should be
classified as a liability at fair value on the date the FDS Additional Warrants
were to be issued.  The Company determined the fair value of the FDS
Additional Warrants at May 30, 2009, and June 30, 2009 to be $1,069,199 and
$964,594, respectively using the Black-Scholes option pricing model with the
following assumptions:  (1) expected life of 7 years; (2) volatility
of 130%; (3) risk free interest of 3.06% and 3.18%, respectively and (4)
dividend rate of 0%.  The fair value of $1,069,199 and $964,594 was
recorded as “accrued derivative liabilities” in the accompanying consolidated
balance sheets and included in “interest and financing costs” in the
consolidated statements of operations at the date of default.





The
Company repaid $500,000 in January 2009 and $1,250,000 in July
2009.





Plainfield Promissory Note
and Warrants





On
December 4, 2008, the Company executed a Promissory Note (the “Plainfield Note”)
promising to pay to Plainfield, the principal amount of $500,000.  The
Company is to pay Plainfield the principal amount in one installment of $500,000
on the earlier of (a) January 15, 2009 or (b) the date the Company enters into
an agreement with Interbank Peru pursuant to which Interbank Peru will provide
the Company with term loan financing, in a principal amount of not less than
$40,330,000. The Plainfield Note is a non-interest bearing note.




19




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


In
partial consideration for Plainfield executing the Plainfield Promissory Note
from the Company, the Company agreed to issue to Plainfield seven-year warrants
to purchase 3,333,333 shares of the Company’s common stock, par value $.001 per
share, at an exercise price of $0.30 per share of common stock (the “Plainfield
Warrants”).  The Plainfield Warrants may be exercised beginning
December 4, 2008 through December 4, 2015.




Due to
the non-payment by the Company when required, the Company was required to issue
to Plainfield seven-year warrants to purchase an additional 13,333,333 shares of
the Company’s common stock at an exercise price of $0.30 per share (the
“Plainfield Additional Warrants”). The Plainfield Additional Warrants are to be
substantially in the form of the original Plainfield Warrants issued with the
Plainfield Note.




In
addition to the issuance of the Plainfield Additional Warrants, the Plainfield
Note shall be converted at Plainfield’s option into either (i) a note evidencing
a three-month term loan bearing an interest rate of 15% per annum to be paid in
debt securities having identical terms and conditions to such three-month term
loan or (ii) the number of duly authorized and validly issued shares of common
stock equal to the total amount of principal outstanding on the Plainfield Note
divided by a conversion price of $0.30; such an amount of principal outstanding
is to be measured on the date of such event of default.





In
accordance with ASC 815, the Company determined that the Plainfield Additional
Warrants should be classified as a liability at fair value on the date the
Plainfield Additional Warrants were to be issued.  The Company did not
issue the Plainfield Additional Warrants until April 8, 2009; however, the
Company valued the warrants as of the date of default to determine the liability
that should be recorded.  The Company determined the fair value of the
Plainfield Additional Warrants at January 15, 2009, to be $788,382 using the
Black-Scholes option pricing model with the following
assumptions:  (1) expected life of 7 years; (2) volatility of 130%;
(3) risk free interest of 2.28% and (4) dividend rate of 0%.  The fair
value of $788,382 was recorded as “accrued derivative liabilities” in the
accompanying consolidated balance sheets and included in “interest and financing
costs” in the consolidated statements of operations at the date of
default.





On April
28, 2009, and July 18, 2009, the Company signed promissory notes (“Plainfield
2009 Notes”) to borrow from Plainfield $500,000 and $250,000, respectively. The
Plainfield 2009 Notes provide that the Company will pay the principal amount
together with accrued and unpaid interest on the entire principal amount of the
Plainfield 2009 Notes at 5% of the principal amount to Plainfield in one (1)
installment of $525,000 and $262,500 on the earlier of (a) May 30, 2009 and June
30, 2009 (“Maturity Dates”), respectively, and (b) the date the Company enters
into an agreement with Interbank Peru pursuant to which Interbank Peru will
provide term loan financing for the Company and/or one or more of its
majority-owned subsidiaries, in a principal amount of not less than
$40,330,000.  Any accrued interest shall be added to the principal sum
then owed by the Company to Plainfield and paid on the Maturity
Date.





The
Plainfield 2009 Notes provide for certain events of default with various
remedies including acceleration or conversion, at Plainfield’s sole option, in
lieu of the other remedies for an event of default, into a Paid-in-Kind (“PIK”)
Note in an aggregate principal amount of $525,000 and $262,500, convertible into
13,125,000 and 6,562,500 shares of common stock, respectively, of the Company’s
common stock at a conversion price of $0.04 per share.  Plainfield may
at its sole option exchange the PIK Note at any time after the date of the event
of default for (a) a promissory note (the “Exchange Note”) issued by the
Company, identical in all respects to the PIK Note, except that the exchange
note shall not have any conversion or exchange rights and (b) a number of shares
of common stock equal to the number of shares that would have been issued upon
the conversion of the PIK Note pursuant to the immediately preceding sentence
divided by 1.2.




20




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


The
Company did not repay the Plainfield 2009 Notes on the required dates and
pursuant to the terms of the agreement, Plainfield opted to exchange the PIK
Note for the Exchange Note and receive shares of common stock.  The
exchange of the PIK Note and the issuance of the common shares were performed in
conjunction with the Interbank Peru financing on July 16, 2009.





In July
2009, the Company repaid the $1,250,000.





Note
8 – Convertible Debt





On
September 12, 2007, the Company entered into a securities purchase agreement
(the “Purchase Agreement”), with Plainfield Special Situations Master Fund
Limited (“PSSM”), Plainfield Peru I LLC (“LLC I”) and Plainfield Peru II LLC
(“LLC II” and together with LLC I, “Plainfield”) pursuant to which the Company
agreed to sell to Plainfield (1) 11,000,000 shares of the Company’s common stock
(the “Shares”), (2) $10,000,000 aggregate principal amount of the 10%/12% senior
convertible PIK election notes due September 12, 2012, (the “Notes”), and (3)
warrants (the “Warrants,” and, together with the Shares and the Notes, the
“Securities”) to purchase up to 56,938,245 shares of the Company’s common stock.
The Notes are convertible into 16,666,667 shares of the Company’s common stock
at the option of the holder of Notes at any time at a conversion price of $0.60
per share. The conversion price is subject to adjustment in accordance with the
terms of the Purchase Agreement. The Company is to pay interest on the Notes
semi-annually in arrears on March 15 and September 15 of each year, commencing
on March 15, 2008.  Subject to the conversion rights set forth below,
the Company is obligated to pay 100% of the principal amount of the Notes, plus
accrued and unpaid interest, in cash on September 12, 2012 (the “Maturity
Date”), provided, however, that the Company may, at its option, elect to pay
interest on the Notes (i) entirely in cash, or (ii) entirely by issuing
additional Notes with an effective interest rate of 12% (“PIK Interest”). The
first payment of interest shall be paid in PIK Interest. The Notes are senior
unsecured obligations of the Company and rank equally in right of payment to the
Company’s future senior indebtedness. The Notes also restrict the Company and
its subsidiaries from incurring indebtedness or other obligations, including
creating liens, merging, selling assets, making dividends, distributions or
investments, entering into transactions with affiliates, making capital
expenditures, modifying charter documents and issuing capital stock in the
future, in each case subject to certain exceptions.





On March
26, 2008, the Company entered into a first amendment to the Purchase Agreement
(the “Amended Purchase Agreement”) with Plainfield. The Amended Purchase
Agreement amends the Purchase Agreement, pursuant to which the Company agreed to
sell to Plainfield (i) the Shares, (ii) $10,000,000 aggregate principal amount
of its 10%/12% senior convertible PIK election notes due September 12, 2012 (the
“Original Notes”), and (iii) the Warrants to purchase up to 56,938,245 shares of
common stock. Pursuant to the Amended Purchase Agreement, the Company agreed to
sell to Plainfield $5,000,000 aggregate principal amount of its 10%/12% senior
convertible PIK election notes due September 12, 2012, (the “Additional Notes”,
and, together with the Original Notes, the “Notes”). The terms of the Additional
Notes are substantially the same as the Original Notes except for the conversion
price as described below.




21




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


The
Additional Notes are convertible into 16,666,667 shares of common stock at the
option of the holder of Additional Notes at any time after the Amendment Date
and on or prior to September 12, 2012, at a conversion price of $0.30 per share.
The conversion price is subject to adjustment in accordance with the terms of
the Amended Purchase Agreement. Concurrent with the issuance of the Additional
Notes, pursuant to the terms of the Amended Purchase Agreement, the conversion
price of the Original Notes and $610,000 aggregate principal amount of PIK
Interest Notes issued on March 15, 2008 as payment of interest on the Original
Notes, was adjusted to $0.30.





The
Company is to pay interest on the Additional Notes semi-annually in arrears on
March 15 and September 15 of each year, commencing September 15, 2008. Subject
to the conversion rights set forth below, the Company is obligated to pay 100%
of the principal amount of the Additional Notes, plus accrued and unpaid
interest, in cash on September 12, 2012 (the “Maturity Date”), provided,
however, that the Company may, at its option, elect to pay interest on the
Additional Notes (i) entirely in cash, or (ii) entirely by issuing additional
Notes with an effective interest rate of 12% (“PIK Interest Notes”). The first
payment of interest shall be paid in PIK Interest Notes.





The
Additional Notes are senior unsecured obligations of the Company and rank
equally in right of payment to the Company’s future senior indebtedness. The
Additional Notes also restrict the Company and its subsidiaries from incurring
indebtedness or other obligations, including creating liens, merging, selling
assets, making dividends, distributions or investments, entering into
transactions with affiliates, making capital expenditures, modifying charter
documents and issuing capital stock in the future, in each case subject to
certain exceptions.





