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, 2010
 
  ̈
              Transition
      report pursuant Section 13 or 15(d) of the Securities Exchange Act of
      1934
 For the
transition period from _______ to _______.
   Commission
file number000-50907
  PURE
BIOFUELS CORP.
  (Exact
Name of Registrant as Specified in Its Charter)
  Nevada
                (State
      of Incorporation)
              47-0930829
                (I.R.S.
      Employer Identification No.)
 3811
Shadow Trace Circle
 Houston,
TX 77082-5637
 (Address
of Principal Executive Offices) (Zip Code)
  1-281
540-9317
 (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 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 companyx
  Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes o  Nox
 
 As of
November 10, 2010, 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
      StatementsConsolidated
      Balance Sheets as of September 30, 2010 (unaudited) and December 31,
      2009
                3Consolidated
      Statements of Operations and Other Comprehensive Loss for the three
      and nine months ended September 30, 2010 and 2009
    (unaudited)
                4Consolidated
      Statement of Stockholders' Equity (Deficit) for the period ended September
      30, 2010 (unaudited)
                5Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2010 and
      2009 (unaudited)
                6Notes
      to Consolidated Financial Statements (unaudited)
                7Item
      2.
                Management’s
      Discussion and Analysis or Plan of Operations
                29Item
      3.
                Quantitative
      and Qualitative Disclosure About Market Risk
                39Item
      4.
                Controls
      and Procedures
                39PART
      II.
                OTHER
      INFORMATION
                40Item
      1.
                Legal
      Proceedings
                40Item
      1A.
                Risk
      Factors
                40Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                40Item
      3.
                Defaults
      Upon Senior Securities
                40Item
      4.
                (Removed
      and Reserved)
                40Item
      5.
                Other
      Information
                40Item
      6.
                Exhibits
                40SIGNATURES
                
                41
 
 2
  PURE
      BIOFUELS CORP. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS
 
 September
      30,
                            
                            
                            December
      31,2010
                            
                            
                            2009(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            1,788,720
                            
                            
                            $
                            735,352Use
      restricted cash
                            
                            
                            927,970
                            
                            
                            
                            6,830,717Accounts
      receivable
                            
                            
                            730,967
                            
                            
                            
                            155,093Inventories,
      net
                            
                            
                            27,513,714
                            
                            
                            
                            355,531VAT
      credits
                            
                            
                            2,618,527
                            
                            
                            
                            1,051,185Deposits
      and other assets
                            
                            
                            586,235
                            
                            
                            
                            1,088,251TOTAL
      CURRENT ASSETS
                            
                            
                            34,166,133
                            
                            
                            
                            10,216,129PROPERTY,
      PLANT AND EQUIPMENT, net
                            
                            
                            39,650,876
                            
                            
                            
                            40,179,286DEBT
      ISSUANCE COSTS, net
                            
                            
                            2,637,308
                            
                            
                            
                            3,332,390GOODWILL
                            
                            
                            8,002,075
                            
                            
                            
                            7,716,956DEPOSIT
      GUARANTEE
                            
                            
                            15,000,000
                            
                            
                            
                            15,000,000DEFERRED
      TAX ASSETS
                            
                            
                            538,529
                            
                            
                            
                            531,625OTHER
      ASSETS
                            
                            
                            4,280,033
                            
                            
                            
                            4,256,644TOTAL
      ASSETS
                            
                            $
                            104,274,954
                            
                            
                            $
                            81,233,030LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable
                            
                            $
                            25,644,569
                            
                            
                            $
                            956,647Accrued
      expenses
                            
                            
                            4,288,785
                            
                            
                            
                            3,815,939Due
      to related parties
                            
                            
                            208,638
                            
                            
                            
                            438,026Short-term
      loans
                            
                            
                            7,136,015
                            
                            
                            
                            -Notes
      payable - current
                            
                            
                            42,700,000
                            
                            
                            
                            43,000,000TOTAL
      CURRENT LIABILITIES
                            
                            
                            79,978,007
                            
                            
                            
                            48,210,612CONVERTIBLE
      NOTES, net of debt discount of $8,069,144 and $10,392,971as
      of September 30, 2010 and December 31, 2009, respectively
                            
                            
                            58,435,395
                            
                            
                            
                            48,795,662ACCRUED
      DERIVATIVE LIABILITIES
                            
                            
                            56,522,337
                            
                            
                            
                            21,556,300TOTAL  LIABILITIES
                            
                            
                            194,935,739
                            
                            
                            
                            118,562,574COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      DEFICITPreferred
      stock; $0.001 par value; 1,000,000 shares authorized, no shares
      issued
                            
                            
                            -
                            
                            
                            
                            -Common
      stock; $0.001 par value; 2,500,000,000 sharesauthorized;
      236,387,893, shares issued and outstandingas
      of September 30, 2010 and December 31, 2009
                            
                            
                            236,388
                            
                            
                            
                            236,388Additional
      paid-in capital
                            
                            
                            62,114,268
                            
                            
                            
                            60,958,526Accumulated
      other comprehensive income
                            
                            
                            2,220,083
                            
                            
                            
                            1,157,588Accumulated
      deficit
                            
                            
                            (155,231,524
                            )
                            
                            
                            (99,682,046
                            )TOTAL
      STOCKHOLDERS' DEFICIT
                            
                            
                            (90,660,785
                            )
                            
                            
                            (37,329,544
                            )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                            
                            $
                            104,274,954
                            
                            
                            $
                            81,233,030
  The
      accompanying notes are an integral part of these consolidated financial
      statements.
 3
 
 PURE
      BIOFUELS CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE
  LOSS
  Three
      Months Ended September 30,
                          
                          
                          Nine
      Months Ended September 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009(unaudited)
                          
                          
                          (unaudited)
                          
                          
                          (unaudited)
                          
                          
                          (unaudited)REVENUE
                          
                          $
                          5,401,082
                          
                          
                          $
                          140,752
                          
                          
                          $
                          7,082,194
                          
                          
                          $
                          1,098,485COST
      OF REVENUE
                          
                          
                          5,219,881
                          
                          
                          
                          237,013
                          
                          
                          
                          6,946,757
                          
                          
                          
                          1,127,535GROSS
      MARGIN
                          
                          
                          181,201
                          
                          
                          
                          (96,261
                          )
                          
                          
                          135,437
                          
                          
                          
                          (29,050
                          )SELLING,
      GENERAL AND ADMINISTRATIVE  EXPENSES
                          
                          
                          2,907,413
                          
                          
                          
                          2,368,425
                          
                          
                          
                          7,701,041
                          
                          
                          
                          6,451,559LOSS
      FROM OPERATIONS
                          
                          
                          (2,726,212
                          )
                          
                          
                          (2,464,686
                          )
                          
                          
                          (7,565,604
                          )
                          
                          
                          (6,480,609
                          )OTHER
      INCOME (EXPENSES):Interest
      and financing costs
                          
                          
                          (53,472,285
                          )
                          
                          
                          (5,184,878
                          )
                          
                          
                          (69,668,501
                          )
                          
                          
                          (19,333,681
                          )Other,
      net
                          
                          
                          45,361
                          
                          
                          
                          183,333
                          
                          
                          
                          265,831
                          
                          
                          
                          (200,535
                          )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
                          
                          
                          3,305,739
                          
                          
                          
                          7,755,285
                          
                          
                          
                          19,857,348
                          
                          
                          
                          (13,319,981
                          )Foreign
      currency transaction gain
                          
                          
                          760,987
                          
                          
                          
                          333,646
                          
                          
                          
                          1,561,448
                          
                          
                          
                          1,879,279TOTAL
      OTHER EXPENSES, net
                          
                          
                          (49,360,198
                          )
                          
                          
                          (12,752,692
                          )
                          
                          
                          (47,983,874
                          )
                          
                          
                          (46,814,996
                          )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                          
                          
                          (52,086,410
                          )
                          
                          
                          (15,217,378
                          )
                          
                          
                          (55,549,478
                          )
                          
                          
                          (53,295,605
                          )PROVISION
      FOR INCOME TAXES
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -NET
      LOSS
                          
                          
                          (52,086,410
                          )
                          
                          
                          (15,217,378
                          )
                          
                          
                          (55,549,478
                          )
                          
                          
                          (53,295,605
                          )OTHER
      COMPREHENSIVE GAIN:Foreign
      currency translation adjustment
                          
                          
                          361,572
                          
                          
                          
                          1,269,891
                          
                          
                          
                          1,062,495
                          
                          
                          
                          1,728,121COMPREHENSIVE
      LOSS
                          
                          $
                          (51,724,838
                          )
                          
                          $
                          (13,947,487
                          )
                          
                          $
                          (54,486,983
                          )
                          
                          $
                          (51,567,484
                          )NET
      LOSS PER SHARE - BASIC AND DILUTED
                          
                          $
                          (0.22
                          )
                          
                          $
                          (0.07
                          )
                          
                          $
                          (0.23
                          )
                          
                          $
                          (0.28
                          )WEIGHTED
      AVERAGE COMMON EQUIVALENTSHARES
      OUTSTANDING - BASIC AND DILUTED
                          
                          
                          236,387,893
                          
                          
                          
                          216,209,821
                          
                          
                          
                          236,387,893
                          
                          
                          
                          187,146,975
  The
      accompanying notes are an integral part of these consolidated financial
      statements.
  4
 
 PURE
      BIOFUELS CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT)
 AccumulatedAdditional
                                  
