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 June 30,
2009




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




For the
transition period from _______ to _______.




Commission
file number000-50903




PURE
BIOFUELS CORP.


(Exact
Name of Registrant as Specified in Its Charter)




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




701
Brazos Street, Suite 1050


Austin,
TX 78707


(Address
of Principal Executive Offices) (Zip Code)




1-310-402-5916


(Registrant’s
Telephone Number, Including Area Code)




N/A


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




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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period than the
registrant was required to submit and post such
files).  Yes oNo o




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 o
            Accelerated
      filer oNon-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes oNo x




As of
August 14, 2009, the Company had 236,387,893 outstanding shares of common stock,
par value $0.001.









PURE
BIOFUELS CORP. AND SUBSIDIARIES
  TABLE OF
CONTENTS




Page
                NumberPART
      I.
              FINANCIAL
      INFORMATIONItem
      1.
              Financial
      StatementsConsolidated
      Balance Sheets as of June 30, 2009 (unaudited) and December 31,
      2008
              
              3Consolidated
      Statements of Operations and Other Comprehensive Loss for the three and
      six months ended June 30, 2009 and 2008 and for the  period from
      May 10, 2006 (date of inception) to June 30, 2009
    (unaudited)
              
              4Consolidated
      Statement of Stockholders' Equity (Deficit) for the period From May 10,
      2006 (date of inception) to June 30, 2009 (unaudited)
              
              5Consolidated
      Statements of Cash Flows for the six months ended June 30, 2009 and 2008
      and for the period from May 10, 2006 (date of inception) to June 30, 2009
      (unaudited)
              
              6Notes
      to Consolidated Financial Statements (unaudited)
              
              7Item
      2.
              Management’s
      Discussion and Analysis or Plan of Operations
              
              35Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              48Item
      4.
              Controls
      and Procedures
              
              48PART
      II.
              OTHER
      INFORMATION
              
              48Item
      1.
              Legal
      Proceedings
              
              48Item
      1A.
              Risk
      Factors
              
              48Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              48Item
      3.
              Defaults
      Upon Senior Securities
              
              49Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              
              49Item
      5.
              Other
      Information
              
              49Item
      6.
              Exhibits
              
              49SIGNATURES
              
              
              50





2




PURE
BIOFUELS CORP. AND SUBSIDIARIES
 (A
Development Stage Company)
 CONSOLIDATED
BALANCE SHEETS
 AS
OF JUNE 30, 2009 AND DECMEBER 31, 2008


June
      30,
              
              
              December
      31,2009
              
              
              2008ASSETS
              
              (unaudited)CURRENT
      ASSETSCash
      and cash equivalents
              
              $
              190,261
              
              
              $
              579,241Restricted
      cash
              
              
              141,908
              
              
              
              141,775Accounts
      receivable
              
              
              45,535
              
              
              
              148,337Other
      receivables
              
              
              279,886
              
              
              
              11,539Inventories
              
              
              663,926
              
              
              
              1,192,362Prepaid
      expenses and other assets
              
              
              3,894,727
              
              
              
              117,094TOTAL
      CURRENT ASSETS
              
              
              5,216,243
              
              
              
              2,190,348VAT
      CREDITS
              
              
              7,824,685
              
              
              
              7,368,021PROPERTY,
      PLANT AND EQUIPMENT, net
              
              
              38,971,287
              
              
              
              37,546,422DEBT
      ISSUANCE COSTS, net
              
              
              3,229,677
              
              
              
              3,919,311GOODWILL
              
              
              7,295,144
              
              
              
              7,015,640OTHER
      ASSETS
              
              
              259,296
              
              
              
              248,133TOTAL
      ASSETS
              
              $
              62,796,332
              
              
              $
              58,287,875LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable
              
              $
              4,846,607
              
              
              $
              5,325,948Accrued
      expenses
              
              
              1,277,707
              
              
              
              879,941Interest
      and penalties payable
              
              
              3,062,241
              
              
              
              1,079,533Due to prior stockholders of Interpacific Oil
              
              
              5,964,056
              
              
              
              5,740,061Due
      to related parties
              
              
              592,616
              
              
              
              399,780Notes
      payable-short term, net of debt discount of $0 and
$266,622as
      of June 30, 2009 and December 31, 2008, respectively
              
              
              2,500,000
              
              
              
              1,233,378Accrued
      derivative liabilities
              
              
              35,837,963
              
              
              
              564,643TOTAL
      CURRENT LIABILITIES
              
              
              54,081,190
              
              
              
              15,223,284CONVERTIBLE
      NOTES, net of debt discount of $13,778,452 and $12,770,545as of June 30, 2009 and December 31, 2008, respectively
              
              
              11,269,917
              
              
              
              6,937,445LINE
      OF CREDIT
              
              
              37,346,939
              
              
              
              37,346,939TOTAL  LIABILITIES
              
              
              102,698,046
              
              
              
              59,507,668COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITY (DEFICIT)Preferred stock; $0.001 par value; 1,000,000 shares authorized, no shares
      issued
              
              
              -
              
              
              
              -Common
      stock; $0.001 par value; 750,000,000 sharesauthorized;
      172,374,699 and shares issued and outstanding as ofJune
      30, 2009 and December 31, 2008, respectively
              
              
              172,375
              
              
              
              172,375Additional
      paid-in capital
              
              
              49,582,924
              
              
              
              55,362,143Accumulated
      other comprehensive loss
              
              
              (106,703
              )
              
              
              (564,933
              )Deficit accumulated during the development stage
              
              
              (89,550,310
              )
              
              
              (56,189,378
              )TOTAL
      STOCKHOLDERS' EQUITY (DEFICIT)
              
              
              (39,901,714
              )
              
              
              (1,219,793
              )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
              
              $
              62,796,332
              
              
              $
              58,287,875
  The
accompanying notes are an integral part of these consolidated financial
statements.
   3
  PURE
BIOFUELS CORP. AND SUBSIDIARIES
 (A
Development Stage Company)
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
 FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008 AND
 FOR
THE PERIOD FROM MAY 10, 2006 (DATE OF INCEPTION) TO JUNE 30,
2009
 For
      the periodfrom
      May 10, 2006Three
      Months Ended
                
                
                Six
      Months Ended
                
                
                (date
      of inception)June
      30, 2009
                
                
                June
      30, 2008
                
                
                June
      30, 2009
                
                
                June
      30, 2008
                
                
                to
      June 30, 2009(unaudited)
                
                
                (unaudited)
                
                
                (unaudited)
                
                
                (unaudited)
                
                
                (unaudited)REVENUE
                
                $
                544,385
                
                
                $
                -
                
                
                $
                957,733
                
                
                $
                -
                
                
                $
                1,090,905COST
      OF REVENUE
                
                
                133,472
                
                
                
                -
                
                
                
                890,522
                
                
                
                -
                
                
                
                2,057,782GROSS
      PROFIT (LOSS)
                
                
                410,913
                
                
                
                -
                
                
                
                67,211
                
                
                
                -
                
                
                
                (966,877
                )SELLING,
      GENERAL AND ADMINISTRATIVE  EXPENSES
                
                
                2,047,062
                
                
                
                2,083,805
                
                
                
                4,083,134
                
                
                
                5,051,986
                
                
                
                27,104,065LOSS
      FROM OPERATIONS
                
                
                (1,636,149
                )
                
                
                (2,083,805
                )
                
                
                (4,015,923
                )
                
                
                (5,051,986
                )
                
                
                (28,070,942
                )OTHER
      INCOME (EXPENSES):Interest
      and financing costs
                
                
                (8,064,264
                )
                
                
                (1,209,396
                )
                
                
                (14,148,803
                )
                
                
                (3,012,867
                )
                
                
                (48,710,640
                )Other
      expenses, net
                
                
                (321,777
                )
                
                
                (160,327
                )
                
                
                (383,868
                )
                
                
                (157,026
                )
                
                
                (429,230
                )Change in fair value of accrued derivative liabilities
                
                
                (20,393,074
                )
                
                
                -
                
                
                
                (21,075,266
                )
                
                
                -
                
                
                
                (11,551,450
                )Foreign currency transaction gain (loss)
                
                
                1,804,130
                
                
                
                (3,193,013
                )
                
                
                1,545,633
                
                
                
                (868,634
                )
                
                
                (788,048
                )TOTAL
      OTHER EXPENSE, net
                
                
                (26,974,985
                )
                
                
                (4,562,736
                )
                
                
                (34,062,304
                )
                
                
                (4,038,527
                )
                
                
                (61,479,368
                )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                
                
                (28,611,134
                )
                
                
                (6,646,541
                )
                
                
                (38,078,227
                )
                
                
                (9,090,513
                )
                
                
                (89,550,310
                )PROVISION
      FOR INCOME TAXES
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                800
                
                
                
                -NET
      LOSS
                
                $
                (28,611,134
                )
                
                $
                (6,646,541
                )
                
                $
                (38,078,227
                )
                
                $
                (9,091,313
                )
                