If there
is an event of default on the Additional Notes, the principal amount of the
Additional Notes, plus accrued and unpaid interest may be declared immediately
due and payable, subject to certain conditions set forth in the Additional
Notes. These amounts automatically become due and payable in the case of certain
types of bankruptcy or insolvency events involving the Company. It is an event
of default under the Additional Notes if (i) the Company fails to pay accrued
interest, principal amount or another amount with respect to the Notes when due;
(ii) certain events of bankruptcy, insolvency or reorganization with respect to
the Company specified in the Notes occur; (iii) the Company fails to pay when
due any other indebtedness in excess of $100,000; (iv) any of the Transaction
Documents (as defined in the Amended Purchase Agreement) shall cease to be in
full force and effect; (v) the Company fails to make the payments on the
Additional Notes required upon a Change of Control (as defined in the Purchase
Agreement); (vi) certain judgments or decrees shall be entered against us or any
of the subsidiaries in an amount exceeding $100,000; (vii) the Company defaults
in the due performance or observance by it of any term, covenant or agreement
contained in the Purchase Agreement; or (viii) any representation, warranty or
statement made or deemed made by the Company in connection with the transaction
shall prove to be untrue in any material respect on the date as of which made or
deemed made.




22




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


The
Company also agreed to grant to Plainfield, within 90 days of the Additional
Notes closing date (as defined in the Amended Purchase Agreement), security
interests in such assets and Capital Stock of the Company’s Subsidiaries (as
defined in the Purchase Agreement) as may be requested from time to time by
Plainfield. Failure to grant such interests shall give rise to an immediate
Event of Default pursuant to the Amended Purchase Agreement and the Loan
Agreement.





As of September 30, 2008, the Company had accrued interest of
$2,322,779 related to its line of credit with Plainfield. In order to obtain
funds to pay the accrued interest and to pay the interest that will accrue
through January 31, 2009, the Company, on November 4, 2008, executed the Second
Amendment to the Securities Purchase Agreement (the “Agreement”) with
Plainfield. Pursuant to this Agreement, the Company agreed to sell to Plainfield
and Plainfield agreed to buy from the Company, (1) $2,370,182 in aggregate
principal amount of the 10%/12% Senior Convertible PIK Election Notes due 2012
for a purchase price of $2,370,182 and (2) $1,537,020 in aggregate principal
amount of 10%/12% Senior Convertible PIK Election Notes due 2012 representing
interest through January 31, 2009.





On March
10, 2009, the Company and Plainfield entered into a third amendment to the
Securities Purchase Agreement (the “Third Amendment”).





Under the
Third Amendment, Article II of the Agreement was amended to provide for
Plainfield’s purchase from the Company (a) on March 10, 2009, $1,283,214 in
aggregate principal amount of additional notes (“2009 Additional Notes”) for a
purchase price of $1,283,214, (b) on a date mutually agreed upon, $1,200,000 in
aggregate principal amount of additional notes (“Second 2009 Additional Notes”)
for a purchase price of $1,200,000 and (c) on April 1, 2009 or on such other
date as mutually agreed upon, $313,559 in aggregate principal amount of
additional notes (“April 2009 Additional Notes”) for a purchase price of
$313,559 (all additional Notes issued pursuant to the Third Amendment
collectively, the “2009 Additional Notes”).





Pursuant
to the Third Amendment, the Company issued to Plainfield 10%/12% Senior
Convertible PIK Notes (“2009 Notes”) due September 12, 2012 in the amount of
$1,000,000 and $1,200,000 on March 10, 2009 and March 27, 2009,
respectively.  The Company may pay the interest in cash or by issuing
additional notes.  The interest rate for the 2009 Notes is 10% if the
Company pays the interest in cash and 12% if the Company issues additional
notes. The Company shall make the first interest payment on the 2009 Notes by
issuing additional notes.  The Company will pay interest on the 2009
Notes semi-annually in arrears on March 15 and September 15 of each year,
commencing on March 15, 2009.  The “2009 Notes” are convertible into
shares of common stock at $0.04 per share.





The
Company determined that the 2009 Notes contained an embedded beneficial
conversion feature as the conversion price of $0.04 per share was less than the
share price of $0.06 on the date of issuance.  The Company recorded
the fair value of $2,714,302 as an accrued derivative liability.  The
fair value was determined using the Black-Scholes option pricing model under the
following assumptions:  (1) expected life between 3.47 and 3.51 years,
(2) risk free interest rate between 1.27% and 1.46%, (3) dividend yield of 0%,
and (4) volatility of 130%.  The Company recorded $2,200,000 to
debt discounts to be amortized over the life of the 2009 Notes and $514,302 to
“interest and financing costs.”




23




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


On July
16, 2009, the Company and Plainfield entered into a fifth amendment to the
Securities Purchase Agreement (the “Fifth Amendment”).




Pursuant
to the Fifth Amendment, the Company repaid the following amounts:





$3,500,000
of the line of credit


$1,250,000
of the short term notes


$2,200,000
of the convertible notes





The
Company also issued a PIK Note to Plainfield for $34,312,220 which represents
the remaining outstanding principal balance of the line of credit after the
$3,500,000 was repaid and the accrued interest through July 15, 2009 of
$465,281.  The $34,312,220 is convertible into 114,374,066 shares of
common stock based on a conversion rate of $0.30.





The
Company determined that the notes issued pursuant to the Fifth Amendment
contained an embedded beneficial conversion feature.  The Company
recorded the fair value of $12,347,942 as an accrued derivative
liability.  The fair value was determined using the Black-Scholes
option pricing model under the following assumptions:  (1) expected
life between 3.16 years, (2) risk free interest rate between 1.54%, (3) dividend
yield of 0%, and (4) volatility of 130%.  The Company recorded
$12,347,942 as “Non-cash expenses in connection with debt
financing.”





The
following table summarizes the convertible notes:





ConvertibleNotesBalance,
      December 31, 2007
                          
                          $
                          602,080Additional
      principal
                          
                          
                          5,000,000Conversion
      of interest to principal
                          
                          
                          1,526,600Line
      of Credit PIK interest
                          
                          
                          3,181,390Discount
      related to additional principaland
      repricing of conversion price
                          
                          
                          (5,648,500
                          )Discount
      related to change in terms
                          
                          
                          (891,987
                          )Amortization
      of note discount
                          
                          
                          3,167,862Balance,
      December 31, 2008
                          
                          $
                          6,937,445Conversion
      of interest to principal
                          
                          
                          5,168,423Additional
      principal
                          
                          
                          2,200,000Increase
      Discount per implementationof
      EITF 07-5
                          
                          
                          (428,153
                          )Discount
      related to additional principal
                          
                          
                          (3,092,683
                          )Amortization
      of note discount
                          
                          
                          2,933,821Write
      off of note discount
                          
                          
                          1,994,860Paydown
      of principal
                          
                          
                          (2,200,000
                          )Convert
      line of credit to convertible note
                          
                          
                          34,312,220Balance,
      September 30, 2009 (unaudited)
                          
                          $
                          47,825,933




24




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


Total
interest incurred for the three and nine months ended September 30, 2009 related
to the convertible notes amounted $1,479,206 and $2,847,177, respectively and
$478,707 and $1,255,446 for three and nine months ended September 30, 2008,
respectively.





For the
three and nine months ended September 30, 2009, the Company amortized debt
discounts in the amount $959,446 and $2,933,820, respectively, and $869,644 and
$2,298,218 for the three and nine months ended September 30, 2008, respectively,
which are recorded in the accompanying consolidated statements of operations as
interest and financing costs.  The accrued interest payable related to
the convertible notes at September 30, 2009 and December 31, 2008 amounted to
$315,673 and $667,280, respectively.





Note 9 – Line of Credit





On
September 12, 2007, the Company entered into a $20,000,000 Loan Agreement (“Line
of Credit”), between the Company, as Guarantor, and Plainfield, as
Administrative Agent.  The Loan Agreement terminates on January 12,
2011.





On March
13, 2008, the Company and the subsidiaries entered into an agreement with
Plainfield pursuant to which the Borrowers may draw down an additional $818,000
(the “Additional Loan”) under the Loan Agreement. Pursuant to the terms of the
agreement, the Company reset the exercise price of Plainfield’s warrants to
purchase 59,104,912 shares of the Company’s common stock from $0.60 to
$0.30.





On April
18, 2008, the Company, as Guarantor, entered into a Second Amendment to Loan
Documents (the “Amendment”) with the Subsidiaries (the “Borrowers”), PSSM, as
the Lender and Administrative Agent (“Plainfield” or the “Administrative
Agent”), and the other credit parties thereto. The Amendment amends the loan
agreement (the “Loan Agreement”) and certain related documents (together with
the Loan Agreement, the “Loan Documents”) entered into by the Company, the
Borrowers and Plainfield on September 12, 2007, as amended on March 13,
2008.




Pursuant
to the terms of the Amendment, available borrowings under the Loan Agreement
were increased by $17,346,939, such that the maximum aggregate principal amount
of loans available under the Loan Agreement is $37,346,939. Prior to the
execution of the Amendment, the Company had borrowed $20,000,000 under the Loan
Agreement. On April 18, 2008, the Company borrowed an additional $4,413,265, on
April 28, 2008, the Company borrowed an additional $4,120,746, on May 7, 2008,
the Company borrowed an addition $3,437,075, and on May 19, 2008, the Company
borrowed an additional $5,375,853 under the Loan Agreement.





On July
16, 2009, the Company paid $3,500,000 of the principal balance and converted the
remaining principal balance of $33,846,939 and accrued interest of $465,281 into
a PIK 10%/12% convertible note.