                                  
                                  Other
                                  
                                  
                                  
                                  
                                  
                                  TotalCommon
      Stock
                                  
                                  
                                  Paid-in
                                  
                                  
                                  Comprehensive
                                  
                                  
                                  Accumulated
                                  
                                  
                                  Stockholders'Shares
                                  
                                  
                                  Amount
                                  
                                  
                                  Capital
                                  
                                  
                                  Income
      (Loss)
                                  
                                  
                                  Deficit
                                  
                                  
                                  Equity
      (Deficit)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
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,352,524
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,352,524Reclassification
      of fair value of options between liability and 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
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,722,521
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,722,521Net
      loss
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (48,209,963
                                  )
                                  
                                  
                                  (48,209,963
                                  )Balance,
      December 31, 2009
                                  
                                  
                                  236,387,893
                                  
                                  
                                  $
                                  236,388
                                  
                                  
                                  $
                                  60,958,526
                                  
                                  
                                  $
                                  1,157,588
                                  
                                  
                                  $
                                  (99,682,046
                                  )
                                  
                                  $
                                  (37,329,544
                                  )Stock
      compensation expense for options issued to employees
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,155,742
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,155,742Foreign
      currency translation adjustment
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,062,495
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,062,495Net
      loss
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (55,549,478
                                  )
                                  
                                  
                                  (55,549,478
                                  )Balance,
      September 30, 2010 (unaudited)
                                  
                                  
                                  236,387,893
                                  
                                  
                                  $
                                  236,388
                                  
                                  
                                  $
                                  62,114,268
                                  
                                  
                                  $
                                  2,220,083
                                  
                                  
                                  $
                                  (155,231,524
                                  )
                                  
                                  $
                                  (90,660,785
                                  )
 The
      accompanying notes are an integral part of these consolidated financial
      statements.
 5
  PURE
      BIOFUELS CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH
FLOWS
  Nine
      Months
                        
                        
                        Nine
      MonthsEnded
                        
                        
                        EndedSeptember
      30, 2010
                        
                        
                        September
      30, 2009(Unaudited)
                        
                        
                        (Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                        
                        $
                        (55,549,478
                        )
                        
                        $
                        (53,295,605
                        )Adjustments
      to reconcile net loss to net cash(used
      in) provided by operating activities:Depreciation
                        
                        
                        1,790,899
                        
                        
                        
                        484,511Stock
      compensation expense for options issued to employees
                        
                        
                        1,155,742
                        
                        
                        
                        1,772,324Fair
      value of shares issued for financing costs
                        
                        
                        -
                        
                        
                        
                        1,819,375Fair
      value of warrants and conversion options issued for financing
      costs
                        
                        
                        48,639,273
                        
                        
                        
                        4,913,240Amortization
      of debt discounts, debt issuance costs and financing costs
                        
                        
                        10,193,723
                        
                        
                        
                        6,223,959(Gain)
      loss on change in fair value of accrued derivative
    liabilities
                        
                        
                        (19,857,348
                        )
                        
                        
                        13,319,981Non-cash
      expenses in connection with debt financing
                        
                        
                        -
                        
                        
                        
                        15,840,078Non-cash
      foreign currency transaction gain
                        
                        
                        (1,124,758
                        )
                        
                        
                        (1,627,214
                        )Loss
      on disposal of assets
                        
                        
                        85,656
                        
                        
                        
                        -Changes
      in operating assets and liabilities:Accounts
      receivable
                        
                        
                        (561,481
                        )
                        
                        
                        152,559Inventories
                        
                        
                        (26,732,590
                        )
                        
                        
                        774,422VAT
      credits
                        
                        
                        (1,505,278
                        )
                        
                        
                        6,838,725Deposit
      and other assets
                        
                        
                        (450,887
                        )
                        
                        
                        (4,198,511
                        )Accounts
      payable
                        
                        
                        24,277,991
                        
                        
                        
                        (4,040,265
                        )Accrued
      expenses
                        
                        
                        7,764,799
                        
                        
                        
                        4,946,512Due
      to related parties
                        
                        
                        (241,841
                        )
                        
                        
                        (162,356
                        )Net
      cash used in operating activities
                        
                        
                        (12,115,578
                        )
                        
                        
                        (6,238,265
                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment
      on amounts due to prior stockholders of Interpacific Oil
                        
                        
                        -
                        
                        
                        
                        (5,600,000
                        )Purchase
      of equipment
                        
                        
                        (45,246
                        )
                        
                        
                        (264,584
                        )Proceeds
      from sale of equipment
                        
                        
                        151,024
                        
                        
                        
                        -Net
      cash provided by (used in) investing activities
                        
                        
                        105,778
                        
                        
                        
                        (5,864,584
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of convertible notes
                        
                        
                        -
                        
                        
                        
                        2,200,000Proceeds
      from issuance of notes payable - short term
                        
                        
                        7,136,015
                        
                        
                        
                        1,500,000Change
      in restricted cash
                        
                        
                        5,967,743
                        
                        
                        
                        (7,432,016
                        )Change
      in deposit guarantee
                        
                        
                        -
                        
                        
                        
                        (15,070,675
                        )Payment
      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
                        )Proceeds
      from Interbank Peru Financing
                        
                        
                        -
                        
                        
                        
                        43,000,000Principal
      payments on note payable (Interbank Peru Financing)
                        
                        
                        (300,000
                        )
                        
                        
                        -Net
      cash provided by financing activities
                        
                        
                        12,803,758
                        
                        
                        
                        14,016,860Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        259,410
                        
                        
                        
                        (550,678
                        )NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                        
                        
                        1,053,368
                        
                        
                        
                        1,363,333CASH
      AND CASH EQUIVALENTS, Beginning of period
                        
                        
                        735,352
                        
                        
                        
                        579,241CASH
      AND CASH EQUIVALENTS, End of period
                        
                        $
                        1,788,720
                        
                        
                        $
                        1,942,574
 The
      accompanying notes are an integral part of these consolidated financial
      statements.
 6
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (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, 2010
are not necessarily indicative of the results to be expected for the full year
ending December 31, 2010.
 
 Organization and Line of
Business
  Pure
Biofuels Corp., through its directly owned subsidiaries Pure Biofuels del Peru
S.A.C. and Palma Industrial S.A.C., processes, produces and distributes
biodiesel as an alternative fuel for freight and transportation fleets, marines,
farming, rail and aviation industries, and other industrial uses.  The
Company’s products are sold in Peru.
 
 Development Stage
Company
 
 The
Company was in the development stage through July 31, 2009.  During
the period that the Company was considered a development stage company, the
Company incurred accumulated losses of approximately $105,000,000, of which,
approximately $75,000,000 were non-cash expenses associated with debt and equity
financings and stock compensation expense for options issued to
employees.
 
 Going-Concern
 
 The
Company has continued to incur losses since exiting from the development stage
and has only recently begun principal operations. For the three months ended
September 30, 2010 and 2009, the Company incurred a net loss of $52,086,410 and
$15,217,378, respectively. For the nine months ended September 30, 2010 and
2009, the Company incurred a net loss of $55,549,478 and $53,295,605,
respectively, and has an accumulated deficit of $155,231,524 as of September 30,
2010. In addition, the Company is in technical non-compliance with certain
covenants under the Interbank Loan Agreement which requires the $42,700,000 to
be classified on the consolidated financial statements as a current
liability.  The Company has also defaulted on payments related to
certain short-term loans during current year.  Due to these current
liabilities classification, the Company has a negative working capital balance
of $45,811,874 at September 30, 2010.  These circumstances raise
substantial doubt about the Company’s ability to continue as a going
concern.
 7
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
  The
Company has begun generating revenues from the sale of biodiesel for the period
after the Company ceased to be a development stage company.  During
July 2009, the Company obtained the $43,000,000 from Interbank in additional
financing which provided the Company with the available cash flow during the
coming year.  With the financing from Interbank, the Company is able
to partially fund working capital.  Revenues increased to $5,401,082
for the three months ended September 30, 2010 and the Company expects the sales
to continue to increase over the next year.
 
 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 and negotiate the
technical non-compliance with the Interbank loan. 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 include the accounts of Pure
Biofuels Corp. and its subsidiaries as follows:
  PlaceSubsidiary
                                
                                Incorporated
                                
                                %
      Owned
                                
                                ParentPure
      Biofuels Del Peru S.A.C.
                                
                                Peru
                                
                                99.9
                                
                                Pure
      Biofuels Corp.Palma
      Industrial S.A.C.
                                
                                Peru
                                
                                99.9
                                
                                Pure
      Biofuels Corp.Pure
      Biocarburantes S.A. *
                                
                                Argentina
                                
                                99.4
                                
                                Pure
      Biofuels Del Peru
S.A.C.
 * Pure
Biocarburantes S. A. was disposed of during 2009.  The operations were
insignificant to the operations of Pure Biofuels Del Peru.
 
 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”) and the Argentinean Peso (ARS);
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. All intercompany balances and transactions
have been eliminated in consolidation.
 
 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.  The
Company’s actual results could differ materially from these estimates upon which
the carrying values were based.
 8
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
  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.
 
 Use 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, 2010 and December 31,
2009, total restricted cash related to the standby letter of credit amounted to
$0 and $141,852, respectively. As of September 30, 2010 and December 31, 2009,
total restricted cash related to restricted working capital amounted to $927,970
and $6,830,717, respectively. As of September 30, 2010 and December 31, 2009,
total non-current restricted cash related to the deposit in guarantee under the
Interbank Financing amounted to $15,000,000.  See Note 9 for details
on deposit in guarantee and restricted working capital.
 