                $
                (89,550,310
                )OTHER
      COMPREHENSIVE GAIN (LOSS):Foreign  currency
      translation adjustment
                
                
                (5,546
                )
                
                
                198,003
                
                
                
                458,230
                
                
                
                11,379
                
                
                
                (106,703
                )COMPREHENSIVE
      LOSS
                
                $
                (28,616,680
                )
                
                $
                (6,448,538
                )
                
                $
                (37,619,997
                )
                
                $
                (9,079,934
                )
                
                $
                (89,657,013
                )NET
      LOSS PER SHARE - BASIC AND DILUTED
                
                $
                (0.17
                )
                
                $
                (0.09
                )
                
                $
                (0.22
                )
                
                $
                (0.12
                )
                
                $
                (0.98
                )WEIGHTED
      AVERAGE COMMONEQUIVALENT
      SHARES OUTSTANDING - BASIC AND DILUTED
                
                
                172,374,699
                
                
                
                77,687,871
                
                
                
                172,374,699
                
                
                
                77,357,848
                
                
                
                91,775,319
  The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  PURE
BIOFUELS CORP. AND SUBSIDIARIES
 (A
Development Stage Company)
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
 FOR
THE PERIOD FROM MAY 10, 2006 (DATE OF INCEPTION) TO JUNE 30,
2009
 Common
      Stock
                      
                      
                      Additional
                        Paid-in
                      
                      
                      Susbscriptions
                        Received
                      
                      
                      Accumulated
                        Other
                        Comprehensive
                      
                      
                      Accumulated
                        During
      the
                        Development
                      
                      
                      Total
                        Stockholders'
      EquityShares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      In
      Advance
                      
                      
                      Loss
                      
                      
                      Stage
                      
                      
                      (Deficit)Balance,
      May 10, 2006
                      
                      
                      1,000
                      
                      
                      $
                      304
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      304Adjustment
      for change in par value
                      
                      
                      -
                      
                      
                      
                      (303
                      )
                      
                      
                      303
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Recapitalization
      transactionsShares
      of Pure Biofuels Corp.
                      
                      
                      71,359,405
                      
                      
                      
                      71,359
                      
                      
                      
                      1,740,626
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,811,985Cancellation
      of Metasun Software Corp. shares
                      
                      
                      (43,912,167
                      )
                      
                      
                      (43,912
                      )
                      
                      
                      43,912
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Recapitalization
      Adjustment
                      
                      
                      29,999,970
                      
                      
                      
                      29,999
                      
                      
                      
                      (210,526
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (180,527
                      )Shares
      acquired by legal parent
                      
                      
                      (1,000
                      )
                      
                      
                      (1
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1
                      )Issuance
      of common stock for cash, October 12, 2006 @ $0.75
                      
                      
                      3,853,547
                      
                      
                      
                      3,854
                      
                      
                      
                      2,886,306
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,890,160Issuance
      of common stock for cash, November 10, 2006 @ $0.75
                      
                      
                      426,666
                      
                      
                      
                      427
                      
                      
                      
                      319,573
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      320,000Issuance
      of common stock for cash, December 19, 2006 @ $0.75
                      
                      
                      404,998
                      
                      
                      
                      405
                      
                      
                      
                      303,344
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      303,749Finders
      fee
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (195,000
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (195,000
                      )Subscriptions
      received in advance
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      96,277
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      96,277Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,075,611
                      )
                      
                      
                      (1,075,611
                      )Balance,
      December 31, 2006
                      
                      
                      62,132,419
                      
                      
                      $
                      62,132
                      
                      
                      $
                      4,888,538
                      
                      
                      $
                      96,277
                      
                      
                      $
                      -
                      
                      
                      $
                      (1,075,611
                      )
                      
                      $
                      3,971,336Issuance
      of common stock for cash, March 23, 2007 @ $0.75
                      
                      
                      303,009
                      
                      
                      
                      303
                      
                      
                      
                      156,440
                      
                      
                      
                      (96,277
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      60,466Issuance
      of common stock for debt issuance costs, April 25, 2007 @
      $0.98
                      
                      
                      183,674
                      
                      
                      
                      184
                      
                      
                      
                      179,816
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      180,000Issuance
      of common stock for cash, July 6, 2007 @ $0.60
                      
                      
                      50,000
                      
                      
                      
                      50
                      
                      
                      
                      29,950
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      30,000Issuance
      of common stock for cash, July 12, 2007 @ $0.60
                      
                      
                      250,000
                      
                      
                      
                      250
                      
                      
                      
                      149,750
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      150,000Issuance
      of common stock for cash, July 12, 2007 @ $0.60
                      
                      
                      250,000
                      
                      
                      
                      250
                      
                      
                      
                      149,750
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      150,000Issuance
      of common stock for cash, July 20, 2007 @ $0.60
                      
                      
                      84,000
                      
                      
                      
                      84
                      
                      
                      
                      49,916
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      50,000Issuance
      of common stock for cash, August 8, 2007 @ $0.60
                      
                      
                      416,667
                      
                      
                      
                      417
                      
                      
                      
                      249,583
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      250,000Issuance
      of common stock with convertible debt, September 12, 2007 @
      $0.50
                      
                      
                      11,000,000
                      
                      
                      
                      11,000
                      
                      
                      
                      5,489,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,500,000Stock
      compensation expense for options issued to employees
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,253,311
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,253,311Fair
      value of warrants issued for debt issuance costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      212,232
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      212,232Fair
      value of warrants issued with convertible debentures
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      507,647
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      507,647Beneficial
      conversion feature associated with convertible debentures
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      507,647
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      507,647Fair
      value of warrants issued for debt extension (704,082
    warrants)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      390,219
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      390,219Fair
      value of warrants issued to consultant
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      54,958
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      54,958Estimated
      liquidated damages
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (25,200
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (25,200
                      )Existing
      shares transferred to placement agents for financing
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,152,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,152,000Repricing
      of warrants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      41,697
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      41,697Transfer
      to accrued derivative liability
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,907,893
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,907,893
                      )Issuance
      of stock for financing costs
                      
                      
                      650,000
                      
                      
                      
                      650
                      
                      
                      
                      408,100
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      408,750Reclassification
      of derivative liability to equity
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,549,576
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,549,576Foreign
      currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (199,791
                      )
                      
                      
                      -
                      
                      
                      
                      (199,791
                      )Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (20,802,625
                      )
                      
                      
                      (20,802,625
                      )Balance,
      December 31, 2007
                      
                      
                      75,319,769
                      
                      
                      $
                      75,320
                      
                      
                      $
                      30,487,037
                      
                      
                      $
                      -
                      
                      
                      $
                      (199,791
                      )
                      
                      $
                      (21,878,236
                      )
                      
                      $
                      8,484,330Stock
      compensation expense for options issued to employees
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,363,216
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,363,216Issuance
      of common stock for Interpacific Oil
                      
                      
                      2,166,667
                      
                      
                      
                      2,167
                      
                      
                      
                      994,500
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      996,667Issuance
      of common stock for services
                      
                      
                      15,000
                      
                      
                      
                      15
                      
                      
                      
                      5,835
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,850Fair
      value of warrants issued with short-term notes payable
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      573,628
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      573,628Conversion
      of convertible debt
                      
                      
                      186,435
                      
                      
                      
                      186
                      
                      
                      
                      106,081
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      106,267Repricing
      of warrants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      979,805
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      979,805Repricing
      of convertible debentures
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,481,833
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,481,833Value
      of beneficial conversion feature on convertible note
    issuance
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      166,667
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      166,667Exchange
      of 59,227,517 warrants for 78,033,754shares
      of common stock with Plainfield on 08/05/08
                      
                      
                      78,033,765
                      
                      
                      
                      78,034
                      
                      
                      
                      9,089,016
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,167,050Issuance
      of 15,714,287 shares for $.35 per share onAugust
      13, 2008
                      
                      
                      15,714,287
                      
                      
                      
                      15,714
                      
                      
                      
                      5,071,786
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,087,500Exchange
      of 1,408,164 warrants for 938,776 shareswith YA Global - on
      09/08/08
                      
                      
                      938,776
                      
                      
                      
                      939
                      
                      
                      
                      42,739
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      43,678Foreign
      currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (365,142
                      )
                      
                      
                      -
                      
                      
                      
                      (365,142
                      )Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (34,311,142
                      )
                      
                      
                      (34,311,142
                      )Balance,
      December 31, 2008 as previously reported
                      
                      
                      172,374,699
                      
                      
                      $
                      172,375
                      
                      
                      $
                      55,362,143
                      
                      
                      $
                      -
                      
                      
                      $
                      (564,933
                      )
                      
                      $
                      (56,189,378
                      )
                      
                      $
                      (1,219,793
                      )Cumulative
      effect of reclassification of warrants and conversion
    options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (6,939,172
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,717,295
                      
                      
                      
                      (2,221,877
                      )Balance,
      January 1, 2009 as adjusted
                      
                      
                      172,374,699
                      
                      
                      $
                      172,375
                      
                      
                      $
                      48,422,971
                      
                      
                      $
                      -
                      
                      
                      $
                      (564,933
                      )
                      