Total
interest expense for the three and nine months ended September 30, 2009 was
$161,837 and $1,992,615, respectively, and $1,198,993 and $2,901,733 for the
three and nine months ended September 30, 2008, respectively.




25




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


The
Company recorded $15,840,078 as “Non-cash expenses in connection with debt
financing” related to the payment of the Plainfield and FDS convertible notes,
the conversion of the line of credit to a convertible promissory note, and the
issuance of common shares to Plainfield as part of the refinancing
arrangement.





Note 10 – Interbank Peru Financing





On July
16, 2009, the Company entered into sale/leaseback transaction with Interbank
Peru (the “Financing”). Under the Financing, Interbank Peru acquired all
the assets that comprise the Company’s Supply Plant, and in turn leased the
Supply Plant back to the Company.  However, the assets remain on the
Company’s books as still owned by the Company in accordance with the accounting
standard that governs this transaction. Further, the Financing agreement allows
a Purchase Option, as defined, by the Company at the end of the six-year term of
the agreement.





Also a
Trust Management was established for the following Company assets: (i) the right
for collections, (ii) cash flows, (iii) a capital contribution (U.S. $15
million), (iv) a deposit in guarantees (U.S. $15 million), and (v) the cash
flows that the Company credited in a reserve account.





The
Company received $51,170,000 in cash pursuant to the Interbank Peru
Financing.  The Company recorded a note payable of $43,000,000 and
reduced VAT credits by $8,170,000.  The principal balance of the
amount due to Interbank Peru is $43,000,000 with an effective interest rate of
10.6% per annum.  The Company will make interest only payments for the
first year and then for years two through six, the Company will make both
principal and interest payments such that the loan is completely repaid at the
end of year six.





Pursuant
to the Interbank Peru Financing agreement, the Company is required to maintain
certain financial and nonfinancial covenants during the term of the Financing
agreement, including submission of financial statements to Interbank within
certain number of days after the close of periods, maintaining funds equivalent
to at least 35% of the note payable amount in a Trust Management Account, as
defined, and maintaining minimum Debt Service Coverage Rate, as defined, among
others.  As of September 30, 2009, and as of the date these
consolidated financial statements were issued, the Company was in compliance
with these covenants.





The
Company recorded interest expense of $906,350 for the three and nine months
ended September 30, 2009 related to the Interbank Peru Financing.  The
following table shows the principal payments for the note payable:




26




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


PrincipalFiscal
      Year
                      
                      Amount2009
                      
                      $
                      -2010
                      
                      
                      900,0002011
                      
                      
                      4,500,0002012
                      
                      
                      7,500,0002013
                      
                      
                      10,900,0002014
                      
                      
                      12,800,0002015
                      
                      
                      6,400,000Total
      debt (unaudited)
                      
                      $
                      43,000,000




Note
11 – Accrued Derivative Liability





Accrued Warrant
Liability





Effective
January 1, 2009, the Company adopted the provisions of ASC 815. ASC 815
applies to any freestanding financial instruments or embedded features that have
the characteristics of a derivative, and to any freestanding financial
instruments that are potentially settled in an entity’s own common
stock.





As a
result, 1,805,667 of the issued and outstanding common stock purchase warrants
previously treated as equity pursuant to the derivative treatment exemption were
no longer afforded equity treatment.  In accordance with the
transition provisions of ASC 815, the new guidance has been applied to the
1,805,667 warrants that were outstanding as of January 1, 2009.  The
cumulative effect of this change in accounting principle of $350,742 has been
recognized as a reduction of the opening balance of accumulated deficit as of
that date.  That cumulative effect adjustment is the difference
between the amounts previously recognized in the Company’s balance sheet as of
December 31, 2008, and the amounts that would have been recognized if the
guidance in ASC 815 had been applied from the issuance date of the outstanding
warrants.





The fair
value of all warrants at September 30, 2009 is $16,465,304.





Accrued Conversion Option
Liability





Convertible
Debt outstanding at January 1, 2009





The
conversion option embedded in the Company’s convertible debt, as described in
Note 8,  previously met the criteria of being “conventional
convertible” debt and, accordingly, it was not separately accounted for as a
derivative instrument liability.  However, the conversion option does
not meet the criteria of ASC 815 because it requires that the conversion price
be adjusted in certain circumstances that do not meet the “fixed-for-fixed’
criteria in that accounting standard.  As a result, the Company is now
required to separately account for the embedded conversion option as a
derivative instrument liability, carried at fair value and marked-to-market each
period, with changes in the fair value each period charged or credited to
operations.




27




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


In
accordance with the transition provisions of ASC 815, the new guidance has been
applied to the $19,707,990 of the Company’s Convertible Notes that were
outstanding as of January 1, 2009.  The cumulative effect of this
change in accounting principle of $4,366,553 has been recognized as a reduction
of the opening balance of accumulated deficit as of that date.  That
cumulative effect adjustment is the difference between the amounts previously
recognized in the Company’s balance sheet as of December 31, 2008 and the
amounts that would have been recognized if the guidance in ASC 815 had been
applied from the issuance date of the outstanding Convertible
Notes.





Convertible
Debt Issued in March 2009





The
Company determined that the 2009 Notes discussed in Note 8, contained an
embedded conversion feature.  In accordance with ASC 815, the
$2,714,302 fair value of the conversion feature was recorded as liability at the
issuance date of the 2009 Notes.





The fair
value of all conversion options at September 30, 2009 is
$17,188,296.





Note
12 – Stockholders’ Equity





Common
Stock




Effective
August 7, 2006, the Company effected a one and one-quarter (1.25) for one (1)
forward stock split of the authorized, issued and outstanding common stock,
without a change to the par value. As a result, the authorized share capital
increased from 75,000,000 shares of common stock with a par value of $0.001 to
93,750,000 shares of common stock with a par value of $0.001. On November 19,
2007, the stockholders approved an amendment to its articles of incorporation to
increase the number of authorized common shares to 250,000,000 and to authorize
1,000,000 shares of preferred stock, par value $0.001.  On October 28,
2008, the stockholders’ approved an amendment to its articles of incorporation
to increase the number of authorized common shares to 325,000,000.  On
May 22, 2009, the stockholders’ approved an amendment to its articles of
incorporation to increase the number of authorized common shares to
750,000,000.





Stock
Options





In 2006,
the Company adopted the Stock Option and Award Plan (the “Plan”) initially
reserving an aggregate of 18,000,000 shares of the Company’s common stock (the
“Available Shares”) for issuance pursuant to the exercise of stock options. The
shares reserved for issuance increased to 21,000,000 in April 2007, subject to
stockholder approval which was obtained in November 2007.





The Plan
provides for the granting at the discretion of the Board of Directors stock
options, stock appreciation rights, stock awards, phantom stock, performance
awards, and other stock-based awards. Participation in the Plan is open to all
employees, officers, and directors of, and other individuals providing bona fide
services to or for the Company.




28




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)




The
following is a summary of the option activity:





WeightedWeighted
                        
                        AverageAverage
                        
                        Remaining
                        
                        AggregateNumber of
                        
                        
                        Exercise
                        
                        Contractual
                        
                        IntrinsicOptions
                        
                        
                        Price
                        
                        Life
      (in years)
                        
                        ValueOutstanding,
      December 31, 2007
                        
                        
                        14,000,000
                        
                        
                        $
                        0.60Granted
                        
                        
                        2,440,000
                        
                        
                        $
                        0.60Exercised
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (1,253,750
                        )
                        
                        $
                        0.60Outstanding,
      December 31, 2008
                        
                        
                        15,186,250
                        
                        
                        $
                        0.60Granted
                        
                        
                        250,000
                        
                        
                        $
                        0.60Exercised
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (70,000
                        )
                        
                        $
                        0.60Outstanding,
      September 30, 2009 (unaudited)
                        
                        
                        15,366,250
                        
                        
                        $
                        0.60
                        
                        7.85
                        
                        -Exercisable,
      September 30, 2009 (unaudited)
                        
                        
                        11,073,750
                        
                        
                        $
                        0.60
                        
                        7.81
                        
                        -





The
Company recognized $617,304 and $1,772,324 in share-based compensation expense
for the three and nine months ended September 30, 2009, respectively, $576,342
and $1,841,058 for three and nine months ended September 30, 2008,
respectively.





The
compensation expense related to the unvested options as of September 30, 2009 is
$1,800,174 which will be recognized over the weighted average period of 0.97
years.