 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. Accounts receivable will be considered
delinquent if payment is not received before the due dates established in the
sales agreement with customers. Delinquent account balances are written-off
after management has determined that the likelihood of collection is not
probable, and known bad debts are written off against allowance for doubtful
accounts when identified. As of September 30, 2010 and December 31, 2009, 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, 2010 and December 31,
2009, 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
 (Unaudited)
 The
estimated useful lives are as follows:
 
 Building
      improvements
                
                10
      yearsFacilities
      and equipment
                
                10 yearsComputer
      equipments and licenses
                
                4
      yearsOther
      fixed assets
                
                5-10
      years
 
 Goodwill and
Impairment
 
 The
Company applies Accounting Standards Codification (“ASC”) Topic 350,
“Intangibles - Goodwill and Other Intangible Assets,” 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, 2010 and
December 31, 2009, there was no impairment of its goodwill.
 
 Impairment or Disposal of
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. The Company evaluates the
recoverability of its long-lived assets if circumstances indicate impairment may
have occurred.  This analysis is performed by comparing the respective
carrying values of the assets to the current and expected future cash flows, on
an undiscounted basis, to be generated from such 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, 2010 and December 31, 2009, there was no
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
 (Unaudited)
 Fair Value
Measurements
 
 
 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, certain other current assets
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. In addition, the Company has long-term
debt with financial institutions. The carrying amounts of the long-term
liabilities approximate their fair values based on current rates of interest for
instruments with similar characteristics. 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’s warrant liability is carried at fair value totaling $53,643,163 and
$11,169,503, as of September 30, 2010 and December 31, 2009,
respectively.  The Company’s conversion option liability is carried at
fair value totaling $2,879,174 and $10,386,797 as of September 30, 2010 and
December 31, 2009, respectively.  The Company used Level 2 inputs for
its valuation methodology for the warrant liability and conversion option
liability as their fair values were determined by using the Black-Scholes option
pricing model using the following assumptions:
 
 September
      30, 2010
                  
                  
                  December
      31, 2009Annual
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      life (years)
                  
                  
                  1.55
      – 6.93
                  
                  
                  
                  2.3-6.6Risk-free
      interest rate
                  
                  
                  .42%-1.91
                  %
                  
                  
                  1.14%-3.39
                  %Expected
      volatility
                  
                  
                  170
                  %
                  
                  
                  140
                  %
 
 Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using daily pricing observations for recent periods that correspond
to the term of the warrants and conversion options. The
Company believes this method produces an estimate that is representative of
our expectations of future volatility over the expected term of these warrants
and conversion options. The Company has no reason to believe future
volatility over the expected remaining life of these warrants is likely to
differ materially from historical volatility. The expected life is based on the
remaining term of the warrants and conversion options. The risk-free interest
rate is based on U.S. Treasury securities with maturity terms similar to the
expected remaining term of the warrants and conversion options.
 11
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 Fair
      Value
                        As
      of
                        September 30,
      2010
                      
                      
                      Fair
      Value Measurements at
                        September 30,
      2010
                        Using
      Fair Value HierarchyLiabilities
                      
                      
                      
                      
                      Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3Warrant
      liability
                      
                      $
                      53,643,163
                      
                      
                      
                      
                      
                      
                      $
                      53,643,163Conversion
      option liability
                      
                      
                      2,879,174
                      
                      
                      
                      
                      
                      
                      
                      2,879,174Total
      accrued derivative liabilities
                      
                      $
                      56,522,337
                      
                      
                      
                      
                      
                      
                      $
                      56,522,337
  The
change in fair value of accrued derivative liabilities is charged as a gain or a
loss on the consolidated statement of operations. The Company recognized a gain
of $3,305,739 and $19,857,348 for the three and nine months ended September 30,
2010, respectively.  The Company recognized a gain of $7,755,285 and a
loss of $13,319,981 for the three and nine months ended September 30, 2009,
respectively.  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 and restricted 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, 2010 and December 31, 2009,
the Company had deposits in excess of federally-insured limits of approximately
$16,777,000 and $22,552,000, respectively. The Company has not experienced any
losses in such accounts.
 
 For the
three months ended September 30, 2010, one supplier accounted for 99.9% of the
Company’s purchases of inventory. For the nine months ended September 30, 2010,
two suppliers accounted for 99.9% of the Company’s purchases of inventory, with
each supplier individually accounting for 85.2% and 14.7%, respectively. As of
September 30, 2010, the total accounts payable due to these suppliers amounted
to $25.2 million, with each supplier individually accounting for 98% and 0% of
the total accounts payable balance.
  One major
customer accounted for approximately 84% of the net revenue for the three months
ended September 30, 2010 and 80% of the net revenue for the nine months ended
September 30, 2010. Total receivable balance due from this customer was
$0.6 million, representing 86% of total accounts receivable as of September 30,
2010.
 The
Company’s operations are carried out in Peru. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the country, and by the general
state of the country’s economy. The Company's operations in Peru are subject to
specific considerations and significant risks not typically associated with
companies in North America. These include risks associated with, among others,
the political, economic and legal environments and foreign currency exchange.
The Company's results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
 
 Foreign Currency
Translations and Comprehensive Income
  The
reporting currency of the Company is the U.S. dollar. The Company’s subsidiaries
use their local currencies, the Peruvian New Sol (PEN) as their functional
currencies for the nine months ended September 30, 2010 and the PEN and
Argentinean Peso (ARS) as their functional currencies for the nine months ended
September 30, 2009. 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 loss in the
consolidated statements of stockholders’ equity (deficit). 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.
 12
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 Asset and
liability amounts at September 30, 2010 and December 31, 2009 were translated at
2.788 PEN to $1.00 USD and 2.890 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 statement of operations accounts
for the nine months ended September 30, 2010 and 2009 were 2.831 PEN and 3.055
PEN to $1.00 USD, respectively; and for the nine months ended September 30, 2009
was 3.71 ARS to $1.00 USD.  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.
 
 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 evaluation of a tax position is a
two-step process. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the
technical merits of that position. The second step is to measure a tax position
that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. Penalties and interest incurred related to
underpayment of income tax are classified as income tax expense in the year
incurred.  No significant penalties or interest relating to income taxes
have been incurred during the nine months ended September 30, 2010 and 2009.
 GAAP also provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosures and
transition.
 13
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 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 calculated dividing income
available to common stockholders by the weighted average number of common shares
outstanding.  Diluted earnings per share is based on the assumption
that all dilutive convertible shares and stock options and warrants were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, warrants and options 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, options and convertible notes were
excluded from the diluted loss per share calculation due to the anti-dilutive
effect.  As of September 30, 2010 and 2009, the following potential
dilutive shares were excluded from the diluted loss per share for all periods
presented due to their anti-dilutive effect.
 
 September
      30, 2010
                              
                              
                              September
      30, 2009Options
                              
                              
                              6,946,250
                              
                              
                              
                              15,366,250Warrants
                              
                              
                              1,862,954,350
                              
                              
                              
                              135,980,665Convertible
      notes
                              
                              
                              221,686,946
                              
                              
                              
                              197,295,443Total
                              
                              
                              2,091,587,546
                              
                              
                              
                              348,642,358
 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.
 14
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 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, directors, 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 with 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 2009 consolidated financial statements
to conform to the 2010 consolidated financial statement presentation. These
reclassifications had no effect on net loss or cash flows as previously
reported.
 
 Recent
Pronouncements
 
 In
October 2009, the FASB issued Accounting Standards Update 2009-15 ("ASU
2009-15") 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 adoption
of this ASU did not have a significant impact on the Company’s consolidated
financial statements.
 15
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 On
December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value
Measurements”.  This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial
reporting.  The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.
 
 In
December 2009, FASB issued ASU No. 2009-17 Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. This ASU is effective for fiscal years beginning on or
after November 15, 2009, and interim periods within those fiscal years. The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
 
 In March
2010, FASB issued ASU No. 2010-10 Amendments for Certain Investment Funds. This
update defers the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entity’s interest in
certain types of entities. The deferral will mainly impact the evaluation of
reporting enterprises’ interests in mutual funds, private equity funds, hedge
funds, real estate investment entities that measure their investment at fair
value, real estate investment trusts, and venture capital funds. The ASU also
clarifies guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision makers. The
ASU is effective for interim and annual reporting periods in fiscal year
beginning after November 15, 2009. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.
 
 On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. The FASB believes these amendments
remove potential conflicts with the SEC’s literature. The adoption of this ASU
did not have a material impact on the Company’s consolidated financial
statements.
 
 On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have
a material impact on the Company’s consolidated financial
statements.
 16
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. This Update provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company does not expect the adoption of ASU 2010-13 to have a
significant impact on its consolidated financial statements.
 