                      $
                      (51,472,083
                      )
                      
                      $
                      (3,441,670
                      )Stock
      compensation expense for options issued to employees
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,155,020
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,155,020Reclassification
      of fair value of options from liability to equity
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,933
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,933Foreign
      currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      458,230
                      
                      
                      
                      -
                      
                      
                      
                      458,230Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (38,078,227
                      )
                      
                      
                      (38,078,227
                      )Balance,
      June 30, 2009 (unaudited)
                      
                      
                      172,374,699
                      
                      
                      $
                      172,375
                      
                      
                      $
                      49,582,924
                      
                      
                      $
                      -
                      
                      
                      $
                      (106,703
                      )
                      
                      $
                      (89,550,310
                      )
                      
                      $
                      (39,901,714
                      )
  Effective
August 7, 2006, the Company effected a one and one-quarter (1.25) for one (1)
forward stock split of the authorized, issued and outstanding common stock,
without change to the par value. All share amounts
have been retroactively adjusted for all periods presented.
  The
accompanying notes are an integral part of these consolidated financial
statements.
  5


PURE
BIOFUELS CORP. AND SUBSIDIARIES
 (A
Development Stage Company)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 AND
FOR THE PERIOD FROM MAY 10, 2006 (DATE OF INCEPTION) TO JUNE 30,
2009
 
 Six
      Months
                Ended
                June
      30, 2009
              
              
              Six
      Months
                Ended
                June
      30, 2008
              
              
              For
      the period
                from
      May 10, 2006
                (date
      of inception)
                to
      June 30, 2009(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (38,078,227
              )
              
              $
              (9,091,313
              )
              
              $
              (89,550,310
              )Adjustments
      to reconcile net loss to net cash(used
      in) provided by operating activities:Depreciation
              
              
              395,284
              
              
              
              22,380
              
              
              
              1,273,571Stock
      compensation expense for options issued to employees
              
              
              1,155,020
              
              
              
              1,264,716
              
              
              
              7,115,830Fair
      value of shares issued for services
              
              
              -
              
              
              
              5,850
              
              
              
              5,850Fair
      value of shares issued for financing costs
              
              
              1,819,375
              
              
              
              46,267
              
              
              
              1,865,642Fair
      value of warrants issued for services
              
              
              -
              
              
              
              -
              
              
              
              54,958Fair
      value of warrants and conversion options issued for financing
      costs
              
              
              4,913,240
              
              
              
              573,628
              
              
              
              5,877,087Financing
      costs of warrant repricing
              
              
              -
              
              
              
              87,818
              
              
              
              129,515Amortization
      of debt discounts, debt issuance costs and financing costs
              
              
              3,995,041
              
              
              
              1,957,412
              
              
              
              13,675,231Financing
      costs related to warrants exchanged for common stock
              
              
              -
              
              
              
              -
              
              
              
              18,966,363Change
      in fair value of accrued derivative liabilities
              
              
              21,075,266
              
              
              
              -
              
              
              
              11,551,450Loss
      on write off of deposit
              
              
              -
              
              
              
              200,875
              
              
              
              203,672Non-cash
      foreign currency transaction loss (gain)
              
              
              (1,587,927
              )
              
              
              1,215,298
              
              
              
              1,462,482Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              106,187
              
              
              
              -
              
              
              
              (52,287
              )Other
      receivables
              
              
              (260,957
              )
              
              
              35,121
              
              
              
              (210,952
              )Inventories
              
              
              564,020
              
              
              
              -
              
              
              
              (709,826
              )Prepaid
      expenses and other assets
              
              
              (730,041
              )
              
              
              452,733
              
              
              
              (518,794
              )Accounts
      payable
              
              
              (442,584
              )
              
              
              (721,491
              )
              
              
              5,076,235Accrued
      expenses
              
              
              369,083
              
              
              
              589,486
              
              
              
              1,090,635Accrued
      consulting fees
              
              
              -
              
              
              
              -
              
              
              
              97,500Interest
      payable
              
              
              3,259,386
              
              
              
              (1,187,945
              )
              
              
              6,125,329Due
      to related parties
              
              
              170,512
              
              
              
              (15,696
              )
              
              
              244,355Net
      cash used in operating activities
              
              
              (3,277,322
              )
              
              
              (4,564,861
              )
              
              
              (16,226,464
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of Interpacific Oil S.A.C.
              
              
              -
              
              
              
              -
              
              
              
              (700,000
              )Increase
      in deposits
              
              
              -
              
              
              
              (141,192
              )
              
              
              (464,956
              )Increase
      in VAT credits
              
              
              (137,482
              )
              
              
              (3,134,001
              )
              
              
              (8,025,364
              )Net
      cash acquired with acquisition
              
              
              -
              
              
              
              -
              
              
              
              1,825,805Prepayment
      for purchase of equipment
              
              
              -
              
              
              
              (429,718
              )
              
              
              (174,276
              )Purchase
      of property, plant and equipment
              
              
              (193,528
              )
              
              
              (14,387,843
              )
              
              
              (36,597,418
              )Net
      cash used in investing activities
              
              
              (331,010
              )
              
              
              (18,092,754
              )
              
              
              (44,136,209
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from subscriptions received in advance
              
              
              -
              
              
              
              -
              
              
              
              96,277Proceeds
      from issuance of convertible notes
              
              
              2,200,000
              
              
              
              5,000,000
              
              
              
              20,200,000Proceeds
      from issuance of notes payable - short term
              
              
              1,500,000
              
              
              
              -
              
              
              
              3,000,000Proceeds
      from line of credit
              
              
              -
              
              
              
              20,946,852
              
              
              
              37,346,939Change
      in restricted cash
              
              
              5,867
              
              
              
              -
              
              
              
              (1,145,596
              )Interest
      payment deducted from restricted cash
              
              
              -
              
              
              
              744,411
              
              
              
              1,039,541Payment
      on notes payable - short term
              
              
              (500,000
              )
              
              
              -
              
              
              
              (500,000
              )Payment
      on convertible debt
              
              
              -
              
              
              
              -
              
              
              
              (3,000,000
              )Payment
      on long term debt
              
              
              -
              
              
              
              -
              
              
              
              (1,200,000
              )Payment
      of debt issuance costs
              
              
              -
              
              
              
              (1,165,617
              )
              
              
              (4,170,963
              )Proceeds
      from the issuance of common stock
              
              
              -
              
              
              
              -
              
              
              
              9,704,375Net
      cash provided by financing activities
              
              
              3,205,867
              
              
              
              25,525,646
              
              
              
              61,370,573Effect
      of exchange rate changes on cash and cash equivalents
              
              
              13,485
              
              
              
              (1,655,779
              )
              
              
              (817,639
              )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              (388,980
              )
              
              
              1,212,252
              
              
              
              190,261CASH
      AND CASH EQUIVALENTS, Beginning of period
              
              
              579,241
              
              
              
              2,991,104
              
              
              
              -CASH
      AND CASH EQUIVALENTS, End of period
              
              $
              190,261
              
              
              $
              4,203,356
              
              
              $
              190,261
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  6






Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 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 six months ended June 30, 2009 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2009.





Organization and Line of
Business




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





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





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




7


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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





Development Stage Company
and Going-Concern





The
Company is in the development stage since planned principal activities have not
commenced and the Company has not generated significant revenue.  The
Company has two principal facilities which have been completed and
tested.  The Company has revenues from the sale of inventory and
by-products that was produced during the testing phase of the
facility.  In a development stage company, management devotes most of
its activities to developing a market for its products and services. 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 and the ability of
the Company to emerge from the development stage is dependent upon the continued
financial support from its stockholders, the ability of the Company to obtain
necessary equity and debt financings to continue operations and to generate
sustainable revenue. There is no guarantee that the Company will be able to
raise adequate equity or debt financings or generate profitable operations. For
the six months ended June 30, 2009, the Company incurred a net loss of
$38,078,227 and as of June 30, 2009, the Company has a deficit accumulated
during the development stage of $89,550,310. Further, as of June 30, 2009, the
Company has negative working capital of $48,864,947 which includes
$35,837,963 of accrued derivative liabilities. These consolidated financial
statements do not include any adjustments to the recoverability and
classification of recorded asset amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
Management continues to seek raising additional funds through equity or debt
financing.





Basis of
Presentation





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





The
Company is a development stage company as defined by Statement of Financial
Accounting Standard (“SFAS”) No. 7, “Accounting and Reporting for Development
Stage Enterprises.”





8




Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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, as reflected in the table below. All
intercompany balances and transactions have been eliminated in
consolidation.





Subsidiary
            
            Place
              Incorporated
            
            % OwnedPure
      Biofuels del Peru S.A.C.
            
            Peru
            
            
            99.9Palma
      Industrial S.A.C.
            
            Peru
            
            
            99.9Palma
      Industrial's five subsidiaries:Aceite
      Pucallpa S.A.C.
            
            Peru
            
            
            99.9Palmas
      de Oriente S.A.C.
            