Note
13 – Warrants





The
following summarizes the stock purchase warrant transactions for the nine months
ended September 30, 2009:




29




Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (unaudited)


WeightedWeighted
                        
                        AverageAverage
                        
                        RemainingNumber of
                        
                        
                        Exercise
                        
                        ContractualWarrants
                        
                        
                        Price
                        
                        Life (in years)Outstanding,
      December 31, 2007
                        
                        
                        60,303,581
                        
                        
                        $
                        0.61Granted
                        
                        
                        12,289,271
                        
                        
                        $
                        0.30Exercised
                        
                        
                        -
                        
                        
                        
                        -Exchanged
                        
                        
                        (60,635,681
                        )
                        
                        $
                        0.31Forfeited
                        
                        
                        (151,505
                        )
                        
                        $
                        1.50Outstanding,
      December 31, 2008
                        
                        
                        11,805,666
                        
                        
                        $
                        0.39Granted
                        
                        
                        124,174,999
                        
                        
                        $
                        0.26Exercised
                        
                        
                        -Forfeited
                        
                        
                        -Outstanding,
      September 30, 2009 (unaudited)
                        
                        
                        135,980,665
                        
                        
                        $
                        0.27
                        
                        6.47Exercisable,
      September 30, 2009 (unaudited)
                        
                        
                        135,980,665
                        
                        
                        $
                        0.27
                        
                        6.47





Note 14 – Related Party Transactions





The
Company entered into the following transactions with related
parties:




a)
            On
      August 6, 2007, the Company entered into an integral service
      agreement with Ocean Marine S.A.C, (“Ocean Marine”) a company controlled
      by certain officers of the Company and a Peruvian Corporation, to provide
      certain advisory services related to use and handling of biodiesel to the
      Company. The agreement provides for a lump sum payment of $309,166,
      retroactive from September 15, 2006 to June 30, 2007, for the
      services rendered by Ocean Marine and a fee of $34,000 per month to Ocean
      Marine from July 1, 2007 through August 12, 2009. Total consulting
      expenses incurred under this agreement totaled $68,000 and $272,000 for
      the three and nine months ended September 30, 2009, respectively, $102,000
      and $306,000 for the three and nine months ended September 30,
      2008.  The outstanding balance owed to Ocean Marine at September
      30, 2009 and December 31, 2008 was $68,723 and $191,142,
      respectively.





b)
            Plainfield
      is a related party as it is a major stockholder of the Company. See
      transactions with Plainfield in notes 7, 8 and
  9.





c)
            As
      of September 30, 2009 and December 31, 2008, the Company has loans due to
      shareholders in the amount of
$208,638.





d)
            Certain
      officers of the Company were shareholders of Interpacific.  See
      Note 17 for the transaction
details.





These
transactions were recorded at the exchange amount which is the amount agreed to
by the related parties.




30




Pure
Biofuels Corp. and Subsidiaries


Notes
to Consolidated Financial Statements


September
30, 2009


(unaudited)





Note
15 – Commitments and Contingencies





The
Company entered into the following agreements:







a)
            During
      the nine months ended September 30, 2009, the Company entered into
      additional agreements with Plainfield. See Notes 7, 8 and 17 for a
      description of these agreements.





b)
            In
      July 2009, the Company entered into a purchase agreement (the “Purchase
      Agreement”) with Trimarine Corporation S.A.
      (“Trimarine”).  Under the Purchase Agreement, the Company has
      the right to order and subsequently purchase, and Trimarine is offering to
      supply and sell certain products to be used in the manufacturing process
      of biodiesel fuel.  The Purchase Agreement states that the
      maximum unpaid purchase price cannot exceed $40,000,000.  The
      Company and Trimarine agreed that the consideration for the supply of the
      product would be the greater of (i) 15.0% per annum or 1.250% per month of
      the total financial value of the product or (ii) 4.0% per annum, or 0.333%
      per month of the total facility amount payable on a monthly basis which is
      equivalent to $133,333 per month.  Pursuant to the Purchase
      Agreement, the Company made a cash deposit to Trimarine of 10% of the
      $40,000,000.  The $4,000,000 deposit is recorded as “deposits
      and other assets” in the accompanying consolidated balance sheet as of
      September 30, 2009.





Leases





c)
            On
      October 1, 2006, the Company entered into an office lease for the Company
      in Lima, Peru. Under the terms of the lease, the Company is required to
      make monthly payments of $6,013 for the first year. The monthly payment
      will increase by 3% annually until September 2009. The office lease
      contains certain rent escalation clauses over the life of the lease. The
      total amount of rental payments due over the lease term is being charged
      to rent expense on a straight-line basis over the term of the
      lease.





d)
            On
      June 1, 2007, the Company entered into a lease for premises in Chorrillos,
      Peru. Under the terms of the lease, the Company is required to make
      monthly payments of $1,350 for the first year, $1,400 for the second year,
      and $1,500 for the third year until the expiration of the lease on May 31,
      2010.





For the
three and nine months ended September 30, 2009, the Company incurred lease
expense in the amount of $22,780 and $68,340, respectively, and $22,239 and
$66,717 for the three and nine months ended September 30, 2008,
respectively.





Note
16 – Supplemental Cash Flow Information





The
following table contains the supplemental cash flow information for the periods
indicated.


31


Pure
Biofuels Corp. and Subsidiaries


Notes
to Consolidated Financial Statements


September
30, 2009


(unaudited)








For
      the
                      
                      
                      For
      theNine
      Months
                      
                      
                      Nine
      MonthsEnded
                      
                      
                      EndedSeptember
      30,
                      
                      
                      September
      30,2009
                      
                      
                      2008(unaudited)
                      
                      
                      (unaudited)SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                      
                      $
                      1,106,513
                      
                      
                      $
                      740,376Income
      taxes paid
                      
                      $
                      -
                      
                      
                      $
                      -





The
following table contains the supplemental information of non-cash investing and
financing activities for the periods indicated.





For
      the
                                                
                                                
                                                For
      theNine
      Months
                                                
                                                
                                                Nine
      MonthsEnded
                                                
                                                
                                                EndedSeptember
      30,
                                                
                                                
                                                September
      30,2009
                                                
                                                
                                                2008(unaudited)
                                                
                                                
                                                (unaudited)SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTINGAND
      FINANCING ACTIVITIES:Issuance
      of convertible promissory note for debt issuance costs
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                60,000Issuance
      of common stock for financing costs
                                                
                                                $
                                                10,242,111
                                                
                                                
                                                $
                                                -Issuance
      of shares for purchase of Interpacific Oil S.A.C.
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                996,667Issuance
      of convertible promissory note for interest payable
                                                
                                                $
                                                5,168,423
                                                
                                                
                                                $
                                                1,526,600Issuance
      of warrants as part of financing agreement
                                                
                                                $
                                                4,398,938
                                                
                                                
                                                $
                                                573,628Capitalize
      interest on construction in progress
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                2,703,910Issuance
      of common stock for convertible debt
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                106,267Debt
      discounts on repricing of warrants
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                891,987Debt
      discounts on repricing of convertible debenture
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                5,481,833Beneficial
      conversion feature on issuance of convertible debt
                                                
                                                $
                                                3,606,986
                                                
                                                
                                                $
                                                166,667Exchange
      line of credit debt for convertible notes
                                                
                                                $
                                                34,312,220
                                                
                                                
                                                $
                                                -Debt
      discounts from issuance of convertible debt
                                                
                                                $
                                                2,554,129
                                                
                                                
                                                $
                                                -





Note
17 – Interpacific Oil S.A.C. Acquisition





Pursuant
to the Merger Agreement (see Note 1), the outstanding capital stock of
Interpacific Oil S.A.C. was converted into the right to receive merger
consideration payable beginning 90 days after the closing of the transaction,
subject to certain performance-based adjustments described below and consisting
of the following: (i) up to $6,300,000 payable with (A) $700,000 in cash, and
(B) (i) up to 9,333,333 shares of common stock, par value $0.001, of the Company
and (ii) a Seven year warrant to purchase up to 2,925,000 shares of common
stock, at an exercise price of $0.47 per share. The shareholders of Interpacific
included Luis Goyzueta and Alberto Pinto, the Chief Executive Officer and Chief
Operating Officer of the Company, respectively.


32


Pure
Biofuels Corp. and Subsidiaries


Notes
to Consolidated Financial Statements


September
30, 2009


(unaudited)





The
$700,000 cash consideration and 2,166,667 shares of the stock consideration
valued at $996,667 were payable 90 days after the closing.  The
remainder of the stock consideration and the warrant consideration (“additional
purchase price”) shall be contingent upon review and confirmation from an
accounting firm agreed upon by the parties to the Merger Agreement that revenue
in accordance with U.S. generally accepted accounting practices for the
operations of Interpacific for the 90-day period beginning on the Closing Date
exceeds $3,900,000. If the revenue is less than $3,900,000, then the additional
stock consideration and warrant consideration shall each be proportionately
reduced. In addition, if the revenue is less than $3,900,000, then Interpacific
shall have the option of measuring the revenue for an additional 90-day period
and can elect to be paid the additional stock consideration and warrant
consideration based solely on the second 90-day period.  As of
December 31, 2007, the Company had paid total cash consideration of $700,000 and
had recorded a shareholder payable for the stock consideration in the amount of
$996,667. The stock was issued on January 26, 2008, pursuant to an amendment to
the Merger Agreement executed on January 23, 2008.





On
November 21, 2008, the Board of Directors established a special committee of the
Board (“Special Committee”) to exercise the authority of the Board of Directors
for the purpose of reviewing, considering, evaluating and approving the
remaining purchase price of $5,600,000 and the granting of 2,925,000 five year
warrants to the shareholders of Interpacific Oil S.A.C. relating to the Merger
Agreement. The Special Committee determined through a resolution that the
Company has an obligation to pay the shareholders of Interpacific Oil S.A.C.
$5,600,000 and to grant 2,925,000 seven year warrants to purchase the Company’s
common stock at an exercise price of $0.30.  This resolution is
intended to replace the additional purchase price discussed above.





In July
2009, the Company paid the $5,600,000 in cash and issued the 2,925,000
warrants.  The fair value of the warrants at the date they were issued
was $530,536 and was determined using the Black-Scholes option pricing model
under the following assumptions:  (1) expected life between 7 years,
(2) risk free interest rate between 3.31% (3) dividend yield of 0%, and (4)
volatility of 130%.  The Company recorded the $530,536 to
goodwill.





Note
18 – Discontinued Operations





During
the quarter ended September 30, 2009, the Company disposed of its Argentine
subsidiary and its five Peruvian subsidiaries.  The Argentine
subsidiary had minimal operations and the five Peruvian subsidiaries had no
operations.  The loss on disposal of the aforementioned subsidiaries
was immaterial to the consolidated financial statements and is included in other
income in the consolidated financial statements.





Note
19 – Subsequent Events





The
Company has performed an evaluation of subsequent events through November 16,
2009, which is the date the financial statements were issued.