 Note
3 – Inventories
 
 Inventories
consist of the following:
 
 September
      30,
                              
                              
                              December
      31,Description
                              
                              2010
                              
                              
                              2009Raw
      Material
                              
                              $
                              27,489,474
                              
                              
                              $
                              147,635Work-in-Process
                              
                              
                              5,036
                              
                              
                              
                              97,272Finished
      Goods
                              
                              
                              19,204
                              
                              
                              
                              110,624Inventories,
      net
                              
                              $
                              27,513,714
                              
                              
                              $
                              355,531
 During
the second quarter, the Company entered into an agreement with LUKOIL Pan
Americas, LLC (“LUKOIL”), whereby LUKOIL provided the Company raw materials in
the amount of approximately $29 million.  The inventory is secured by a
storage warrant issued by Alma Peru and endorsed to LUKOIL.  The product
will be released by LUKOIL to the Company through the use of the storage warrant
that will expire in March 2011 but the Company has the option to renew it on an
annual basis.  The Company is charged a financing rate of 4% per annum
calculated on the sum of daily inventory multiplied by the sales price.  As
of September 30, 2010, raw materials purchased from LUKOIL remaining in the
Company’s inventory amounted to approximately $25 million.
 
 Note
4 – VAT Credits
 17
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 At
September 30, 2010 and December 31, 2009, the Company has value added tax
(“VAT”) credit of $2,618,527 and $1,051,185, respectively, in Peru. VAT is
charged at a standard rate of 19% of the purchases made by the Company and the
Company obtains VAT 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 VAT tax credits against its Peruvian VAT tax
liability generated from sales or service revenue or to receive a cash refund
from the Peruvian government after necessary approvals are obtained from the
Peruvian government. No significant penalties or interest relating to VAT taxes
have been incurred during the nine months ended September 30, 2010 and
2009.
 
 Note
5 – Property, Plant and Equipment
 
 Property,
plant and equipment consist of the following:
 
 September
      30,
                              
                              
                              December
      31,2010
                              
                              
                              2009Land
                              
                              $
                              3,628,882
                              
                              
                              $
                              3,499,583Plant
      under construction
                              
                              
                              156,496
                              
                              
                              
                              4,873,475Building
      improvements
                              
                              
                              801,145
                              
                              
                              
                              858,397Facilities
      and equipment
                              
                              
                              37,962,348
                              
                              
                              
                              32,144,859Computer
      equipment and licenses
                              
                              
                              277,240
                              
                              
                              
                              261,618Other
      fixed assets
                              
                              
                              207,126
                              
                              
                              
                              97,96943,033,237
                              
                              
                              
                              41,735,901Accumulated
      depreciation
                              
                              
                              (3,382,361
                              )
                              
                              
                              (1,556,615
                              )Property, Plant and Equipment,
      net
                              
                              $
                              39,650,876
                              
                              
                              $
                              40,179,286
 Plant
under construction represents labor costs, material, capitalized interest
incurred in connection with the construction of plant improvements at the
Chorillo facilities.   The Company estimates plant improvements to be
fully completed by the fourth quarter of 2010.  The Company is waiting
for the proper certifications for completion of the project at which time the
improvements under construction will be reclassified to facilities and
equipment.
 
 Depreciation
expense amounted to $1,411,722 and $1,790,899, for the three and nine months
ended September 30, 2010, respectively, and $89,227 and $484,511 for the three
and nine months ended September 30, 2009, respectively.
 
 Note
6 – Goodwill
 
 Goodwill
represents the excess of the purchase price of businesses over the fair value of
the identifiable net assets acquired in accordance with ASC Topic 805, “Business
Combination.” Goodwill and other indefinite life intangible assets are no longer
amortized, but instead tested for impairment on an annual basis or more
frequently when impairment indicators arise.
 
 The
carrying value of goodwill is $8,002,075 and $7,716,956 at September 30, 2010
and December 31, 2009, respectively. No impairment was noted on the goodwill at
September 30, 2010 and December 31, 2009.
 18
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 Balance
      at
                      
                      
                      
                      
                      
                      Balance
      atDecember
      31,
                      
                      
                      Change
      in
                      
                      
                      September
      30,2009
                      
                      
                      Value
                      
                      
                      2010Interpacific
      Oil S.A.C
                      
                      
                      7,716,956
                      
                      
                      
                      285,119
                      
                      
                      
                      8,002,075
 In the
table above, the change in value of goodwill is related to the change in the
foreign exchange rates used to translate the balance sheet.
 
 Note
7 – 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 Company paid a fee of $30,000 to extend the
agreement to January 31, 2011.  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 has the right to
exchange all or any FDS Bond Warrants at any time after the Effective Date
(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.
 
 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.  On the date of issuance, 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:
 
 ·
              Expected
      life of 7 years
 ·
              Volatility
      of 130%;
 ·
              Dividend
      yield of 0%;
 ·
              Risk
      free interest rate of 2.28%
 
 The fair
value of $4,085,589 was recorded as a prepaid asset and warrant liability in the
consolidated balance sheets.  The Company amortized the $4,085,589
over one year.  The amortization expense for the three and nine months
ended September 30, 2010 was $0 and $962,632, respectively, and $1,029,793 and
$2,093,165 for the three and nine months ended September 30, 2009, respectively.
These amounts are included in “interest and financing costs” in the accompanying
consolidated statements of operations.  As of March 31, 2010, the
performance bond was fully amortized.
 19
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 Note
8 – Convertible Debt
 
 In March
2010, the Company converted accrued interest from PIK Notes from September 15,
2009 through March 15, 2010 in the amount of $3,551,411 into PIK convertible
notes with an exercise price of $0.30 per share.
 
 The
Company determined that the convertible notes contained an embedded conversion
feature as of the date of issuance.  The Company recorded the fair
value of $588,446 as a debt discount to be amortized over the life of the notes
and as an accrued derivative liability.  The fair value was determined
using the Black-Scholes option pricing model under the following
assumptions:
 
 ·
              Expected
      life of 2.5 years
 ·
              Volatility
      of 140%;
 ·
              Dividend
      yield of 0%;
 ·
              Risk
      free interest rate of 0.96%
 
 On July
16, 2009, the Company and Plainfield entered into a fifth amendment to the
securities and purchase agreement.  Pursuant to the agreement, the
Company issued a warrant to Plainfield to purchase up to 22,500,000 shares of
the Company’s common stock on July 16, 2010 because the Company had not repaid
in full the convertible notes by July 16, 2010.  The warrant can be
exercise through July 16, 2017 with exercise price at the date of issuance of
$0.20 per share of common stock.
 
 The
Company recorded the warrant’s fair value of $787,884 as a ‘Interest and
financing costs” on the accompanying consolidated statements of
operations.  The fair value was determined using the Black-Scholes
option pricing model under the following assumptions:
 
 ·
              Expected
      life of 7 years
 ·
              Volatility
      of 140%;
 ·
              Dividend
      yield of 0%;
 ·
              Risk
      free interest rate of 2.37%
 
 In
September 2010, the Company converted accrued interest from PIK Notes from March
15, 2010 through September 15, 2010 in the amount of $3,764,495 into PIK
convertible notes with an exercise price of $0.30 per share.
 
 The
Company determined that the convertible notes contained an embedded conversion
feature as of the date of issuance.  The Company recorded the fair
value of $95,666 as a debt discount to be amortized over the life of the notes
and as an accrued derivative liability.  The fair value was determined
using the Black-Scholes option pricing model under the following
assumptions:
 
 ·
              Expected
      life of 1.99 years
 ·
              Volatility
      of 170%;
 ·
              Dividend
      yield of 0%;
 ·
              Risk
      free interest rate of 0.50%
 20
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 The
following table summarizes the convertible notes:
 
 Balance,
      December 31, 2009
                          
                          $
                          48,795,662Conversion
      of interest to principal
                          
                          
                          7,315,906Discount
      related to additional principal
                          
                          
                          (684,112
                          )Amortization
      of note discount
                          
                          
                          3,007,939Balance,
      September 30, 2010 (unaudited)
                          
                          $
                          58,435,395
 The
$58,435,395 is net of debt discounts of $8,069,144.  The total
principal amount of $66,504,539 is due on September 12, 2012, has an interest
rate of 10% if paid in cash and 12% if paid in stock, and is convertible into
shares of common stock at $0.30 per share.
 
 Total
interest related to the convertible notes amounted to $1,902,371 and
$5,579,172 for the three and nine months ended September 30, 2010, respectively
and $1,479,206 and $2,847,177 for the three and nine months ended September 30,
2009, respectively.
 
 For the
three and nine months ended September 30, 2010 , the Company amortized debt
discounts in the amount $1,031,061 and $3,007,939, respectively, and $959,446
and $2,933,820, respectively for the three and nine months ended September 30,
2009, 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, 2010 and December 31,
2009 amounted to $847,750 and $2,091,332, respectively, which is recorded in
accrued expenses on the accompanying consolidated balance sheets.
 
 As of
September 30, 2010, the Company was in default of the Interbank Peru Financing
agreement and certain short-term loans which then triggered an event of default
under the terms of the Plainfield convertible note agreements.  The
Company has since received a waiver from Plainfield that waived any potential
default events that triggered the certain events of default under the terms of
the agreements as of September 30, 2010.
 