            Peru
            
            
            99.9Palmas
      Tropicales S.A.C.
            
            Peru
            
            
            99.9Pucapalma
      S.A.C.
            
            Peru
            
            
            99.9Ecopalma
      S.A.C.
            
            Peru
            
            
            99.9Pure
      Biofuels Del Peru's subsidiary:Pure
      Biocarburantes S.A.
            
            Argentina
            
            
            99.4





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 warrant liability. Actual results could differ
materially from these estimates upon which the carrying values were
based.





Cash
and Cash Equivalents





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





Restricted
Cash





Restricted
cash consists of monies under a standby letter of credit as required by a
vendor.  As of June 30, 2009 and December 31, 2008, total restricted
cash related to the standby letter of credit amounted to $141,908 and $141,775,
respectively.





Accounts
Receivable





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




9


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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 June 30, 2009 and December 31 2008, the Company believes that no reserve was
necessary.





Property, Plant and
Equipment





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





The
estimated useful lives were as follows:





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





Goodwill and
Impairment





The
Company applies SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”), to record goodwill and intangible assets.  In accordance with
SFAS 142, 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 June 30, 2009 and December 31, 2008, there was no significant
impairment of its goodwill.





Long-Lived
Assets





The
Company applies the provisions of SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 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 June 30, 2009 and December 31, 2008, there was no
significant impairment of its long-lived assets.




10


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


Accrued Derivative
Liabilities





The
Company applies FASB’s Emerging Issues Task Force (“EITF”) Issue 07-5,
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock” (“EITF 07-5”).  EITF 07-5 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 SFAS 133
paragraph 11(a) scope exception. 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 EITF 07-5, 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 “change in fair value of accrued derivative
liabilities.”





Fair Value
Measurements





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





SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments,” requires disclosure of the fair value of financial instruments
held by the Company. SFAS No. 157, “Fair Value Measurements” (“SFAS 157”),
adopted in January 1, 2008, defines fair value, and establishes a three-level
valuation hierarchy for disclosures of fair value measurement that enhances
disclosure requirements for fair value measures.  The carrying amounts
reported in the consolidated balance sheets for receivables and current
liabilities each qualify as financial instruments and are a reasonable estimate
of their fair values because of the short period of time between the origination
of such instruments and their expected realization and their current market rate
of interest. The three levels of valuation hierarchy are defined as
follows:





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





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





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




11




Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)




The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”




The
Company’s warrant liability is carried at fair value totaling $19,697,582 and
$564,643, as of June 30, 2009 and December 31, 2008,
respectively.  The Company’s conversion option liability is carried at
fair value totaling $16,140,381 and $0 as of June 30, 2009 and December 31,
2008, respectively.  The Company used Level 2 inputs for its valuation
methodology for the warrant liability, conversion option liability and
option liability as their fair values were determined by using the Black-Scholes
option pricing model based on various assumptions.




Fair
      Value
              As
      of
              June
      30, 2009
            
            Fair
      Value Measurements at
              June
      30, 2009
              Using
      Fair Value HierarchyLiabilities
            
            (unaudited)
            
            Level 1
            
            Level 2
            
            Level 3Warrant
      liability
            
            $
            19,697,582
            
            
            
            $
            19,697,582Conversion
      option liability
            
            $
            16,140,381
            
            
            
            $
            16,140,381




The
Company recognized losses of $20,393,074, $21,075,266 and $11,551,450, for the
change in the fair value of accrued derivative liabilities for the three and six
months ended June 30, 2009 and for the period from May 10, 2006 (date of
inception) to June 30, 2009.  For the three and six months ended June
30, 2008, there was no gain or loss for the changes in the valuations of the
aforementioned liabilities.





The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented in the consolidated balance sheets at fair value in
accordance with SFAS 157.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. SFAS 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
The Company adopted SFAS 159 on January 1, 2008. The Company chose not to elect
the option to measure the fair value of eligible financial assets and
liabilities.





Concentration ofCreditRisk





Cash
includes cash on hand and demand deposits in accounts maintained within Peru,
Argentina and the United States. Certain financial instruments, which subject
the Company to concentration of credit risk, consist of cash. The Company
maintains balances at financial institutions which, from time to time, may
exceed Federal Deposit Insurance Corporation insured limits for the banks
located in the Unites States. Balances at financial institutions within Peru and
Argentina are not covered by insurance. As of June 30, 2009 and December 31,
2008, the Company had deposits in excess of federally-insured limits of
approximately $190,000 and $567,000, respectively. The Company has not
experienced any losses in such accounts.




12




Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


Foreign Currency
Transactions and Comprehensive Income




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




The
Company recorded a translation loss of $5,546 for the three months ended June
30, 2009 and a translation gain of $458,230 for the six months ended June 30,
2009.  The Company recorded translation gains of $198,003 and $11,379 for
the three and six months ended June 30, 2008, respectively and a translation
loss of $106,703 for the period from May 10, 2006 (date of inception) to June
30, 2009. Asset and liability amounts at June 30, 2009 and December 31, 2008
were translated at 3.011 PEN to $1.00 USD and 3.142 PEN to $1.00 USD,
respectively for the Company’s Peruvian subsidiaries. Equity accounts were
stated at their historical rates. The average translation rates applied to
income statement accounts for the six months ended June 30, 2009 and 2008 were
3.098 PEN and 2.982 PEN to $1.00 USD, respectively.  At June 30, 2009
and December 31, 2008, the exchange rates for the assets and liabilities of the
Company’s Argentinean subsidiary were 3.720 ARS and 3.453 ARS to $1.00 USD,
respectively. The average translation rates applied to the income statement
accounts for the Company’s Argentinean subsidiary for the six months ended June
30, 2009 and 2008 were 3.626 ARS and 3.110 to $1.00 USD, respectively. Cash
flows are also translated at average translation rates for the period.
Therefore, amounts reported on the consolidated statements of cash flows will
not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets.





Foreign Currency Transaction
Gains and Losses





Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.  For the three and six months ended
June 30, 2009, the Company recorded transaction gains of $1,804,130 and
$1,545,633, respectively.  The Company recorded transaction losses of
$3,193,013, $868,634, and $788,048 for the three and six months ended June 30,
2008, and for the period from May 10, 2006 (date of inception) to June 30, 2009,
respectively. 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 SFAS No. 109, “Accounting
for Income Taxes” (“SFAS 109”) and Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). SFAS 109 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.





13


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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





Revenue
Recognition





In
accordance with the Securities and Exchange Commission’s (“SEC”) Staff
Accounting Bulletin (“SAB”) No. 104, “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 SFAS No. 128, “Earnings Per
Share” (“SFAS 128”). Net earnings per share for all periods presented have been
restated to reflect the adoption of SFAS 128. Basic earnings per share is based
upon the weighted average number of common shares outstanding. Diluted earnings
per share is based on the assumption that all dilutive convertible shares and
stock warrants were converted or exercised. Dilution is computed by applying the
treasury stock method. Under this method, warrants are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average market
price during the period. All warrants and convertible notes were excluded
from the diluted loss per share calculation due to the anti-dilutive
effect.





Stock-Based
Compensation





The
Company records stock-based compensation in accordance with SFAS No. 123(R),
“Share-Based Payment” (“SFAS 123R”). SFAS 123R 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 SFAS 123R, 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
 (A
Development Stage Company)
 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 SFAS 123R using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.





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





Statement of Cash
Flows





In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rate. As a result, amounts related to assets and liabilities
reported on the consolidated statements of cash flows will not necessarily agree
with changes in the corresponding balances on the consolidated balance
sheets.





Reclassification





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





Recent
Pronouncements





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It is intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling interests by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160 also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation. It requires that
a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated, requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others.  The Company adopted SFAS 160 effective January 1,
2009.  The adoption of SFAS 160 did not have a material impact on the
Company’s consolidated financial statements.




15


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


In April
2009, the FASB issued three related FASB Staff Positions: (i) FSP SFAS No. 115-2
and SFAS No. 124-2, “Recognition of Presentation of Other-Than-Temporary
Impairments” (“FSP SFAS 115-2 and SFAS 124-2”), (ii) FSP SFAS No. 107-1 and APB
No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP
SFAS 107-1 and APB 28-1”), and (iii) FSP SFAS No. 157-4, “Determining the Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
SFAS 157-4”), which are effective for interim and annual reporting periods
ending after June 15, 2009. FSP SFAS 115-2 and SFAS 124-2 modifies the
requirement for recognizing other-than-temporary impairments, changes the
existing impairment model, and modifies the presentation and frequency of
related disclosures. FSP SFAS 107-1 and APB 28-1 requires disclosures about fair
value of financial instruments for interim reporting periods as well as in
annual financial statements. FSP SFAS 157-4 provides additional guidance for
estimating fair value in accordance with SFAS 157. The adoption of these FASB
Staff Positions did not have a material impact on the Company’s consolidated
financial statements.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) [ASC
855-10-05], which provides guidance to establish general standards of accounting
for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS 165 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. SFAS 165 is
effective for interim and annual periods ending after June 15, 2009, and
accordingly, the Company adopted this Standard during the second quarter of
2009. SFAS 165 requires that public entities evaluate subsequent events through
the date that the financial statements are issued. The Company has evaluated
subsequent events through the time of filing these financial statements with the
SEC.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140” (“SFAS 166”) [ASC
860], which requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. The Company has not completed its assessment
of the impact SFAS 166 will have on its consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”) [ASC 810-10], which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS
167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose
and design and a company’s ability to direct the activities of the entity that
most significantly impact the entity’s economic performance. SFAS 167
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. SFAS 167 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS 167 is
effective for fiscal years beginning after November 15, 2009. The Company has
not completed its assessment of the impact SFAS 167 will have on its
consolidated financial statements.