33


Item
2. Management’s Discussion and Analysis or Plan of Operation





Forward-looking
statements





The
following discussion of our financial condition and results of operations should
be read in conjunction with the financial statements and the related notes
thereto included elsewhere in this quarterly report on Form 10-Q. This quarterly
report on Form 10-Q contains certain forward-looking statements and our future
operating results could differ materially from those discussed herein. Certain
statements contained in this discussion, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and the
like, constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). However, as we issue
“penny stock,” as such term is defined in Rule 3a51-1 promulgated under the
Exchange Act, we are ineligible to rely on these safe harbor provisions. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. We disclaim any obligation to update any such
factors or to announce publicly the results of any revisions of the
forward-looking statements contained herein to reflect future events or
developments.





Overview





We have
constructed, tested, and plan to operate a 52.5 million gallon biodiesel
production plant at a site near the Callao Port in Lima, Peru, (“Callao Port
Facility”), and operate a 10.0 million gallon biodiesel production plant that we
acquired from Interpacific Oil, (“Interpacific”, or the “Interpacific
Facility”), on December 4, 2007.





In
addition, we will seek to generate additional revenue by leasing to third
parties the use of our storage tanks at the Callao Port Facility. There can be
no assurance that we will be able to lease any unused storage tanks on terms
that are favorable to us if at all.





The
Callao Port Facility has a design capacity of approximately 52.5 million gallons
of biodiesel per year. In addition, we expect the plant will produce
approximately 6.5 million gallons of crude glycerin each year. The plant will
consist principally of a materials handling and storage area, a
transesterification reactor in which the biodiesel is produced, storage and
loading area for biodiesel and glycerin, truck scales and an administrative
office.





On
December 4, 2007, we completed the acquisition of the Interpacific Facility,
which opened in 2001, and was one of the first biodiesel production facilities
ever constructed in Peru. We have expanded production capacity of the
Interpacific Facility from 7.2 million gallons per year to 10 million gallons
per year.





We plan
to be self-sufficient with our primary raw material, vegetable oil. This
comprises approximately 92% of our estimated production costs.  We
plan to use alternative non-edible crops like Jatropha trees, which can be
planted in arid lands unsuitable for most food crops  We no longer
have any intention to make palm oil part of our vertical integration
strategy.  Our long term objective is to develop sufficient crops in
order to be 100% self-sufficient. There can be no assurance that we will be able
to secure any such financing at terms that are favorable to us or at all, or,
even if we secure such financing, that we will ever become self sufficient as
described above.


34





Results of
Operations





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





Revenues
were $140,752 for the three months ended September 30, 2009 compared to $0 for
the three months ended September 30, 2008.  Revenues were obtained
from sales of inventory and byproducts that were produced during the testing
period at the Callao Port Facility.





Costs of
revenues were $237,013 for the three months ended September 30, 2009 compared to
$0 for the three months ended September 30, 2008.  The costs of
revenue include the material and production costs plus additional costs incurred
during the testing of the Callao Port Facility.





Selling,
general and administrative expenses were $2,368,425 for the three months ended
September 30, 2009 compared to $4,622,857 for the three months ended September
30, 2008, for a decrease of $2,254,432 or 48.8%.  The decrease was due
to a decrease in consulting fees of approximately $570,000 and general and
administrative expenses of approximately $1,820,000 offset by an increase in
professional fees of approximately $89,000 and wages of approximately
$46,000. Consulting fees decreased because we have not been using
consultants now that we have completed the facility and have begun
production.  General and administrative expenses decreased
substantially compared to the three months ended September 30, 2008 because
during that period of time, we were still building our
infrastructure.





Interest
and financing costs consisted of the following for the periods
indicated:





For
      the Three
                              
                              
                              For
      the ThreeMonths
      Ended
                              
                              
                              Months
      Ended
                              
                              
                              IncreaseSeptember
      30, 2009
                              
                              
                              September
      30, 2008
                              
                              
                              (Decrease)
                              
                              
                              % ChangeInterest
      expense
                              
                              $
                              3,207,918
                              
                              
                              $
                              2,227,500
                              
                              
                              $
                              980,418
                              
                              
                              
                              44
                              %Financing
      costs
                              
                              
                              392,929
                              
                              
                              
                              8,905,028
                              
                              
                              
                              (8,512,099
                              )
                              
                              
                              -96
                              %Amortization
      of debt discountand
      debt issuance costs
                              
                              
                              1,584,031
                              
                              
                              
                              1,198,575
                              
                              
                              
                              385,456
                              
                              
                              
                              32
                              %$
                              5,184,878
                              
                              
                              $
                              12,331,103
                              
                              
                              $
                              (7,146,225
                              )
                              
                              
                              -58
                              %





The
increase of $980,418 in interest expense is due to the increase in our
debt.  With the additional $43,000,000 long term note that we issued
on July 16, 2009, the interest expense will increase approximately $4,000,000
during the next year.





The
financing cost decreased $8,512,099 for the three months ended September 30,
2009 compared to the three months ended September 30, 2008.  During
the three months ended September 30, 2008, we incurred approximately $9,000,000
in financing costs associated with the exchange of warrants for
shares.  The financing cost is the value of the shares at the date of
the transaction, which was approximately $24,000,000 less than the fair value of
the warrants, which was approximately $15,000,000.





The
increase in the amortization of debt discounts and debt issuance costs is
primarily due to the increase in debt discounts related to warrants and
convertible notes that have been issued after September 30, 2008.





The
change in fair value of accrued derivative liability for the three months ended
September 30, 2009 was a gain of $7,755,285 compared to $0 for the three months
ended September 30, 2008.  The change is because the common stock
share price decreased from $0.16 per share at June 30, 2009 to $0.13 per share
at September 30, 2009.  We did not have any derivative liabilities
during the three months ended September 30, 2008.


35





Foreign
currency transaction gain was $333,646 for the three months ended September 30,
2009 compared to a loss of $455,700 for the three months ended September 30,
2008.  The change is primarily due to the line of credit and
subsequently the long tern note payable both of which were denominated and
payable in U.S. dollars and the appreciation of the PEN in relation to the U.S.
dollar for the periods indicated.





The
“Non-cash expenses in connection with debt financing” amounted to $15,840,078
for the three months ended September 30, 2009 compared to $0 for the three
months ended September 30, 2008.  During July 2009, we converted
$34,312,220 of principal and interest from the line of credit to convertible
notes and issued 64,013,194 shares to Plainfield.  We also paid down
convertible notes of $2,200,000.  The “Non-cash expenses in connection
with debt financing” is calculated as follows:





Description
                
                AmountWrite
      off of unamortized debt discount for $1MM Note
                
                $
                (1,994,859
                )Write
      off of debt issue costs related to the line of credit
                
                
                (920,652
                )Write
      off the BCF related to the $2.2MM convertible Notes
                
                
                7,846,111Expense
      related to BCF related to the LOC that was converted to a Convertible
      Note
                
                
                (12,347,942
                )Expense
      related to shares issued to Plainfield
                
                
                (8,422,736
                )Loss
      on debt extinguishment
                
                $
                (15,840,078
                )





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





Revenues
were $1,098,485 for the nine months ended September 30, 2009 compared to $0 for
the nine months ended September 30, 2008.  Revenues were obtained from
sales of inventory and by products that were produced during the testing period
at the Callao Port Facility.





Costs of
revenues were $1,127,535 for the nine months ended September 30, 2009 compared
to $0 for the nine months ended September 30, 2008.  The costs of
revenue include the material and production costs plus additional costs incurred
during the testing of the Callao Port Facility.





Selling,
general and administrative expenses were $6,451,559 for the nine months ended
September 30, 2009 compared to $9,674,843 for the nine months ended September
30, 2008, for a decrease of $3,223,284 or 33.3%.  The decrease was due
to a decrease in consulting fees of approximately $1,530,000, general and
administrative expenses of approximately $1,350,000 and professional fees
of approximately $400,000 offset by an increase in wages of
approximately $61,000.  Consulting fees decreased because we have not
been using consultants now that we have completed the facility and have begun
production.  General and administrative expenses decreased
substantially compared to the three months ended September 30, 2008 because
during that period of time, we were still building our
infrastructure.





Interest
and financing costs consisted of the following for the periods
indicated:


36





For
      the Nine
                      
                      
                      For
      the NineMonths
      Ended
                      
                      
                      Months
      Ended
                      
                      
                      IncreaseSeptember
      30, 2009
                      
                      
                      September
      30, 2008
                      
                      
                      (Decrease)
                      
                      
                      % ChangeInterest
      expense
                      
                      $
                      6,839,918
                      
                      
                      $
                      2,275,427
                      
                      
                      $
                      4,564,491
                      
                      
                      
                      201
                      %Financing
      costs
                      
                      
                      7,125,544
                      
                      
                      
                      9,912,556
                      
                      
                      
                      (2,787,012
                      )
                      
                      
                      -28
                      %Amortization
      of debt discountand
      debt issuance costs
                      
                      
                      5,368,219
                      
                      
                      
                      3,155,987
                      
                      
                      
                      2,212,232
                      
                      
                      
                      70
                      %$
                      19,333,681
                      
                      
                      $
                      15,343,970
                      
                      
                      $
                      3,989,711
                      
                      
                      
                      26
                      %





The
increase of $4,564,491 in interest expense is due to the increase in our debt,
and that in 2008, we capitalized certain amounts of interest into property,
plant and equipment.





The
financing costs of $7,125,544 for the nine months ended September 30, 2009
consisted primarily of the following:





·
            $514,000
      related to the excess of fair value of the conversion option over the
      principal of the Plainfield Notes.


·
            $1,819,000
      related to the fair value of the shares to be issued per the default
      provisions on the Plainfield 2009
Notes.