 Note
9 – Interbank Peru Financing
 
 On July
16, 2009, the Company entered into a 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 accounting
standard ASC 840-40. Further, the Financing agreement allows a Purchase Option,
as defined, by the Company at the end of the six-year term of the
agreement.  In addition, the Company pledged its land, with a carrying
value of $3,628,882, as collateral pursuant to the Interbank Peru Financing
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 recorded the
capital contribution as “restricted cash” and the deposit in guarantees as
“deposit guarantee.” Restricted cash is released from restriction only to pay
working capital costs. The deposit guarantee will always hold 35% of the
principal outstanding and will be released on an annual basis as the principal
gets amortized over the term of the agreement. As of September 30, 2010 and
December 31, 2009 the balance in restricted cash related to the capital
contribution amounted to $927,970 and $6,830,717.  As of September 30,
2010 and December 31, 2009 the deposit guarantee amounted to
$15,000,000.
 21
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 The
Company received proceeds of $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 as part of the sale of VAT credits to
Interbank.  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, 2010, the Company was not in compliance
with certain financial covenants which could trigger an event of default under
the terms of the agreement.  Due to the non compliance, Interbank, at
its option, has the right to assess a 2% penalty of the unpaid principal balance
of the loan for the time period that the bank deems the Company to be in default
until the waiver is granted.  The Company has not received a waiver or
forbearance at the time these consolidated financial statements were issued, so
the Company recorded the $42,700,000 payable as a current
liability.
 
 The
Company recorded interest expense of $1,060,562 and $3,081,042 for the three and
nine months ended September 30, 2010, respectively and $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 per the contractual agreement:
 
 PrincipalFiscal
      Year
                      
                      Amount2010
                      
                      $
                      450,0002011
                      
                      
                      4,150,0002012
                      
                      
                      8,000,0002013
                      
                      
                      10,900,0002014
                      
                      
                      12,800,000Thereafter
                      
                      
                      6,400,000$
                      42,700,000
 
 Note
10 – Short-Term Loans
 
 FDS Short-Term
Loan
 
 On June
4, 2010, the Company entered into an unsecured loan with FDS for a term of three
months in the principal amount of $1,100,000 (the “FDS Loan”).  In
connection with the FDS Loan, the Company issued to seven year warrants to
purchase 43,421,053 shares of common stock of the Corporation (the “FDS
Warrants”) at an exercise price of $0.076 per share of Common Stock. In
addition, FDS may at its sole option exchange all or any FDS Warrants at any
time after the date of issuance 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 Warrants divided by 1.2.
 22
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 In
accordance with ASC 815, the Company determined that the FDS Warrants should be
classified as a liability at fair value on the date the FDS Warrants were to be
issued.  The Company determined the fair value of the FDS Warrants at
June 4, 2010 to be $2,015,130 using the Black-Scholes option pricing model with
the following assumptions:
 
 ·
              Expected
      life of 7 years
 ·
              Volatility
      of 140%;
 ·
              Dividend
      yield of 0%;
 ·
              Risk
      free interest rate of 2.65%
 
 The fair
value of $2,015,130 was recorded as “accrued derivative liabilities” with
$1,100,000 being recorded to debt discount to be amortized over the life of the
FDS Loan and the remaining $915,130 was recorded as “interest and financing
costs” in the consolidated statements of operations.
 
 On
September 4, 2010, the Company did not pay the principal amount of $1,100,000 as
required per the loan agreement.  Due to the default, the Company was
required to issue 289,473,684 seven year warrants with an exercise price of
$0.076.
 
 In
accordance with ASC 815, the Company determined that the additional warrants
should be classified as a liability at fair value on the date the warrants were
to be issued.  The Company determined the fair value of the warrants
at September 4, 2010 to be $8,379,133 using the Black-Scholes option pricing
model with the following assumptions:
 
 ·
              Expected
      life of 7 years
 ·
              Volatility
      of 170%;
 ·
              Dividend
      yield of 0%;
 ·
              Risk
      free interest rate of 2.14%
 
 The fair
value of $8,379,133 was recorded as “accrued derivative liabilities” and
“interest and financing costs” in the consolidated balance sheets and statements
of operations, respectively.
 
 Plainfield Short-Term
Loan
 
 On June
4, 2010, the Company entered into an unsecured loan with Plainfield for a term
of three months in the principal amount of $4,400,000 (the “Plainfield
Loan”).  In connection with the Plainfield Loan, the Company issued
seven year warrants to purchase 173,684,211 shares of common stock of the
Corporation (the “Plainfield Warrants”) at an exercise price of $0.076 per share
of Common Stock. In addition, Plainfield may at its sole option exchange all or
any Plainfield Warrants at any time after the date of issuance 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 Plainfield Warrants
divided by 1.2.
 23
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 In
accordance with ASC 815, the Company determined that the Plainfield Warrants
should be classified as a liability at fair value on the date the Plainfield
Warrants were to be issued.  The Company determined the fair value of
the Plainfield Warrants at June 4, 2010 to be $8,060,521 using the Black-Scholes
option pricing model with the following assumptions:
 
 ·
              Expected
      life of 7 years
 ·
              Volatility
      of 140%;
 ·
              Dividend
      yield of 0%;
 ·
              Risk
      free interest rate of 2.65%
 
 The fair
value of $8,060,521 was recorded as “accrued derivative liabilities” with
$4,400,000 being recorded to debt discount to be amortized over the life of the
FDS Loan and the remaining $3,660,521 was recorded as “interest and financing
costs” in the consolidated statements of operations.
 
 On
September 4, 2010, the Company did not pay the principal amount of $4,400,000 as
required per the loan agreement.  Due to the default, the Company was
required to issue 1,157,894,737 seven year warrants with an exercise price of
$0.076.
 
 In
accordance with ASC 815, the Company determined that the additional warrants
should be classified as a liability at fair value on the date the warrants were
to be issued.  The Company determined the fair value of the warrants
at September 4, 2010 to be $33,496,086 using the Black-Scholes option pricing
model with the following assumptions:
 
 ·
              Expected
      life of 7 years
 ·
              Volatility
      of 170%;
 ·
              Dividend
      yield of 0%;
 ·
              Risk
      free interest rate of 2.14%
 
 The fair
value of $33,496,086 was recorded as “accrued derivative liabilities” and
“interest and financing costs” in the consolidated balance sheets and statements
of operations, respectively.
 
 For the
three and nine months ended September 30, 2010, the Company recorded interest
expense of $206,250 and $268,125, respectively, for the FDS and Plainfield
Loans.
 
 For the
three and nine months ended September 30, 2010, the Company amortized $3,945,652
and $5,500,000, respectively, of the debt discount related to the FDS and
Plainfield Loans.
 
 Trimarine Short-Term
Loan
 
 During
the nine months ended September 30, 2010, Trimarine advanced $1,636,015 to the
Company.  On June 30, 2010, the Company and Trimarine entered into an
unsecured loan agreement whereby Trimarine agreed to lend the Company up to
$2,000,000.  The funds are due August 4, 2010 and accrue interest at
6% beginning on June 30, 2010.  The Company did not make the required
payment for the Trimarine loan on August 4, 2010. The Company is currently
negotiating an extended due date.  The balance at September 30, 2010
was $1,636,015.  The Company accrued interest expense of $52,088 for
the nine months ended September 30, 2010.
 
 The
following are the short-term loans at September 30, 2010:
 24
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 September
      30,
                              
                              
                              
                              Interest2010
                              
                              Due
      Date
                              
                              RateFDS
                              
                              $
                              1,100,000
                              
                              September
      4, 2010
                              
                              
                              15
                              %Plainfield
                              
                              
                              4,400,000
                              
                              September
      4, 2010
                              
                              
                              15
                              %Trimarine
                              
                              
                              1,636,015
                              
                              August 4,
    2010
                              
                              
                              6
                              %$
                              7,136,015
 Note
11 – 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.
On June 4, 2010, the board of directors approved an amendment to its article of
incorporation to increase the number of authorized common shares to
2,500,000,000. The certificate of amendment became effective on August 9,
2010.
 
 Stock
Options
 
 The
following is a summary of the option activity:
 
 WeightedNumber
      of
                                      
                                      
                                      Weighted
                                      
                                      Average
                                      
                                      AggregateOptions
                                      
                                      
                                      Average
                                      
                                      Remaining
                                      
                                      IntrinsicExercise
                                      
                                      Contractual
                                      
                                      ValuePrice
                                      
                                      Life
      (in years)Outstanding,
      December 31, 2008
                                      
                                      
                                      15,186,250
                                      
                                      
                                      $
                                      0.60Granted
                                      
                                      
                                      250,000
                                      
                                      
                                      
                                      0.60Exercised
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Forfeited
                                      
                                      
                                      (175,000
                                      )
                                      
                                      
                                      0.60Outstanding,
      December 31, 2009
                                      
                                      
                                      15,261,250
                                      
                                      
                                      $
                                      0.60Granted
                                      
                                      
                                      -Exercised
                                      
                                      
                                      -Forfeited
                                      
                                      
                                      (8,315,000
                                      )Outstanding,
      September 30, 2010 (unaudited)
                                      
                                      
                                      6,946,250
                                      
                                      
                                      $
                                      0.60
                                      
                                      6.85
                                      
                                      -Exercisable,
      September 30, 2010 (unaudited)
                                      
                                      
                                      6,946,250
                                      
                                      
                                      $
                                      0.60
                                      
                                      6.85
                                      
                                      -
 25
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 Warrants
 
 The
following summarizes the stock purchase warrant activity:
 
 WeightedWeighted
                                
                                AverageAverage
                                
                                RemainingNumber
      of
                                
                                
                                Exercise
                                
                                ContractualWarrants
                                
                                
                                Price
                                
                                Life
      (in years)Outstanding,
      December 31, 2008
                                
                                
                                11,805,666
                                
                                
                                $
                                0.39Granted
                                
                                
                                124,174,999
                                
                                
                                