16





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM
and the Hierarchy of Generally Accepted Accounting Principles a Replacement
of FASB Statement No. 162” (“SFAS 168”). This Standard establishes
the FASB Accounting Standards CodificationTM (the “Codification”) as the
source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim
and annual periods ending after September 15, 2009, and as of the
effective date, all existing accounting standard documents will be
superseded. The Codification is effective in the third quarter of 2009,
and accordingly, the Quarterly Report on Form 10-Q for the quarter ending
September 30, 2009 and all subsequent public filings will reference
the Codification as the sole source of authoritative
literature.





Note
3 – Inventories





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





June
      30,
              
              
              December
      31,Description
              
              2009
              
              
              2008(unaudited)Raw
      Material
              
              $
              289,917
              
              
              $
              794,493Work-in-Process
              
              
              101,852
              
              
              
              152,844Finished
      Goods
              
              
              272,157
              
              
              
              245,025Inventories,
      net
              
              $
              663,926
              
              
              $
              1,192,362





Note
4 – VAT Credits





At June
30, 2009 and December 31, 2008, the Company recognized a value added tax (“VAT”)
credit of $7,824,685 and $7,368,021, respectively in Peru. VAT is charged at a
standard rate of 19% of the purchases made by the Company, and the Company
obtains income tax credits for VAT paid in connection with the purchase of
capital equipment and other goods and services employed in its operations. The
Company is entitled to use the credits against its Peruvian income tax liability
or to receive a refund against VAT payable or sales. As the Company does not
anticipate incurring either a Peruvian tax or a VAT liability during the next
fiscal year, the credits have been classified as non-current.





17




Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


Note 5 – Property, Plant and
Equipment





Property,
plant and equipment consisted of the following:





June
      30,
              
              
              December 31,2009
              
              
              2008(unaudited)Land
              
              $
              3,360,166
              
              
              $
              3,220,041Plant
      under construction
              
              
              4,676,300
              
              
              
              4,974,263Building
      improvements
              
              
              805,934
              
              
              
              595,039Equipment
              
              
              31,036,833
              
              
              
              29,236,036Computer
      equipment and licenses
              
              
              243,359
              
              
              
              240,374Other
      fixed assets
              
              
              111,336
              
              
              
              101,12440,233,928
              
              
              
              38,366,877Accumulated
      depreciation
              
              
              (1,262,641
              )
              
              
              (820,455
              )Property,
      Plant and Equipment, net
              
              $
              38,971,287
              
              
              $
              37,546,422





Depreciation
expense amounted to $229,314 and $395,284, for the three and six months ended
June 30, 2009, respectively,  and $11,504 and $22,380 for the three
and six months ended June 30, 2008, respectively, and $1,273,571 for the period
from May 10, 2006 (inception) to June 30, 2009.





Note
6 – Performance Bond





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





In
accordance with EITF 07-5 and SFAS 133, the Company determined that the FDS Bond
Warrants should be classified as a liability at fair value on the date the FDS
Bond Warrants were issued.  The Company determined the fair value of
the FDS Bond Warrants to be $4,085,589 using the Black-Scholes option pricing
model with the following assumptions:  (1) expected life of 7 years;
(2) volatility of 130%; (3) risk free interest rate of 2.28% and (4) dividend
rate of 0%.  The fair value of $4,085,589 was recorded as a prepaid
asset and warrant liability in the consolidated balance sheets.  The
Company will amortize the $4,085,589 over one year.  The amortization
expense for the three and six months ended June 30, 2009 was $1,018,598, and
$1,063,372, respectively, and is included in “interest and financing costs” in
the accompanying consolidated statements of operations.




18





Note
7 – Notes Payable – Short Term





FDS Notes and
Warrants




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





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




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




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





In
accordance with EITF 07-05 and SFAS 133, the Company determined that the FDS
Additional Warrants should be classified as a liability at fair value on the
date the FDS Additional Warrants were to be issued.  The Company did
not issue the FDS Additional Warrants until April 8, 2009; however, the Company
valued the warrants as of the date of default to determine the liability that
should be recorded.  The Company determined the fair value of the FDS
Additional Warrants at January 15, 2009 to be $1,576,763 using the Black-Scholes
option pricing model with the following assumptions:  (1) expected
life of 7 years; (2) volatility of 130%; (3) risk free interest of 2.28% and (4)
dividend rate of 0%.  The fair value of $1,576,763 was recorded as
“accrued derivative liabilities” in the accompanying consolidated balance sheets
and included in “interest and financing costs” in the consolidated statements of
operations at the date of default.





During
the six months ended June 30, 2009, the Company repaid $500,000 toward the
outstanding principal balance of $1,000,000.




19


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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





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





In
accordance with EITF 07-05 and SFAS 133, the Company determined that the FDS
2009 Warrants should be classified as a liability at fair value on the date the
FDS Additional Warrants were to be issued.  The Company determined the
fair value of the FDS Additional Warrants at May 30, 2009 and June 30, 2009 to
be $1,069,199 and $964,594, respectively using the Black-Scholes option pricing
model with the following assumptions:  (1) expected life of 7 years;
(2) volatility of 130%; (3) risk free interest of 3.06% and 3.18%, respectively
and (4) dividend rate of 0%.  The fair value of $1,069,199 and
$964,594 was recorded as “accrued derivative liabilities” in the accompanying
consolidated balance sheets and included in “interest and financing costs” in
the consolidated statements of operations at the date of default.





Plainfield Promissory Note
and Warrants





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





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




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




20


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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





In
accordance with EITF 07-05 and SFAS 133, the Company determined that the
Plainfield Additional Warrants should be classified as a liability at fair value
on the date the Plainfield Additional Warrants were to be issued.  The
Company did not issue the Plainfield Additional Warrants until April 8, 2009;
however, the Company valued the warrants as of the date of default to determine
the liability that should be recorded.  The Company determined the
fair value of the Plainfield Additional Warrants at January 15, 2009 to be
$788,382 using the Black-Scholes option pricing model with the following
assumptions:  (1) expected life of 7 years; (2) volatility of 130%;
(3) risk free interest of 2.28% and (4) dividend rate of 0%.  The fair
value of $788,382 was recorded as “accrued derivative liabilities” in the
accompanying consolidated balance sheets and included in “interest and financing
costs” in the consolidated statements of operations at the date of
default.





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





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




21


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


The
Company did not repay the Plainfield 2009 Notes on the required dates and
pursuant to the terms of the agreement, Plainfield opted to exchange the PIK
Note for the Exchange Note and receive shares of common stock.  The
exchange of the PIK Note and the issuance of the common shares were performed in
conjunction with the Interbank Peru financing on July 16, 2009.  The
fair value of the 10,937,500 shares (13,125,000 divided by 1.2) on May 30, 2009
was $984,375 and the fair value of the 5,468,750 shares (6,562,500 divided by
1.2) on June 30, 2009, was $875,000.  The Company recorded these
amounts as “interest and financing costs” in the consolidated statement of
operations with a corresponding credit to “interest and penalties payable” in
the consolidated balance sheets.





Note
8 – Convertible Debt





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





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




22


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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





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





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





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





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




23


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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





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





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





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





The
Company determined that the 2009 Notes contained an embedded beneficial
conversion feature as the conversion price of $0.04 per share was less than the
share price of $0.06 on the date of issuance.  The Company applied
EITF 07-5 and recorded the fair value of $2,714,302 as an accrued derivative
liability.  The fair value was determined using the Black-Scholes
option pricing model under the following assumptions:  (1) expected
life between 3.47 and 3.51 years, (2) risk free interest rate between 1.27% and
1.46%, (3) dividend yield of 0%, and (4) volatility of 130%.  The
Company recorded $2,200,000 to debt discounts to be amortized over the life of
the 2009 Notes and $514,302 to “interest and financing costs.”