·
            $4,399,000
      related to the warrants that were issued to FDS and Plainfield per the
      default provisions in their respective short-term
  notes.


·
            $394,000
      related to the Trimarine supply
agreement.





The
increase in the amortization of debt discounts and debt issuance costs is
primarily due to the increase in debt discounts related to warrants and
convertible notes that have been issued after September 30, 2008.





The
change in fair value of accrued derivative liability for the nine months ended
September 30, 2009 was an increase of $13,319,981 compared to $0 for the nine
months ended September 30, 2008.  The change was because the common
stock share price increased from $0.07 per share at December 31, 2008 to $0.13
per share at September 30, 2009, and the volatility used in the Black-Scholes
Model increased to 140% for the September 30, 2009 calculation compared to 123%
for the December 31, 2008 calculation.  We did not have any derivative
liabilities during the nine months ended September 30, 2008.





Foreign
currency transaction gain was $1,879,279 for the nine months ended September 30,
2009 compared to a loss of $1,324,334 for the nine months ended September 30,
2008. The change is primarily due to the line of credit and subsequently the
long term note payable both of which were denominated and payable in U.S.
dollars and the appreciation of the PEN in relation to the U.S. dollar for the
periods indicated.





The
“Non-cash expenses in connection with debt financing” amounted to $15,840,078
for the nine months ended September 30, 2009 compared to $0 for the nine months
ended September 30, 2008.  In July 2009, we converted $34,312,220 of
principal and interest from the line of credit to convertible notes and issued
64,013,194 shares to Plainfield.  We also paid down convertible notes
of $2,200,000.  The “Non-cash expenses in connection with debt
financing” is calculated as follows:


37





Description
                
                AmountWrite
      off of unamortized debt discount for $1MM Note
                
                $
                (1,994,859
                )Write
      off of debt issue costs related to the line of credit
                
                
                (920,652
                )Write
      off the BCF related to the $2.2MM convertible Notes
                
                
                7,846,111Expense
      related to BCF related to the LOC that was converted to a Convertible
      Note
                
                
                (12,347,942
                )Expense
      related to shares issued to Plainfield
                
                
                (8,422,736
                )Loss
      on debt extinguishment
                
                $
                (15,840,078
                )





Liquidity and Capital
Resources





As of
September 30, 2009, we had $1,942,574 in cash and cash equivalents. In addition,
during the nine months ended September 30, 2009, our cash used in operating
activities was $13,076,990 compared to our cash used in operating activities of
$8,655,526 for the nine months ended September 30, 2008.





During
the nine months ended September 30, 2009 cash provided by investing activities
was $974,141 compared to cash used in investing activities of $24,013,224 for
the nine months ended September 30, 2008.  During the nine months
ended September 30, 2009, we paid $5,600,000 related to the Interpacific
acquisition, had a decrease in the VAT credits of $6,838,725 and purchased
property, plant and equipment of $264,584.  During the nine months
ended September 30, 2008, we purchased equipment of $19,525,157 and increased
our VAT credits by $4,341,604.





During
the nine months ended September 30, 2009 and 2008, cash provided by financing
activities was $14,016,860 and $30,587,182, respectively. During the nine months
ended September 30, 2009, we received $43,000,000 from Interbank Peru as a long
term financing.  From the $43,000,000, we were required to set up two
restricted cash accounts of $15,000,000 for each account from which we were able
to draw down approximately $7.5MM from one of the accounts.  We also
paid $3,500,000 toward the principal balance of the line of
credit.  During the nine months, we received an additional $3,700,000
in convertible and short term notes and we paid $5,200,000 of principal towards
these notes.  As of September 30, 2009, we had repaid all short term
notes.





Financings





To date,
we have had negative cash flows from operations and we have been dependent on
sales of our equity securities and debt financing to meet our cash
requirements.





Loan
Agreement





In order
to finance the construction of the Callao Port Facility, on September 12, 2007,
we entered into a $20,000,000 loan agreement, (the “Loan Agreement”), with
Plainfield.





On April
18, 2008, we amended the Loan Agreement which increased the borrowing amount by
$17,346,939, such that the maximum aggregate principal amount of loans available
under the Loan Agreement was $37,346,939.  As of September 30, 2009
and December 31, 2008, the principal balance outstanding was $37,346,939 and
during the nine months ended September 30, 2009, we had converted $1,970,758 of
accrued interest to our PIK Notes. In conjunction with the July 16, 2009
Interbank Peru Financing, we repaid $3,500,000 of the outstanding balance and
converted $34,312,220 of principal and interest into a PIK Note which is
convertible into 114,374,065 shares of common stock at a conversion rate of
$0.30 per share.


38





Convertible
Debt





On
September 12, 2007, we issued to Plainfield $10,000,000 aggregate principal
amount of our PIK Notes.  Our Company is to pay interest on the Notes
semi-annually in arrears on March 15 and September 15 of each year, commencing
March 15, 2008. The PIK Notes are senior unsecured obligations of our Company
and rank equally in right of payment to our Company’s future senior
indebtedness. The Additional Notes also restrict our Company and its
subsidiaries from incurring indebtedness or other obligations, including
creating liens, merging, selling assets, making dividends, distributions or
investments, entering into transactions with affiliates, making capital
expenditures, modifying charter documents and issuing capital stock in the
future, in each case subject to certain exceptions.





As of
December 31, 2008, we had issued $19,707,990 of PIK Notes.  During the
nine months ended September 30, 2009 and through the Interbank Peru Financing on
July 16, 2009, we issued the following PIK Notes:





·
            $1,970,758
      for accrued interest on the Loan Agreement with an exercise price is $0.30
      per share.


·
            $1,169,621
      for accrued interest from September 15, 2008 through March 15, 2009
      related to the PIK Notes with an exercise price of $0.30 per
      share.


·
            $34,312,220
      for the outstanding balance of the line of credit which includes accrued
      interest of $465,281.





In
conjunction with the Interbank Peru Financing on July 16, 2009, we paid
Plainfield $2,285,133 related to convertible notes and the accrued
interest.





Plainfield
Promissory Note





On
December 4, 2008, we executed a Promissory Note (the “Plainfield Note”)
promising to pay to Plainfield, the principal amount of $500,000.  We
were to pay Plainfield the principal amount in one installment of $500,000 on
the earlier of (a) January 15, 2009 or (b) the date we enter into an agreement
with Interbank Peru pursuant to which Interbank Peru will provide us with term
loan financing, in a principal amount of not less than $40,330,000. The
Plainfield Note is a non-interest bearing note.





We did
not make the required principal payment of $500,000 on January 15,
2009.  Pursuant to the agreement, we issued 13,333,333 additional
warrants on April 8, 2009.  In conjunction with the Interbank Peru
Financing, we repaid the outstanding balance of $500,000.





Plainfield
2009 Notes





On April
28, 2009 and July 18, 2009, we signed promissory notes (“Plainfield 2009 Notes”)
to pay Plainfield $500,000 and $250,000, respectively. The Plainfield 2009 Notes
provide that we will pay the principal amount together with accrued and unpaid
interest on the entire principal amount of the Plainfield 2009 Notes at 5% of
the principal amount to Plainfield in one (1) installment of $525,000 and
$262,500 on the earlier of (a) May 30, 2009 and June 30, 2009 (“Maturity
Dates”), respectively, and (b) the date we enter into an agreement with
Interbank Peru pursuant to which Interbank Peru will provide term loan financing
for us and/or one or more of our majority-owned subsidiaries, in a principal
amount of not less than $40,330,000.  Any accrued interest shall be
added to the principal sum then owed by us to Plainfield and paid on the
Maturity Date.





The
Plainfield 2009 Notes provide for certain events of default with various
remedies including acceleration or conversion, at Plainfield’s sole option, in
lieu of the other remedies for an event of default, into a PIK Note in an
aggregate principal amount of $525,000 and $262,500, convertible into 13,125,000
and 6,562,500 shares of common stock, respectively, of our common stock at a
conversion price of $0.04 per share. Plainfield may at its sole option exchange
the PIK Note at any time after the date of the event of default for (a) a
promissory note (the “Exchange Note”) issued by us, identical in all respects to
the PIK Note, except that the exchange note shall not have any conversion or
exchange rights and (b) a number of shares of common stock equal to the number
of shares that would have been issued upon the conversion of the PIK Note
pursuant to the immediately preceding sentence divided by 1.2.


39





We did
not repay the Plainfield 2009 Notes on the required dates and pursuant to the
terms of the agreement, Plainfield opted to exchange the PIK Note for the
Exchange Note and receive shares of common stock.  The exchange of the
PIK Note and the issuance of the common shares were performed in conjunction
with the Interbank Peru Financing on July 16, 2009.  The value of the
10,937,500 shares (13,125,000 divided by 1.2) on May 30, 2009 was $984,375 and
the value of the 5,218,750 shares (6,562,500 divided by 1.2) on June 30, 2009,
was $835,000.  We recorded these amounts as “interest and financing
costs” in the consolidated statement of operations with a corresponding credit
to “interest and penalties payable” in the consolidated balance
sheet.





In
conjunction with the Interbank Peru Financing on July 16, 2009, we repaid
$1,334,375 of the Plainfield Notes and the Plainfield 2009 Notes which included
accrued interest.