                                0.26Exercised
                                
                                
                                -Forfeited
                                
                                
                                -Outstanding,
      December 31, 2009
                                
                                
                                135,980,665
                                
                                
                                $
                                0.27Granted
                                
                                
                                1,726,973,685
                                
                                
                                
                                0.076Exercised
                                
                                
                                -Forfeited
                                
                                
                                -Outstanding,
      September 30, 2010 (unaudited)
                                
                                
                                1,862,954,350
                                
                                
                                $
                                0.08
                                
                                6.78Exercisable,
      September 30, 2010 (unaudited)
                                
                                
                                1,862,954,350
                                
                                
                                $
                                0.08
                                
                                6.78
  Note
12 – Related Party Transactions
 
 The
Company entered into the following transactions with related
parties:
 
 a)
              On
      August 1, 2009, the Company entered into a service agreement with
      Challenge Capital Corporation, (“Challenge Capital”), a company controlled
      by certain officers of the Company, to provide services related to the
      handling of biofuels to the Company until August 1, 2010.  This
      agreement provides a monthly fee of $25,699.  On June 1, 2010,
      the Company amended the Challenge Capital agreement to a monthly fee of
      $13,000. The Company expensed $39,000 and $180,495 for the three and nine
      months ended September 30, 2010 and there was no outstanding balance at
      September 30, 2010.
 
 b)
              Plainfield is
      a related party as it is a major stockholder of the Company. See
      transactions with Plainfield in Note 8 and Note
  10.
 
 c)
              As
      of September 30, 2010 and December 31 2009, the Company has loans due to
      shareholders in the amount of
$208,638.
 
 These
transactions were recorded at the exchange amount which is the amount agreed to
by the related parties.
 
 Note
13 – Commitments and Contingencies
 
 Under the
Purchase Agreement entered into in July 2009, 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 deposit of
$4,000,000 is recorded as “other assets” in the accompanying consolidated
balance sheet as of September 30, 2010.
 26
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 On July
16, 2010, the Company issued 40,000,000 seven year warrants with an exercise
price of $0.20 as required per the Purchase Agreement.
 
 In
accordance with ASC 815, the Company determined that the additional warrants
should be classified as a liability at fair value on the date the warrants were
to be issued.  The Company determined the fair value of the warrants
at July 16, 2010 to be $1,400,518 using the Black-Scholes option pricing model
with the following assumptions:
 
 ·
              Expected
      life of 7 years
 ·
              Volatility
      of 140%;
 ·
              Dividend
      yield of 0%;
 ·
              Risk
      free interest rate of 2.37%
 
 The fair
value of $1,400,518 was recorded as “accrued derivative liabilities” and
“interest and financing costs” in the consolidated balance sheets and statements
of operations, respectively.
 
 For the
three and nine months ended September 30, 2010, the Company incurred fees
related to this facility with Trimarine amounting to $422,499 and $971,167,
respectively. For the three and nine months ended September 30, 2009, the
Company incurred fees related to this facility with Trimarine amounting to
$333,333. As of September 30, 2010 and December 31, 2009, the Company had an
outstanding payable owed to Trimarine in the amounts of $2,037,499 and $818,000,
respectively.
 
 Note
14 – Supplemental Cash Flow Information
 
 The
following table contains the supplemental cash flow information for the periods
indicated.
 
 For
      the
                              
                              
                              For
      theNine
      Months
                              
                              
                              Nine
      MonthsEnded
                              
                              
                              EndedSeptember
      30,
                              
                              
                              September
      30,2010
                              
                              
                              2009SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
    paid
                              
                              $
                              3,145,743
                              
                              
                              $
                              1,106,513Income taxes
      paid
                              
                              $
                              -
                              
                              
                              $
                              -
  27
 Pure
Biofuels Corp. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 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
      30,2010
                                    
                                    
                                    2009SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTINGAND
    FINANCINGIssuance of common stock for
      financing costs
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    10,242,111Issuance of convertible
      promissory note for interest payable
                                    
                                    $
                                    7,315,906
                                    
                                    
                                    $
                                    5,168,423Issuance of warrants as part of
      financing agreement
                                    
                                    $
                                    54,139,273
                                    
                                    
                                    $
                                    4,398,938Beneficial conversion feature on
      issuance of convertible debt
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    3,606,986Exchange line of credit debt for
      convertible notes
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    34,312,220Debt discounts from issuance of
      convertible debt
                                    
                                    $
                                    684,112
                                    
                                    
                                    $
                                    2,554,129
 28
 Item 2. Management’s
Discussion and Analysis or Plan of Operations
 
 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 were a
development stage company through July 31, 2009.  During the period
that we were considered a development stage company, we incurred accumulated
losses of approximately $105,000,000, of which, approximately $75,000,000 were
non-cash expenses associated with debt and equity financings and stock
compensation expense for options issued to employees.  In order to
operate profitably, we need significant working capital.  We are
actively seeking sufficient working capital which will permit us to operate on a
commercially viable level and to comply with our financial
commitments.
 
 We have
completed the construction of our biodiesel processing plant on 4.7 hectares of
land owned by our company near the Callao Port in Lima, Peru (the “Callao Port
Facility”). The Callao Port Facility is designed for a continuous 24 hour
production of 150,000 gallons of biodiesel per day, equating to approximately
52.5 million gallons per year (“MMgy”). Approximately 6.5 million gallons of
crude glycerin is also expected to be produced from the
process.  The Callao Port Facility also holds a liquid storage
terminal with a total capacity of 155,760 cubic meters and provides buoy mooring
for loading and discharging products by sea via underwater pipelines connected
to our storage tanks.
 
 To date,
we have not generated significant revenues from the operations at the Callao
Port Facility.  Our principal delays have been due to the uncertainty
of the approval of Peruvian law which dictates that all diesel fuel
commercialized in Lima, Peru will carry a mandatory biodiesel portion of 2% and
also be Ultra Low Sulfur diesel.  Consequently, our biodiesel
production and our planned diesel imports were halted until the mandate was
approved.  The Peruvian law was finally approved on December 31, 2009,
making Peru a significant importer of Diesel fuel since current local refineries
lack the capacity to produce Ultra Low Sulfur diesel.  In addition,
our Company engaged Oil Tanking Andina S.A.C (“Oil Tanking”) to provide services
as terminal operators.  As a result, Oil Tanking had to perform an
exhaustive Due Diligence to verify and certify that our storage terminal
facility complies with the highest international standards of safety and
quality.  The result of this due diligence was the facility was
approved by Oiltanking to operate at the international standards generally
acceptable in our industry.  In addition, we possess the international
certification issued by the Peruvian authorities required to undertake our
terminal activity.  Thereafter, on February 12, 2010, our Company
signed the service agreement with Oil Tanking and began generating revenues
during the second quarter of 2010 and has continued to generate revenues since
then.
 
 29
 As of
September 30, 2010, our Interpacific Facility, which we purchased in 2007,
reached full technical capacity of 30,000 gallons per day.  In full
production, the Interpacific Facility is anticipated to operate 24 hours a
day, seven days a week.  Approximately 4-8 personnel will be
required to fill four shift rosters.  The Interpacific Facility will
be supplied with raw materials from the Callao Port Facility. As of September
30, 2010, the Interpacific Facility has not be in production mode, and the
Company does not expect it be producing until market conditions
change.
 
 In
addition, we 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.
 
 Results of
Operations
 
 Comparison of the three
months ended September 30, 2010 and 2009
 
 Revenues:  Revenues
were $5,401,082 for the three months ended September 30, 2010 compared to
$140,752 for the three months ended September 30, 2009.  The 2009
revenues were associated with our liquidating inventory because of our cash
shortage.  With the financing that we received from Interbank in July
2009, we are in a better cash position and have been purchasing
inventory.  We have begun making sales during April
2010.  During the second quarter of 2010, we entered into an agreement
with LUKOIL for the purchase of approximately $29 million of
inventory.  The agreement provides us with the inventory we need for
the anticipated increase in customers, and allows us to defer payment until we
use the inventory.  We anticipate adding additional customers during
the fourth quarter of 2010.  However, there is no assurance that we
will obtain any new contracts, agreements, or commitments with customers, which
if fully performed have the potential of generating revenues sufficient to
dispose of the $25 million of inventory.
 
 Cost of
Revenues:Costs of revenues were $5,219,881 for the three
months ended September 30, 2010 compared to $237,013 for the three months ended
September 30, 2009.  Cost of revenue increased due to our increase in
revenues during the period. When we went from a development stage company to a
fully operating company, we incurred certain costs in addition to raw material
costs that are being charged through cost of revenues which causes the costs of
revenue as a percentage of revenue to be higher than we would anticipate once
these costs have been expensed.
 
 Selling, General and Administrative
Expenses: Selling, general and administrative expenses consisted of the
following for the periods indicated:
 
 Three
      Months
                              
                              
                              Three
      MonthsEnded
                              
                              
                              EndedSeptember
      30,
                              
                              
                              September
      30,2010
                              
                              
                              2009
                              
                              
                              Difference
                              
                              
                              %
      ChangeConsulting
      fees
                              
                              $
                              43,411
                              
                              
                              $
                              29,822
                              
                              
                              $
                              13,589
                              
                              
                              
                              45.6General
      and administrative
                              
                              
                              1,484,048
                              
                              
                              
                              694,934
                              
                              
                              
                              789,114
                              
                              
                              
                              113.6Professional
      fees
                              
                              
                              652,384
                              
                              
                              
                              590,411
                              
                              
                              
                              61,973
                              
                              
                              
                              10.5Wages
                              
                              
                              727,570
                              
                              
                              
                              1,053,258
                              
                              
                              
                              (325,688
                              )
                              
                              
                              -30.9$
                              2,907,413
                              
                              
                              $
                              2,368,425
                              
                              
                              $
                              538,988
                              
                              
                              
                              22.8
  30
 
 Consulting
Fees:The change in consulting fees is not
significant.
 