24


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


The
following table summarizes the convertible notes:





ConvertibleNotesBalance,
      December 31, 2007
              
              $
              602,080Additional
      principal
              
              
              5,000,000Conversion
      of interest to principal
              
              
              1,526,600Line
      of Credit PIK interest
              
              
              3,181,390Discount
      related to additional principaland
      repricing of conversion price
              
              
              (5,648,500
              )Discount
      related to change in terms
              
              
              (891,987
              )Amortization
      of note discount
              
              
              3,167,862Balance,
      December 31, 2008
              
              $
              6,937,445Conversion
      of interest to principal
              
              
              1,169,622Additional
      principal
              
              
              2,200,000Line
      of Credit PIK interest
              
              
              1,970,758Increase
      Discount per implementationof
      EITF 07-5
              
              
              (428,153
              )Discount
      related to additional principal
              
              
              (2,554,129
              )Amortization
      of note discount
              
              
              1,974,374Balance,
      June 30, 2009 (unaudited)
              
              $
              11,269,917





Total
interest incurred for the three and six months ended June 30, 2009 related to
the convertible debentures amounted $741,956 and $1,367,971, respectively
and $468,300 and $778,220 for three and six months ended June 30, 2008,
respectively, and $3,198,517 for the period from May 10, 2006 (date of
inception) to June 30, 2009.





For the
three and six months ended June 30, 2009, the Company amortized debt discounts
in the amount $1,067,583 and $1,974,374, respectively and $860,193 and
$1,428,574, for the three and six months ended June 30, 2008, respectively,
and $5,744,316 for the period from May 10, 2006 (date of inception) to June 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 June 30, 2009 and December 31, 2008
is $864,418 and $667,280, respectively.





Note 9 – Line of Credit





On
September 12, 2007, the Company entered into a $20,000,000 Loan Agreement (“Line
of Credit”), between the Company, as Guarantor, and Peru SAC and Palma
Industrial S.A.C., each a 99.9% owned subsidiary of the Company
(“Subsidiaries”), various lenders and PSSM, as Administrative
Agent.  The Loan Agreement terminates on January 12,
2011.





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




25


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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




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




Also,
pursuant to the Amendment, interest under the Loan Agreement from March 12, 2008
through to but excluding October 1, 2008, shall accrue and be due and payable in
four equal installments to be paid on October 1, 2008, November 1, 2008,
December 1, 2008 and January 1, 2009.




Obligations
under the Loan Agreement are secured by liens on substantially all of the assets
of the Company, the Borrowers and each of the Borrowers’ subsidiaries. However,
pursuant to the Amendment, Plainfield agreed to release any liens or security
interests on inventory (including raw materials, finished product, byproducts
and inventory in process) and accounts receivable and the proceeds there from of
the Borrowers.





The Loan
Agreement, among other things, requires the Company to furnish monthly,
quarterly and annual financial statements within a specified time period, and
prohibits the Company from encumbering its property or assets, disposing of its
assets, declare or pay dividends, lend money, acquire stock, or make capital
expenditures that are not approved in writing by Plainfield.





Under the
terms of the Amendment, the Company and the Borrowers agreed to (1) implement a
trust arrangement with respect to the Collateral (as defined in the Loan
Agreement) within 120 days of the effective date of the Amendment, (2) if
requested by Plainfield and/or Plainfield Peru I LLC and Plainfield Peru II
LLC, affiliates of Plainfield (collectively, the “Purchaser”), recapitalize the
debt and equity structure of the Borrowers and the other Credit Parties (as
defined in the Loan Agreement) in order to cause the reduction of the amount
outstanding under the Convertible Notes (as defined in the Loan Agreement),
including, if requested by the Purchaser and/or Plainfield, any collateral
secured pursuant to the Convertible Note Documents (as defined in the Loan
Agreement) and/or the Amendment) and an increase in the amount outstanding under
the Loans in a manner satisfactory to the Administrative Agent within 90 days of
such request, (3) if requested by Plainfield and/or the Purchaser, have the
Company issue warrants to Plainfield to purchase an amount of shares of the
Company’s common stock in an amount when exercised equal to $17,346,939 divided
by an exercise price per share of the Company’s common stock to be determined
but no greater than $0.30 (the “Warrant Issuance”) and in connection with the
Warrant Issuance there will be grants of certain equity to management based on
performance measures to be mutually agreed upon by the Company and Plainfield
within 90 days of such request, and (4) amend the Company’s articles of
incorporation to increase its authorized common stock in an amount sufficient to
support the issuance of the common stock underlying the Warrant Issuance (the
“Stock Authorization Amendment”) within 90 days of such request (or 120 days if
the Securities and Exchange Commission reviews the preliminary proxy filed in
connection therewith).




26


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


The
outstanding balance of the Line of Credit at June 30, 2009 and December 31, 2008
was $37,346,939. Total interest expense for the three and six months ended June
30, 2009 was $920,446 and $1,830,778, respectively, and $1,112,071 and
$1,702,740 for the three and six months ended June 30,2008, respectively, and
$6,173,343 for the period from May 10, 2006 (date of inception) to June 30,
2009.





Principal maturities on total debt are scheduled to occur in the
following years as of June 30:





2009
              
              $
              2,500,0002010
              
              
              -2011
              
              
              37,346,9392012
              
              
              25,048,369Total
      debt
              
              $
              64,895,308





Note
10 – Accrued Derivative Liability





Accrued Warrant
Liability





Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5. EITF 07-5
applies to any freestanding financial instruments or embedded features that have
the characteristics of a derivative, as defined by SFAS 133, and to any
freestanding financial instruments that are potentially settled in an entity’s
own common stock.





As a
result of adopting EITF 07-5, 1,805,667 of the issued and outstanding common
stock purchase warrants previously treated as equity pursuant to the derivative
treatment exemption were no longer afforded equity treatment.  In
accordance with the transition provisions of EITF 07-5, the new guidance has
been applied to the 1,805,667 warrants that were outstanding as of January 1,
2009.  The cumulative effect of this change in accounting principle of
$350,742 has been recognized as a reduction of the opening balance of
accumulated deficit as of that date.  That cumulative effect
adjustment is the difference between the amounts previously recognized in the
Company’s balance sheet as of December 31, 2008 and the amounts that would have
been recognized if the guidance in EITF 07-5 had been applied from the issuance
date of the outstanding warrants.





The fair
value of all warrants at June 30, 2009 is $19,697,582.




27


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


Accrued Conversion Option
Liability





Convertible
Debt Otstanding at January 1, 2009





The
conversion option embedded in the Company’s convertible debt, as described in
Note 8,  previously met the criteria of being “conventional
convertible” debt and, accordingly, it was not separately accounted for as a
derivative instrument liability.  However, the conversion option does
not meet the criteria of EITF 07-5 because it requires that the conversion price
be adjusted in certain circumstances that do not meet the “fixed-for-fixed’
criteria in that Issue.  As a result, the Company is now required to
separately account for the embedded conversion option as a derivative instrument
liability, carried at fair value and marked-to-market each period, with changes
in the fair value each period charged or credited to operations.





In
accordance with the transition provisions of EITF 07-5, the new guidance has
been applied to the $19,707,990 of the Company’s Convertible Notes that were
outstanding as of January 1, 2009.  The cumulative effect of this
change in accounting principle of $4,366,553 has been recognized as a reduction
of the opening balance of accumulated deficit as of that date.  That
cumulative effect adjustment is the difference between the amounts previously
recognized in the Company’s balance sheet as of December 31, 2008 and the
amounts that would have been recognized if the guidance in EITF 07-5 had been
applied from the issuance date of the outstanding Convertible
Notes.





Convertible
Debt Issued in March 2009





The
Company determined that the 2009 Notes discussed in Note 8, contained an
embedded conversion feature.  Based on EITF 07-05, the $2,714,302 fair
value of the conversion feature was recorded as liability at the issuance date
of the 2009 Notes.





The fair
value of all conversion options at June 30, 2009 is $16,140,381.





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.





Stock
Options





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





28


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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





The
following is a summary of the option activity:


Number of
      Options
                  
                  
                  Weighted
      Average Exercise Price
                  
                  Weighted
      Average Remaining Contractual Life (in years)
                  
                  Aggregate
      Intrinsic ValueOutstanding,
      December 31, 2007
                  
                  
                  14,000,000
                  
                  
                  $
                  0.60Granted
                  
                  
                  2,440,000
                  
                  
                  $
                  0.60Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (1,253,750
                  )
                  
                  $
                  0.60Outstanding,
      December 31, 2008
                  
                  
                  15,186,250
                  
                  
                  $
                  0.60Granted
                  
                  
                  -Exercised
                  
                  
                  -Forfeited
                  
                  
                  -Outstanding,
      June 30, 2009 (unaudited)
                  
                  
                  15,186,250
                  
                  
                  
                  
                  
                  8.09
                  
                  -Exercisable,
      June 30, 2009 (unaudited)
                  
                  
                  10,983,750
                  
                  
                  $
                  0.60
                  
                  8.05
                  
                  -




The
Company recognized $577,510 and $1,155,020 in share-based compensation expense
for the three and six months ended June 30, 2009, respectively, $632,358 and
$1,264,716 for three and six months ended June 30, 2008, respectively, and
$7,115,830 for the period from May 10, 2006 (date of inception) to June 30,
2009.





The
compensation expense related to the unvested options as of June 30, 2009 is
$2,353,945 which will be recognized over the weighted average period of 1.20
years.