After
considering all transactions with Plainfield, Plainfield and its affiliates
own:





·
            153,696,959
      shares of our common stock, or 63% of our issued and outstanding
      stock


·
            Warrants
      exercisable into 16,666,666 shares of our common stock at an exercise
      price of approximately $0.30 per
share


·
            $59,188,633
      aggregate principal amount of PIK Notes convertible into 197,295,443
      shares of our common stock at a conversion price of $0.30 due on September
      12, 2012





FDS
Note




On
December 4, 2008, we executed a Promissory Note (the “FDS Note”) promising to
pay to FDS Corporation S.A (“FDS”), the principal amount of
$1,000,000.  We were to pay FDS the principal amount in one
installment of $1,000,000 on the earlier of (a) January 15, 2009 or (b) the date
we enter into an agreement with Interbank Peru pursuant to which Interbank Peru
will provide us with term loan financing, in a principal amount of not less than
$40,330,000. The FDS Note is a non-interest bearing note.





We did
not make the required principal payment of $1,000,000 on January 15,
2009.  Pursuant to the agreement, we issued 26,666,666 additional
warrants on April 8, 2009.





FDS
2009 Notes





On April
28, 2009 and June 18, 2009, we signed promissory notes (“FDS 2009 Notes”) to pay
FDS $500,000 and $250,000, respectively. The FDS 2009 Notes provide that the
Company will pay the principal amount together with accrued and unpaid interest
on the entire principal amount of the FDS 2009 Notes at 5% of the principal
amount to FDS in one (1) installment of $525,000 and $262,500 on the earlier of
(a) May 30, 2009 and June 30, 2009 (“Maturity Dates”), respectively, and (b) the
date we enter into an agreement with Interbank Peru pursuant to which Interbank
Peru will provide term loan financing us and/or one or more of our
majority-owned subsidiaries, in a principal amount of not less than
$40,330,000.  Any accrued interest shall be added to the principal sum
then owed by us to FDS and paid on the Maturity Dates.





The FDS
2009 Notes provide for certain events of default with various remedies including
acceleration or conversion, at FDS’ sole option, into seven-year cashless
exercise warrants (“FDS 2009 Warrants”) to purchase 12,500,000 and 6,250,000
shares of our common stock at an exercise price of $0.04 per share of common
stock in addition to $525,000 and the $262,500 principal and interest balances,
respectively.  FDS may at its sole option exchange all or any FDS 2009
Warrants at any time after the date of the event of default and during the
exercise period for a number of shares of common stock equal to the number of
shares that would have been issued upon the exercise of the FDS 2009 Warrants
divided by 1.2.


40


The
Company repaid $500,000 in January 2009 and $1,250,000 in July
2009.





Performance
Bond





On March
27, 2009, the Company entered into a performance bond agreement (the “Bond
Agreement”), with FDS Corporation (“FDS”).  Under the Bond Agreement,
FDS agreed to open a financial bond (the “FDS Bond”) in the amount of up to
$2,500,000 required by the Peruvian Authorities to provide the regulatory and
other permits necessary to commercialize the Callao Facility as a terminal and
bonded warehouse under the laws of Peru for a term of up to twelve months,
subject to the Company’s option to extend the term for up to two additional
twelve month periods.  The FDS Bond accrues interest on a monthly
basis in the amount of $31,250. As additional consideration for the placement of
the FDS Bond, the Company issued to FDS seven year cashless warrants (the “FDS
Bond Warrants”) to purchase 62,500,000 shares of common stock by which FDS will
have the right to purchase one share of common stock at an exercise price of
$0.05 per share for every warrant issued. FDS may exchange all or any FDS Bond
Warrants at any time after the Effective Date and on or prior to March 31, 2016
for a number of shares of common stock equal to the number of shares that would
have been issued upon the exercise of the FDS Bond Warrants pursuant to Section
4 of the Bond Agreement divided by 1.2.  FDS may withdraw the FDS Bond
at any time and terminate this Agreement if there is an event of default and
Plainfield accelerates the obligations in connection with such event of default
under the Loan Agreement dated as of September 12, 2007.





Bank
Financing





On July
16, 2009, we entered into a sale/leaseback transaction with Interbank
Peru.  Under the Interbank Peru Financing, Interbank Peru
acquired all the assets that comprise our Supply Plant, and in turn leased the
Supply Plant back to us.  However, the assets remain on our
books.





We
received $51,170,000 in cash as part of the sale Interbank Peru
Financing.  We recorded a note payable of $43,000,000 and reduced the
VAT by $8,170,000.  The principal balance of the amount due to
Interbank Peru is $43,000,000 with an effective interest rate of
10.6%.  We will make interest only payments for the first year and
then for years two through six, we will make both principal and interest
payments such that the loan is completely repaid at the end of year
six.





Also a
Trust Management was established for the following Company assets: (i) the right
for collections, (ii) cash flows, (iii) a capital contribution of $15,000,000,
(iv) a deposit in guarantees for $15,000,000 and (v) the cash flows that the
Company credited in a reserve account.





In
conjunction with the Interbank Peru Financing, the Company entered into the
Fifth Amendment to Securities Purchase Agreement (the “Fifth Amendment”), with
Plainfield.




Pursuant
to the Fifth Amendment, the Company repaid the following amounts:





·
            $3,500,000
      of the line of credit


·
            $1,250,000
      of the short term notes


·
            $2,200,000
      of the convertible notes


·
            $169,508
      of interest





The
Company also issued a PIK Note for $34,312,220 which represents the remaining
outstanding principal balance of the line of credit after the $3,500,000 was
repaid and the accrued interest through July 15, 2009.  The
$34,312,220 is convertible into 114,374,066 shares of common stock based on a
conversion rate of $0.30.


41


Pursuant
to the Interbank Peru Financing agreement, we are required to maintain certain
financial and nonfinancial covenants during the term of the Financing agreement,
including submission of financial statements to Interbank within certain number
of days after the close of periods, maintaining funds equivalent to at least 35%
of the note payable amount in a Trust Management Account, as defined, and
maintaining minimum Debt Service Coverage Rate, as defined, among
others.  As of the date these consolidated financial statements were
issued, we were in compliance with these covenants.  There can be no
assurance that we will be in compliance with the covenants in the
future





Uncertainties and
Going-Concern





We have
incurred recurring losses from operations. The continuation of our Company as a
going concern is dependent upon our Company attaining and maintaining profitable
operations.  The consolidated financial statements do not include any
adjustment relating to the recovery and classification of recorded asset amounts
or the amount and classification of liabilities that might be necessary should
our Company discontinue operations.





Due to
the uncertainty of our ability to meet our current operating expenses and the
capital expenses noted above, in their report on the annual consolidated
financial statements for the year ended December 31, 2008, our independent
auditors included an explanatory paragraph regarding concerns about our ability
to continue as a going concern. Our consolidated financial statements contain
additional note disclosures describing the circumstances that lead to this
disclosure by our independent auditors.





Commitments and
Contingencies





We have
entered into the following agreements:







a)
            During
      the nine months ended September 30, 2009, we entered into additional
      agreements with Plainfield.





b)
            During
      July 2009, we entered into a purchase agreement (the “Purchase Agreement”)
      with Trimarine Corporation S.A. (“Trimarine”).  Under the
      Purchase Agreement, we have the right to order and subsequently purchase,
      and Trimarine is offering to supply and sell certain products to be used
      in the manufacturing process of biodiesel fuel.  We agreed that
      the consideration for the supply of the product would be the greater of
      (i) 15.0% per annum or 1.250% per month of the total financial value of
      the product or (ii) 4.0% per annum, or 0.333% per month of the total
      facility amount payable on a monthly basis which is equivalent to $133,333
      per month.  The Purchase Agreement states that the maximum
      unpaid purchase price cannot exceed $40,000,0000.  Pursuant to
      the Purchase Agreement, we made a cash deposit to Trimarine of 10% of the
      $40,000,000.  The $4,000,000 deposit is recorded as “prepaid
      expenses and other assets” in the accompanying balance
    sheets.





Leases


c)
            On
      October 1, 2006, we entered into an office lease for our subsidiary in
      Lima, Peru. Under the terms of the lease, we are required to make monthly
      payments of $6,013 for the first year. The monthly payment will increase
      by 3% annually until September 2009. The office lease contains certain
      rent escalation clauses over the life of the lease. The total amount of
      rental payments due over the lease term is being charged to rent expense
      on a straight-line basis over the term of the
  lease.


42





d)
            On
      June 1, 2007, we entered into a lease for premises in Chorrillos, Peru.
      Under the terms of the lease, we are required to make monthly
      payments of $1,350 for the first year, $1,400 for the second year, and
      $1,500 for the third year until the expiration of the lease on May 31,
      2010.





We
estimate that our contingency costs for the next twelve month period will be
approximately $250,000. These costs will primarily consist of unexpected
expenses due to evolving regulations in the industry.





Contractual
Obligations





Our
significant contractual obligations are as follows:





Payments
      due by PeriodLess
      than
                                          
                                          
                                          One
      to
                                          
                                          
                                          Three
      to
                                          
                                          
                                          More
      ThanOne
      Year
                                          
                                          
                                          Three
      Years
                                          
                                          
                                          Five
      Years
                                          
                                          
                                          Five
      Years
                                          
                                          
                                          TotalPromissory
      notes
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          59,188,633
                                          
                                          
                                          $
                                          
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          59,188,633Sale
      Lease back
                                          
                                          
                                          450,000
                                          
                                          
                                          
                                          10,200,000
                                          
                                          
                                          
                                          22,750,000
                                          
                                          
                                          
                                          9,600,000
                                          
                                          
                                          
                                          43,000,000Operating
      lease obligations
                                          
                                          
                                          19,138
                                          
                                          
                                          
                                          16,500
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          35,638Total
                                          
                                          $
                                          469,138
                                          
                                          
                                          $
                                          69,405,133
                                          
                                          
                                          $
                                          22,750,000
                                          
                                          
                                          $
                                          9,600,000
                                          
                                          
                                          $
                                          102,224,271





Off-Balance Sheet
Arrangements





Performance
Bond





On March
27, 2009, we entered into a performance bond agreement (the “Bond Agreement”),
with FDS. Under the Bond Agreement, FDS agreed to open a financial bond (the
“FDS Bond”) in the amount of up to $2,500,000 required by the Peruvian
Authorities to provide the regulatory and other permits necessary to
commercialize the Callao Facility as a terminal and bonded warehouse under the
laws of Peru for a term of up to twelve months, subject to automatic extension
for up to two additional twelve month periods.  The Bond Agreement
accrues interest on a monthly basis in the amount of $31,250. As additional
consideration for the placement of the Bond Agreement, we issued to FDS seven
year cashless warrants (the “FDS Bond Warrants”) to purchase 62,500,000 shares
of common stock by which FDS will have the right to purchase one share of common
stock at an exercise price of $0.05 per share for every warrant issued. FDS may
exchange all or any FDS Bond Warrants at any time after the Effective Date and
on or prior to March 31, 2016 for a number of shares of common stock equal to
the number of shares that would have been issued upon the exercise of the FDS
Bond Warrants pursuant to Section 4 of the Bond Agreement divided by
1.2.  FDS may withdraw the FDS Bond at any time and terminate this
Agreement if there is an event of default and Plainfield accelerates the
obligations in connection with such event of default under the Loan Agreement
dated as of September 12, 2007.