 General and Administrative:General and administrative expenses increased $789,114 or 113.6%
primarily due to the recording of approximately $260,712 for board of director
fees and $437,500 for compensation incentives and bonuses for
management.  During April 2010, the Board of Directors approved
$60,000 annual fees per independent board member retroactive to each member’s
respective start date.  Also, the Board of Directors approved a
$250,000 bonus for management for past services and established a $250,000 bonus
pool for 2010.  We expensed $187,500 related to the 2010 bonus
pool.  These amounts have been accrued in the consolidated financial
statements.
 
 Professional
Fees:  Professional fees increased by $61,973 or 10.5%
primarily due to the increase in professional engineering fees paid to Oil
Tanking for operation and maintenance of the Callao Port.
 
 Wages:  Wages
decreased $325,688 or 30.9% during the three months ended September 30, 2010
compared to 2009.  The decrease is primarily due to the layoff of
temporary and contract employees.
 
 Interest and Financing
Costs:  Interest and financing costs consisted of the following
for the periods indicated:
 
 Three
      Months
                                
                                
                                Three
      MonthsEnded
                                
                                
                                EndedSeptember
      30,
                                
                                
                                September
      30,
                                
                                
                                Increase2010
                                
                                
                                2009
                                
                                
                                (Decrease)
                                
                                
                                %
      ChangeInterest
      expense
                                
                                $
                                3,146,740
                                
                                
                                $
                                3,207,918
                                
                                
                                $
                                (61,178
                                )
                                
                                
                                -1.9
                                %Financing
      costs
                                
                                
                                45,091,063
                                
                                
                                
                                392,929
                                
                                
                                
                                44,698,134
                                
                                
                                
                                11375.6
                                %Amortization
      of debt discountand
      debt issuance costs
                                
                                
                                5,234,482
                                
                                
                                
                                1,584,031
                                
                                
                                
                                3,650,451
                                
                                
                                
                                230.5
                                %$
                                53,472,285
                                
                                
                                $
                                5,184,878
                                
                                
                                $
                                48,287,407
                                
                                
                                
                                931.3
                                %
 
 Interest
Expense:  The decrease of $61,178 or 1.9% in interest expense
is not material.
 
 Financing
Costs:  The financing costs increased $44,698,134 or 11,375.6%
from 2009 to 2010.  During the three months ended September 30, 2010,
we issued additional warrants to Plainfield and FDS because we had defaulted on
their short-term notes.  The fair value of the warrants was
$41,875,219.  We issued Plainfield additional warrants as we had not
repaid the convertible loans by July 16, 2010 as specified in the fifth
amendment to the purchase agreement.  The fair value of the warrants
was $787,884.  In addition, we issued to Trimarine 40,000,000 warrants
as the Company was not able to replace the $40,000,000 feedstock
facility.  These warrants were valued at $1,400,518.
 
 Amortization of Debt Discounts and
Debt Issuance Costs:  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, 2009.
 
 Accrued Derivative
Liability:  The change in fair value of accrued derivative
liability for the three months ended September 30, 2010 was a gain of $3,305,739
compared to a gain of $7,755,285 for the three months ended September 30,
2009.  The gain of $3,305,739 for the three months ended September 30,
2010 was due to the decrease in our share price from $0.04 at June 30, 2010 to
$0.03 at September 30, 2010.  The gain of $7,755,285 for the three
months ended September 30, 2009 was due to the decrease in our stock price from
$0.16 at June 30, 2009 to $0.13 at September 30, 2009.
 
 31
 Foreign Currency Transaction
Gain:  Foreign currency transaction gain was $760,987 for the
three months ended September 30, 2010 compared to a $333,646 for the three
months ended September 30, 2009.  During the three months ended
September 30, 2010, the dollar decreased in value by 1.4% versus 4.2% for the
three months ended September 30, 2009.  At September 30, 2010, we had
approximately $27 million of net liabilities due in USD compared to
approximately $20 million in net liabilities at September 30, 2009.
 
 Comparison of the nine
months ended September 30, 2010 and 2009
 
 Revenues:  Revenues
were $7,082,194 for the nine months ended September 30, 2010 compared to
$1,098,485 for the nine months ended September 30, 2009.  The 2009
revenues were associated with our liquidating inventory because of our cash
shortage.  With the financing that we received from Interbank in July
2009, we are in a better cash position and have been purchasing
inventory.  We have begun making sales during April 2010. During the
second quarter of 2010, we entered into an agreement with LUKOIL for the
purchase of approximately $29 million of inventory.  The agreement
provides us with the inventory we need for the anticipated increase in
customers, and allows us to defer payment until we use the
inventory.  We anticipate adding additional customers during the
fourth quarter of 2010.  However, there is no assurance that we will
obtain any new contracts, agreements, or commitments with customers, which if
fully performed have the potential of generating revenues sufficient to dispose
of the $25 million of inventory.
 
 Cost of
Revenues:Costs of revenues were $6,946,757 for the nine
months ended September 30, 2010 compared to $1,127,535 for the nine months ended
September 30, 2009.  Cost of revenue increased due to our increase in
revenues during the period.  When we went from a development stage
company to a fully operating company, we incurred certain costs in addition to
raw material costs that are being charged through cost of revenue which causes
the costs of revenue as a percentage of revenue to be higher than we would
anticipate once these costs have been expensed.
 
 Selling, General and Administrative
Expenses: Selling, general and administrative expenses consisted of the
following for the periods indicated:
 
 Nine
      Months
                              
                              
                              Nine
      MonthsEnded
                              
                              
                              EndedSeptember
      30,
                              
                              
                              September
      30,2010
                              
                              
                              2009
                              
                              
                              Difference
                              
                              
                              %
      ChangeConsulting
      fees
                              
                              $
                              121,510
                              
                              
                              $
                              57,109
                              
                              
                              $
                              64,401
                              
                              
                              
                              112.8
                              %General
      and administrative
                              
                              
                              3,339,306
                              
                              
                              
                              2,247,555
                              
                              
                              
                              1,091,751
                              
                              
                              
                              48.6
                              %Professional
      fees
                              
                              
                              1,506,207
                              
                              
                              
                              1,130,096
                              
                              
                              
                              376,111
                              
                              
                              
                              33.3
                              %Wages
                              
                              
                              2,734,018
                              
                              
                              
                              3,016,799
                              
                              
                              
                              (282,781
                              )
                              
                              
                              -9.4
                              %$
                              7,701,041
                              
                              
                              $
                              6,451,559
                              
                              
                              $
                              1,249,482
                              
                              
                              
                              19.4
                              %
 
 Consulting Fees:The change
in consulting fees is comparable with prior year.
 
 General and Administrative:The change in general and administrative expenses increased $1,091,751 or
48.6% due to our recording of approximately $260,712 for board of director fees
and $437,500 for compensation incentives and bonuses for
management.  During April 2010, the Board of Directors approved
$60,000 annual fees per independent board member retroactive to each member’s
respective start date.  Also, the Board of Directors approved a
$250,000 bonus for management for past services and established a $250,000 bonus
pool for 2010.  We expensed $187,500 related to the 2010 bonus
pool.  These increases in general and administrative expenses were
offset by an overall decrease in administrative expenses reflecting the
management’s attempt in streamlining internal  administrative layers
and reduce its administrative costs.
 
 32
 Professional
Fees:  Professional fees increased $376,111 or 33.3% primarily
due to a decrease in legal fees of approximately $140,000 offset by an increase
in professional engineering fees of approximately $440,000 paid to Oil Tanking
for operation and maintenance of the Callao Port.
 
 Wages:  The
decrease in wages is primarily due to the layoff of temporary and contract
employees .
 
 Interest and Financing Costs:
Interest and financing costs consisted of the following for the periods
indicated:
  Nine
      Months
                                
                                
                                Nine
      MonthsEnded
                                
                                
                                EndedSeptember
      30,
                                
                                
                                September
      30,
                                
                                
                                Increase2010
                                
                                
                                2009
                                
                                
                                (Decrease)
                                
                                
                                %
      ChangeInterest
      expense
                                
                                $
                                9,110,600
                                
                                
                                $
                                6,839,918
                                
                                
                                $
                                2,270,682
                                
                                
                                
                                33.2
                                %Financing
      costs
                                
                                
                                50,348,382
                                
                                
                                
                                7,125,544
                                
                                
                                
                                43,222,838
                                
                                
                                
                                606.6
                                %Amortization
      of debt discountand
      debt issuance costs
                                
                                
                                10,209,519
                                
                                
                                
                                5,368,219
                                
                                
                                
                                4,841,300
                                
                                
                                
                                90.2
                                %$
                                69,668,501
                                
                                
                                $
                                19,333,681
                                
                                
                                $
                                50,334,820
                                
                                
                                
                                260.3
                                %
 
 Interest
Expense:  The increase of $2,270,682 or 33.2% in interest
expense is due to the increase in our our notes payable from Interbank in July
2009 which existed for two months for the nine months ended September
30,2009.  Our average debt was approximately $111 million for the nine
months ended September 30, 2010 compared to approximately $72 million for the
nine months ended September 30, 2009.
 