29


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


Note
12 – Warrants





The
following summarizes the stock purchase warrant transactions for the six months
ended June 30, 2009:





WeightedWeighted
                  
                  AverageAverage
                  
                  RemainingNumber of
                  
                  
                  Exercise
                  
                  ContractualWarrants
                  
                  
                  Price
                  
                  Life
      (in years)Outstanding,
      December 31, 2007
                  
                  
                  60,303,581
                  
                  
                  $
                  0.61Granted
                  
                  
                  12,289,271
                  
                  
                  $
                  0.30Exercised
                  
                  
                  -
                  
                  
                  
                  -Exchanged
                  
                  
                  (60,635,681
                  )
                  
                  $
                  0.31Forfeited
                  
                  
                  (151,505
                  )
                  
                  $
                  1.50Outstanding,
      December 31, 2008
                  
                  
                  11,805,666
                  
                  
                  $
                  0.39Granted
                  
                  
                  121,249,999
                  
                  
                  $
                  0.26Exercised
                  
                  
                  -Forfeited
                  
                  
                  -Outstanding,
      June 30, 2009 (unaudited)
                  
                  
                  133,055,665
                  
                  
                  $
                  0.27
                  
                  6.72Exercisable,
      June 30, 2009 (unaudited)
                  
                  
                  133,055,665
                  
                  
                  $
                  0.27
                  
                  6.72


Note 13 – Related Party Transactions





The
Company entered into the following transactions with related
parties:




a)
            On
      August 6, 2007, the Company entered into an integral service
      agreement with Ocean Marine S.A.C, (“Ocean Marine”) a company controlled
      by certain officers of the Company and a Peruvian Corporation, to provide
      certain advisory services related to use and handling of biodiesel to the
      Company. The agreement provides for a lump sum payment of $309,166,
      retroactive from September 15, 2006 to June 30, 2007, for the
      services rendered by Ocean Marine and a fee of $34,000 per month to Ocean
      Marine from July 1, 2007 through to August 12, 2009. Total consulting
      expenses incurred under this agreement totaled $102,000 and $204,000 for
      the three and six months ended June 30, 2009, respectively, $102,000 and
      $187,000 for the three and six  months ended June 30, 2008,
      respectively, and $1,152,556 for the period from May 10, 2006 (date of
      inception) to June 30, 2009.  The outstanding balance owed to
      Ocean Marine at June 30, 2009 and December 31, 2008 was $383,971 and
      $191,142, respectively.





b)
            Plainfield
      is a related party as it is a major stockholder of the Company. See
      transactions with Plainfield in notes 7, 8 and
  17.





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





d)
            Certain
      officers of the Company were shareholders of Interpacific.  See
      Note 16 for the transaction
details.




30


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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




Note 14 – Commitments and Contingencies





The
Company entered into the following agreements:






a)
            On
      August 13, 2007, Pure Biofuels del Peru entered into a services agreement
      with Ocean Marine, whereby Ocean Marine agreed to render consulting,
      management and logistical support services with respect to executive
      office duties and responsibilities.  Pure Biofuels del Peru pays
      Ocean Marine $408,000 annually for these services.  The term of
      this agreement is from August 13, 2007 through August 12,
      2009.





b)
            On
      September 12, 2007, the Company entered into a registration rights
      agreement (the “ARC Registration Rights Agreement”) withARC Investment
      Partners, LLC, Tapirdo Enterprises, LLC (an affiliate of Adam Roseman),
      and SGM Capital, LLC (an affiliate of Steven Magami) (collectively, the
      “ARC Holders”) in which the Company granted to each of the ARC Holders the
      right to request two demand registrations. In addition, the ARC Holders
      were granted certain shelf registration and piggyback registration
      rights.




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





Leases





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





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





For the
three and six months ended June 30, 2009, the Company incurred lease expense in
the amount of $22,780 and $45,560, respectively and $22,239 and $44,478, for the
three and six months ended June 30, 2008, respectively, and $303,879 for the
period from May 10, 2006 (date of inception) to June 30, 2009.





31


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


Note
15 – Supplemental Cash Flow Information




32


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)


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





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





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





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





At June
30, 2009, the fair value of the warrants was $363,977 which was determined by
using the Black-Scholes option pricing model with the following
assumptions:  (1) expected life of 4.44 years; (2) volatility of 130%;
(3) risk free interest rate of 1.67% and (4) dividend rate of 0%.





As a
result of the resolution by the Special Committee, the Company has a verbal
understanding with the previous shareholders of Interpacific on the additional
purchase price as discussed above. As of June 30, 2009, in accordance with SFAS
No. 141, “Business Combinations,” and SFAS No. 5, “Accounting for
Contingencies,” the Company has recognized additional goodwill and a liability
of $5,963,977 for the additional purchase price.




33


Pure
Biofuels Corp. and Subsidiaries
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 (unaudited)
 Note
17 – Subsequent Events





On July
16, 2009, the Company entered into a financing transaction to restructure its
debts by using what in Peru is called a sale/leaseback but under U.S. law is
more appropriately called a financing transaction with Interbank Peru
(“Interbank Peru Financing”).  Under the Interbank Peru
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.





To
guarantee the Interbank Peru Financing, it was required to remove the existing
lien on the Company’s property in favor of Plainfield. Once these liens were
removed the following agreements were executed as part of
the guarantee to Interbank Peru (i) a mortgage on the land of the Company’s
Supply Plant, (ii) a surface right over the land on which the Supply Plant
stands and (iii) a conditional assignment of contractual position regarding the
lease of the Company’s biodiesel plant located in Chorrillos.





The
Company received $51,170,000 in cash as part of the Interbank Peru
Financing.  The Company will record a note payable of $43,000,000 and
reduce the VAT by $8,170,000.  The principal balance of the amount due
to Interbank Peru is $43,000,000 with an effective interest rate of
10.6%.  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.





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





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




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





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


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


·
            $2,200,000
      of the convertible notes


·
            $169,508
      of interest





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




The
following is the pro-forma balance sheet at July 16, 2009 after making
adjustments based on an initial evaluation of the Interbank Peru Financing to
the June 30, 2009 consolidated balance sheet. The Company is still in the
process of evaluating the final effects of the Interbank Peru Financing on the
consolidated financial statements.





July
      16,2009
              
              
              June
      30,Pro
      Forma
              
              
              2009ASSETS
              
              (unaudited)
              
              
              (unaudited)CURRENT
      ASSETSCash
      and cash equivalents
              
              $
              10,791,208
              
              
              $
              190,261Restricted
      cash
              
              
              30,141,908
              
              
              
              141,908Accounts
      receivable and other assets
              
              
              4,884,074
              
              
              
              4,884,074TOTAL
      CURRENT ASSETS
              
              
              45,817,190
              
              
              
              5,216,243VAT
      CREDITS
              
              
              (345,315
              )
              
              
              7,824,685PROPERTY,
      PLANT AND EQUIPMENT, net
              
              
              38,971,287
              
              
              
              38,971,287GOODWILL,
      DEBT ISSUANCE COSTS AND OTHER ASSETS
              
              
              12,085,348
              
              
              
              10,784,117TOTAL
      ASSETS
              
              $
              96,528,510
              
              
              $
              62,796,332LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
              
              $
              6,124,314
              
              
              $
              6,124,314Interest
      and penalties payable
              
              
              549,620
              
              
              
              3,062,241Due to prior stockholders of Interpacific Oil and related
      parties
              
              
              6,556,672
              
              
              
              6,556,672Notes payable-short term, net of debt discount of $0 and
      $266,622as of June 30, 2009 and December 31, 2008, respectively
              
              
              -
              
              
              
              2,500,000Accrued
      derivative liabilities
              
              
              40,248,891
              
              
              
              35,837,963TOTAL
      CURRENT LIABILITIES
              
              
              53,479,497
              
              
              
              54,081,190Convertible
      Notes, net of debt discount of $24,103,876 and $13,778,452as
      of July 16, 2009 and June 30, 2009, respectively
              
              
              33,056,713
              
              
              
              11,269,917Lease
      obligation
              
              
              43,000,000
              
              
              
              -Line
      of credit
              
              
              -
              
              
              
              37,346,939TOTAL  LIABILITIES
              
              
              129,536,210
              
              
              
              102,698,046COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock; $0.001 par value; 325,000,000 sharesauthorized;
      236,387,893 and 172,374,699 and shares issued and
    outstandingas
      of July 16, 2009 and June 30, 2009, respectively
              
              
              236,388
              
              
              
              172,375Additional
      paid-in capital
              
              
              59,761,022
              
              
              
              49,582,924Accumulated
      other comprehensive loss
              
              
              (106,703
              )
              
              
              (106,703
              )Deficit
      accumulated during the development stage
              
              
              (92,898,407
              )
              
              
              (89,550,310
              )TOTAL
      STOCKHOLDERS' EQUITY (DEFICIT)
              
              
              (33,007,700
              )
              
              
              (39,901,714
              )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
              
              $
              96,528,510
              
              
              $
              62,796,332





The
Company has performed an evaluation of subsequent events through August 14,
2009, which is the date the financial statements were issued.