Critical Accounting
Policies





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make assumptions, estimates and judgments that affect the amounts reported,
including the notes thereto, and related disclosures of commitments and
contingencies, if any.  We have identified certain accounting policies that
are significant to the preparation of our financial statements.  These
accounting policies are important for an understanding of our financial
condition and results of operation.  Critical accounting policies are those
that are most important to the portrayal of our financial conditions and results
of operations and require management's difficult, subjective, or complex
judgment, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain and may change in subsequent periods.
 Certain accounting estimates are particularly sensitive because of their
significance to financial statements and because of the possibility that future
events affecting the estimate may differ significantly from management's current
judgments.  We believe the following critical accounting policies involve
the most significant estimates and judgments used in the preparation of our
financial statements.


43





Use of
Estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant areas requiring the use of management estimates relate to the
determination of depreciation rates for equipment, reserves for slow moving and
obsolete inventory, future tax rates used to determine future income taxes, and
the carrying values of goodwill and accrued derivative liabilities. Actual
results could differ from these estimates upon which the carrying values were
based.





Accrued Derivative
Liabilities





We apply
ASC Topic 815, “Derivatives and Hedging,” which provides a two-step model to
determine whether a financial instrument or an embedded feature is indexed to an
issuer’s own stock and thus able to qualify for the scope exception in ASC
815-10-15-74. This standard triggers liability accounting on all instruments and
embedded features exercisable at strike prices denominated in any currency other
than the functional currency of the operating entity in Peru.  Using
the criteria in ASC 815, we determine which instruments or embedded features
that require liability accounting and record the fair values as an accrued
derivative liability. The changes in the values of the accrued derivative
liabilities are shown in the accompanying consolidated statements of operations
as “gain (loss) on change in fair value of accrued derivative
liabilities.”





Fair Value
Measurements





For
certain of our financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, accounts payable, accrued liabilities and
short-term debt, the carrying amounts approximate their fair values due to their
short maturities. In addition, we have long-term debt with financial
institutions. The carrying amounts of the line of credit and other long-term
liabilities approximate their fair values based on current rates of interest for
instruments with similar characteristics.





ASC Topic
820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair
value of financial instruments held us. ASC Topic 825, “Financial Instruments”
defines fair value, and establishes a three-level valuation hierarchy for
disclosures of fair value measurement that enhances disclosure requirements for
fair value measures.  The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:





·
            Level
      1 inputs to the valuation methodology are quoted prices for identical
      assets or liabilities in active
markets.





·
            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.





·
            Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.




44


We
analyze all financial instruments with features of both liabilities and equity
under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.





Concentrations





Our
operations are primarily in Peru and virtually all of our assets and liabilities
are giving rise to market risks from changes in foreign currency rates. The
financial risk is the risk to our operations that arise from fluctuations in
foreign exchange rates and the degree of volatility of these rates. Currently,
we do not use derivative instruments to reduce our exposure to foreign currency
risks.





Long-lived
Assets





In
accordance with ASC Topic 360, “Property, Plant and Equipment,” the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances that may suggest impairment.
We recognize impairment when the sum of the expected undiscounted future cash
flows is less than the carrying amount of the asset. Impairment losses, if any,
are measured as the excess of the carrying amount of the asset over its
estimated fair value.





Foreign Currency
Translation





Our
reporting currency is the U.S. dollar. Our subsidiaries use their local
currencies, the PEN, as their functional currencies. Assets and liabilities
are translated using the exchange rates prevailing at the balance sheet date.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income (loss) in the consolidated statements of
stockholders’ equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.





Revenue
Recognition





In
accordance with the Securities and Exchange Commission’s (“SEC”) Staff
Accounting Bulletin (“SAB”) Topic 13, “Revenue Recognition,” we recognize
revenue when it is realized or realizable and earned. The four criteria under
SAB 104 are:





·           Persuasive
evidence of an arrangement exists


·           Delivery
has occurred


·           The
sales price is fixed or determinable


·           Collection
is reasonably assured





Stock-based
Compensation





We record
stock-based compensation in accordance with ASC Topic 718 “Compensation – Stock
Compensation.”  ASC 718 requires companies to measure compensation
cost for stock-based employee compensation at fair value at the grant date and
recognize the expense over the employee’s requisite service period. Under ASC
718, our volatility is based on the historical volatility of our stock or the
expected volatility of similar companies. The expected life assumption is
primarily based on historical exercise patterns and employee post-vesting
termination behavior. The risk-free interest rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant.


45





We use
the Black-Scholes option-pricing model which was developed for use in estimating
the fair value of options. Option-pricing models require the input of highly
complex and subjective variables including the expected life of options granted
and our expected stock price volatility over a period equal to or greater than
the expected life of the options. Because changes in the subjective assumptions
can materially affect the estimated value of our employee stock options, it is
management’s opinion that the Black-Scholes option-pricing model may not provide
an accurate measure of the fair value of the our employee stock options.
Although the fair value of employee stock options is determined in accordance
with ASC 718 using an option-pricing model, that value may not be indicative of
the fair value observed in a willing buyer/willing seller market
transaction.





Recent
Pronouncements





On
January 1, 2009, we adopted ASC sub-topic 810-10 (formerly SFAS
No. 160, “Accounting and Reporting on Non-controlling Interest in
Consolidated Financial Statements, an Amendment of ARB 51”). ASC 810-10 states
that accounting and reporting for minority interests are to be recharacterized
as noncontrolling interests and classified as a component of equity. The
calculation of earnings per share continues to be based on income amounts
attributable to the parent. ASC 810-10 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but
affects only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary.  The
adoption of ASC 810-10 did not have a material impact on our consolidated
financial statements.


46


Item
3.  Quantitative and Qualitative Disclosure about Market
Risk





Not
applicable.





Item
4. Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





The
Company has established disclosure controls and procedures to ensure that
information required to be disclosed in this quarterly report on Form 10-Q was
properly recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms.  The Company’s controls
and procedures are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Act is
accumulated and communicated to the Company’s management, including its
principal executive and principal financial officers to allow timely decisions
regarding required disclosure.   A control system, no matter how
well conceived or operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met.





We
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) at September 30, 2009, based on the evaluation of these
controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15
under the Exchange Act.  This evaluation was carried out under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, at September 30, 2009, our disclosure
controls and procedures are not effective solely due to the fact that the
Company continues to have material weaknesses in its internal control over
financial reporting.  Notwithstanding the foregoing, management believes
that the disclosure information set forth in this report on Form 10-Q is
complete, compliant and accurate and that the financial statements included in
this report fairly present in all material respects our financial condition,
results of operations and cash flows for the periods presented.




Changes in Internal Control
Over Financial Reporting





No change
in the Company’s internal control over financial reporting occurred during the
third quarter ended September 30, 2009, that materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





PART
II - OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





We know
of no material, existing or pending legal proceedings against us, nor are we
involved as a plaintiff in any material proceeding or pending litigation. There
are no proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial stockholder, is an adverse party or has a material
interest adverse to our company.





ITEM
1A.  RISK FACTORS





Not
applicable.




ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





None
except as set forth in the Company’s Report on Form 8-K filed July 23,
2009


47





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





None.





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


None.





ITEM 5. OTHER INFORMATION




(a)
            None.





(b)
            There
      were no changes to the procedures by which security holders may recommend
      nominees to our board of directors.





Item
6. Exhibits





31.1
              
              Certification
      of the Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              
              Certification
      of the Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
              
              Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
              
              Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002


48





SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) 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.




PURE
      BIOFUELS CORP.By:
              /s/ Alberto PintoAlberto
      Pinto
                Chief
      Executive Officer and
President





Date:
November
16, 2009




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:





Signature
                    
                    Title
                    
                    Date/s/ Alberto
      Pinto
                    
                    Chief
      Executive Officer and Director
                    
                    November
      16, 2009Alberto
      Pinto/s/
      Gustavo Goyzueta
                    
                    Chief
      Financial Officer
                    
                    November
      16, 2009Gustavo
      Goyzueta
                    
                    (Principal
      Financial Officer andPrincipal
      Accounting Officer)/s/
      C. Wendell Tewell
                    
                    Chairman
      of the Board of Directors
                    
                    November
      16, 2009C.
      Wendell Tewell/s/ Laurence
      Charney
                    
                    Director
                    
                    November
      16, 2009Laurence
      Charney/s/ Luis
      H. Goyzueta
                    
                    Director
                    
                    November
      16, 2009Luis
      H. Goyzueta


49