 Financing Costs: The
financing costs increased $43,222,838 or 606.6% from 2009 to
2010.  During the nine months ended September 30, 2009, we issued
additional convertible notes and warrants to Plainfield and FDS because we had
defaulted on their convertible notes.  The fair value of the warrants
and conversion features was $6,732,615.  During the nine months ended
September 30, 2010, we issued two short-term loans to Plainfield and FDS for an
aggregate principal of $5,500,000, and in connection with the short-term loans,
we issued a combined total of 217,105,264 seven year warrants with an exercise
price of $0.076.  The fair value for the warrants was
$10,075,652.  We recorded a debt discount of $5,500,000 and financing
costs of $4,575,652. We issued Plainfield additional warrants as we had not
repaid the convertible loans by July 16, 2010 as specified in the fifth
amendment to the purchase agreement.  The fair value of the warrants
was $787,884.  On September 4, 2010, we issued additional warrants to
Plainfield and FDS because we had defaulted on their short-term
notes.  The fair value of the warrants was $41,875,219.  In
addition, we issued to Trimarine 40,000,000 warrants as the Company was not able
to replace the $40,000,000 feedstock facility.  These warrants were
valued at $787,884.
 
 Amortization of Debt Discounts and
Debt Issuance Costs:  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, 2009.
 
 Accrued Derivative
Liability:  The change in fair value of accrued derivative
liability for the nine months ended September 30, 2010 was a gain of $19,857,348
compared to a loss of $13,319,981 for the nine months ended September 30,
2009.  The gain of $19,857,348 for the nine months ended September 30,
2010 was due to the decrease in our stock price from $0.09 at December 31, 2009
to $0.03 at September 30, 2010.  The loss of $13,319,981 for the nine
months ended September 30, 2009 was due to the increase in our share price from
$0.07 at December 31, 2008 to $0.13 at September 30, 2009.
 
 33
 Foreign Currency Transaction
Gain:  Foreign currency transaction gain was $1,561,448 for the
nine months ended September 30, 2010 compared to a $1,879,279 for the nine
months ended September 30, 2009.  During the nine months ended
September 30, 2010, the dollar decreased in value by 3.6% versus 8.2% for the
nine months ended September 30, 2009.  At September 30, 2010, we had
approximately $27 million of net liabilities due in USD compared to
approximately $20 million in net liabilities at September 30, 2009.
 
 Liquidity and Capital
Resources
 
 As of
September 30, 2010, we had $1,788,720 in cash and cash equivalents compared to
$735,352 at December 31, 2009.   Our principal demands for
liquidity are purchasing raw materials and paying the day to day
operations.  We have the following debt as of September 30,
2010:
 
 ·
              Convertible
      debts outstanding of $66,504,539 bearing interest at 10%/12% for interest
      paid in cash/stock with a due date of September 12,
  2012.
 ·
              Notes
      payable to Interbank $42,700,000 bearing an effective interest rate of
      10.6%.  The Company is required to make monthly payments until
      all principal and interest is fully paid on June 16,
  2015.
 ·
              Short-term
      loans for an aggregate principal amount of $5,500,000 due September 4,
      2010 with an annual interest rate of
15%.
 ·
              Short-term
      loans of $1,636,015 from Trimarine which were due on August 4, 2010 and
      accrue interest at 6.0%.  The Company has not made the required
      payments, but we are negotiating with Trimarine to extend the due
      date.
 
 As of
September 30, 2010, we had a negative working capital of $45,811,874 compared to
a negative working capital of $37,994,483 as of December 31,
2009.  However, as we are not in compliance with our debt covenants
with the note payable, the entire principal amount of $42,700,000 is classified
as a current liability.  With the $42,700,000 removed from current
liabilities, our working capital for September 30, 2010 and December 31, 2009 is
$(3,111,874) and $5,005,517, respectively.
 
 Net cash
flows used in operating activities was $12,115,578 for the nine months ended
September30, 2010 which was comprised primarily of our net loss of $55,549,478,
non cash gains of $40,837,941, and increases in inventories of $26,732,590,
offset primarily by an increase in accounts payable and accrued expenses of
$24,277,991 and $7,764,799, respectively.  In April, 2010, we
purchased approximately $29 million of inventory on credit from
LUKOIL.
 
 During
the nine months ended September 30, 2010, cash provided by financing activities
was $12,803,758 which was comprised of the following:
 
 ·
              Short-term
      loan from FDS of $1,100,000 due September 4,
  2010.
 ·
              Short-term
      loan from Plainfield of $4,400,000 due September 4,
  2010.
 ·
              Short-term
      loan from Trimarine of $1,636,015, due August 4,
  2010
 ·
              Draw
      down on our “Use restricted cash” of
$5,967,743
 ·
              Principal
      payment on note payable (Interbank Peru Financing) of
    $300,000
 
 We do not
anticipate significant capital expenditure in the foreseeable
future.
 
 Uncertainties and
Going-Concern
 
 34
  We have
continued to incur losses since exiting from the development stage and have only
recently begun principal operations. For the nine months ended September 30,
2010, we incurred a net loss of $55,549,478 and have an accumulated deficit of
$155,231,524. In addition, we are in technical non-compliance with certain of
our covenants under the Interbank Loan Agreement which requires the $43,000,000
to be classified on the consolidated financial statements as a current
liability. The Company has also defaulted on payments related to certain
short-term loans during current year.  Due to these current liabilities
classification, we have a negative working capital balance of $45,811,874 at
September 30, 2010.
 
 We have
begun generating revenues from the sale of biodiesel as well as by-products of
products for the period after we ceased to be a development stage
company.  During July 2009, we obtained $43,000,000 in additional
financing provided us with the available cash flow during the coming
year.  With the additional financing from Interbank, we are able to
fund working capital and we began generating revenues during the second quarter
of 2010.   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 we 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, 2009, 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.
 
 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 Company paid a fee
of $30,000 to extend the agreement to January 31, 2011. 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.  The fair value of the warrants on the date of grant was
$4,085,589 which is being amortized over one year.  For the nine
months ended September 30, 2010, we amortized the remaining $962,632 as interest
and financing costs.  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.
 
 35
 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
 
 
 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. . In
addition, the Company has long-term debt with financial institutions. The
carrying amounts of the long-term liabilities approximate their fair values
based on current rates of interest for instruments with similar
characteristics. 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.
 
 36
 ·
              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.
  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 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.
 
 37
 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 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.
 
 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 evaluation of a tax position is a
two-step process. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the
technical merits of that position. The second step is to measure a tax position
that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. Penalties and interest incurred related to
underpayment of income tax are classified as income tax expense in the year
incurred.  No significant penalties or interest relating to income taxes
have been incurred during the nine months ended September 30, 2010 and 2009.
GAAP also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures and
transition.
 
 Recent
Pronouncements
 
 On
December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value
Measurements”.  This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial
reporting.  The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.
 
 On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. The FASB believes these amendments
remove potential conflicts with the SEC’s literature. The adoption of this ASU
did not have a material impact on the Company’s consolidated financial
statements.
 
 38
 On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have
a material impact on the Company’s consolidated financial
statements.
 
 In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. This Update provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company does not expect the adoption of ASU 2010-13 to have a
significant impact on its consolidated financial statements.
 
 Item
3.  Quantitative and Qualitative Disclosure about Market
Risk
 
 Not
applicable.
 
 Item
4. Controls and Procedures
 
 Evaluation of Disclosure
Controls and Procedures
 
 The
Company’s Chief Executive Officer and Chief Financial Officer has evaluated
the effectiveness of the Company’s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September
30, 2010. Based upon such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of September 30, 2010, the Company’s
disclosure controls and procedures were  not effective. This
conclusion by the Company’s Chief Executive Officer and Chief Financial
Officer does not relate to reporting periods after September 30,
2010.
 
 This
conclusion is based upon material weaknesses that relate to the
following:
  1.  Accounting and Finance
Personnel Weaknesses – Our current accounting staff is relatively small
and we do not have the required infrastructure of meeting the higher demands of
being a U.S. public company.
 
 2.  Lack of Internal Audit
Function – We lack sufficient resources to perform the internal audit
function.
  39
 In order
to mitigate these material weaknesses to the fullest extent possible, all
financial reports are reviewed by an outside accounting firm that is not our
audit firm. All unexpected results are investigated. At any time, if it appears
that any control can be implemented to continue to mitigate such weaknesses, it
will be immediately implemented.
  Changes in Internal Control
Over Financial Reporting
 
 No change
in the Company’s internal control over financial reporting occurred during
the three months ended September 30, 2010, 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.
 
 ITEM
3.  DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 ITEM
4.  (Removed and Reserved)
 
 
 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
 
 40
  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/
      Carlos Alberto PintoCarlos
      Alberto Pinto
                    Chief
      Executive Officer and
Director
 Date:
November 12, 2010
 
  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/
      Carlos Alberto Pinto
              
              Chief
      Executive Officer and Director
              
              November
      12, 2010Carlos
      Alberto Pinto
              
              (Principal
      Executive Officer)/s/
      Juan Santoyo
              
              Chief
      Financial Officer
              
              November
      12 2010Juan
      Santoyo
              
              (Principal
      Financial Officer andPrincipal
      Accounting Officer)
 
 41