34





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





Forward-looking
statements





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





Overview





We have
constructed, tested, and plan to operate a 52.5 million gallon biodiesel
production plant at a site near the Callao Port in Lima, Peru, (“Callao Port
Facility”), and operate a 10.0 million gallon biodiesel production plant that we
acquired from Interpacific Oil, (“Interpacific”, or the “Interpacific
Facility”), on December 4, 2007. Currently, we are a development-stage company
with no significant revenues from operations. To date, our efforts have been
devoted principally to the construction of the Callao Port Facility, engaging
service providers and related activities.





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





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





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





We plan
to be self-sufficient with our primary raw material, vegetable oil. This
comprises approximately 92% of our estimated production costs. As part of our
vertical integration, we anticipate that we will need to raise $16 million in
order to plant roughly 12,000 hectares of Jatropha trees.  We no
longer have any intention to make palm oil part of our vertical integration
strategy.  Our studies show that this will yield approximately 3
metric tons or more of oil per hectare by 2012, once the plants reach maturity.
This will supply an estimated 8% of our raw material requirements and our long
term objective is to develop sufficient crops in order to be 100%
self-sufficient. We plan to use alternative non-edible crops like Jatropha,
which can be planted in arid lands unsuitable for most food crops. There can be
no assurance that we will be able to secure any such financing at terms that are
favorable to us or at all, or, even if we secure such financing, that we will
ever become self sufficient as described above.




35


Results of
Operations





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





Revenues
were $544,385 for the three months ended June 30, 2009 compared to $0 for the
three months ended June 30, 2008.  Revenues were obtained from sales
of inventory and byproducts that were produced during the testing period at the
Callao Port Facility.  The Company expects the Callao Port Facility to
be fully operational during the third quarter of 2009.





Costs of
revenues were $133,472 for the three months ended June 30, 2009 compared to $0
for the three months ended June 30, 2008.  The costs of revenue
include the material and production costs plus additional costs incurred during
the testing of the Callao Port Facility.





Selling,
general and administrative expenses were $2,047,062 for the three months ended
June 30, 2009 compared to $2,083,805 for the three months ended June 30, 2008,
for a decrease of $36,743 or 1.8%.





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





For
      the Three
              
              
              For
      the ThreeMonths
      EndedJune
      30, 2009
              
              
              Months
      EndedJune
      30, 2008
              
              
              Increase(Decrease)
              
              
              %
      ChangeInterest
      expense
              
              $
              2,002,379
              
              
              $
              (259,322
              )
              
              $
              2,261,701
              
              
              
              -872
              %Financing
      costs
              
              
              3,853,168
              
              
              
              317,151
              
              
              
              3,536,017
              
              
              
              1115
              %Amortization
      of debt discountand
      debt issuance costs
              
              
              2,208,717
              
              
              
              1,151,567
              
              
              
              1,057,150
              
              
              
              92
              %$
              8,064,264
              
              
              $
              1,209,396
              
              
              $
              6,854,868
              
              
              
              567
              %




The
increase of $2,261,701 in interest expense is due to the increase in our debt
and that during 2008, we capitalized interest into property, plant, and
equipment.  The credit balance for the three months ended June 30,
2008 was due to the reclassification of interest expense to capitalized
interest.





The
financing cost of $3,853,168 for the three months ended June 30, 2009 consisted
of the following:





·
            $1,819,375
      related to the fair value of the shares to be issued per the default
      provisions on the Plainfield 2009
Notes.


·
            $2,033,793
      related to the warrants that were issued to FDS and Plainfield per the
      default provisions on their respective short term promissory
      notes.





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 June 30, 2008.





The
change in fair value of accrued derivative liability for the three months ended
June 30, 2009 was an increase of $20,393,074 compared to $0 for the three months
ended June 30, 2008.  The change is because the common stock share
price increased from $0.07 per share at March 31, 2009 to $0.16 per share at
June 30, 2009.  We did not have any derivative liabilities during the
three months ended June 30, 2008.




36




Foreign
currency transaction gain was $1,804,130 for the three months ended June 30,
2009 compared to a loss of $3,193,013 for the three months ended June 30,
2008.  The change is primarily due to the line of credit which was
denominated and payable in U.S. dollars and the appreciation of the PEN is
relation to the U.S. dollars for the periods indicated.





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





Revenues
were $957,733 for the six months ended June 30, 2009 compared to $0 for the six
months ended June 30, 2008.  Revenues were obtained from sales of
inventory that was produced during the testing period at the Callao Port
Facility. The Company expects the Callao Port Facility to be operational
during the third quarter of 2009.





Costs of
revenues were $890,522 for the six months ended June 30, 2009 compared to $0 for
the three months ended June 30, 2008.  The costs of revenue include
the material and production costs plus additional costs incurred during the
testing of the Callao Port Facility.  As such, these costs are higher
than what we would expect once the plant is fully operational.





Selling,
general and administrative expenses were $4,083,134 for the six months ended
June 30, 2009 compared to $5,051,986 for the six months ended June 30, 2008, for
a decrease of $968,852 or 19.2%.  The decrease was primarily due to
the decrease in consulting expenses of approximately $960,000 that were no
longer necessary.





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





For
      the Six
              
              
              For
      the SixMonths
      EndedJune
      30, 2009
              
              
              Months
      EndedJune
      30, 2008
              
              
              Increase(Decrease)
              
              
              %
      ChangeInterest
      expense
              
              $
              3,632,000
              
              
              $
              47,927
              
              
              $
              3,584,073
              
              
              
              7478
              %Financing
      costs
              
              
              6,732,615
              
              
              
              1,007,528
              
              
              
              5,725,087
              
              
              
              568
              %Amortization
      of debt discountand debt
      issuance costs
              
              
              3,784,188
              
              
              
              1,957,412
              
              
              
              1,826,776
              
              
              
              93
              %$
              14,148,803
              
              
              $
              3,012,867
              
              
              $
              11,135,936
              
              
              
              370
              %




The
increase of $3,584,073 in interest expense is due to the increase in our debt
and that in 2008, we were capitalizing interest into property, plant and
equipment.





The
financing costs of $6,732,615 for the six months ended June 30, 2009 consisted
of the following:





·
            $514,302
      related to the excess of fair value of the conversion option over the
      principal of the Plainfield Notes.


·
            $1,819,375
      related to the fair value of the shares to be issued per the default
      provisions on the Plainfield 2009 Notes.


·
            $4,398,938
      related to the warrants that were issued to FDS and Plainfield per the
      default provisions in their respective short-term
  notes.





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 June 30, 2008.





The
change in fair value of accrued derivative liability for the six months ended
June 30, 2009 was an increase of $21,075,266 compared to $0 for the six months
ended June 30, 2008.  The change is because the common stock share
price increased from $0.07 per share at December 31, 2008 to $0.16 per share at
June 30, 2009, and the volatility used in the Black-Scholes Model increased to
130% for the June 30, 2009 calculation compared to 123% for the December 31,
2008 calculation.  We did not have any derivative liabilities during
the six months ended June 30, 2008.





37




Foreign
currency transaction gain was $1,545,633 for the six months ended June 30, 2009
compared to a loss of $868,634 for the six months ended June 30, 2008. The
change is primarily due to the line of credit which was denominated and payable
in U.S. dollars and the appreciation of the PEN is relation to the U.S. dollars
for the periods indicated.





Liquidity and Capital
Resources





As of
June 30, 2009, we had $190,261 in cash and cash equivalents. In addition, during
the six months ended June 30, 2009, our cash used in operating activities was
$3,277,322 compared to our cash used in operating activities of $4,564,861 for
the six months ended June 30, 2008.





During
the six months ended June 30, 2009 and 2008, we used $331,010 and $18,092,754 in
investing activities, respectively. For the six months ended June 30, 2009 and
2008, we used $193,528 and $14,387,843, respectively for the purchase of
property, plant, and equipment. Our VAT credit increased by $137,482 and
$3,134,001 for the six months ended June 30, 2009 and 2008,
respectively.





During
the six months ended June 30, 2009 and 2008, cash provided by financing
activities was $3,205,867 and $25,525,646, respectively. During the six months
ended June 30, 2009, we received $2,200,000 from the issuance of convertible
debt and $1,500,000 from the issuance of short-term debt.  We also
repaid $500,000 during the six months ended June 30, 2009.  During the
six months ended June 30, 2008, we received $5,000,000 of convertible debt and
$20,946,852 proceeds from the line of credit.





Financings





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





Loan
Agreement





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





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





Convertible
Debt





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




38




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





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


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


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





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





Plainfield
Promissory Note





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





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





Plainfield
2009 Notes





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





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





39




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





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





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





·
            153,696,959
      shares of our common stock, or 65% of our issued and outstanding
      stock


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


·
            $57,160,589
      aggregate principal amount of PIK Notes convertible into 190,535,296
      shares of our common stock at a conversion price of $0.30 due on September
      12, 2012





FDS
Note




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





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





FDS
2009 Notes





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





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




40


In
accordance with EITF 07-05 and SFAS 133, we determined that the FDS 2009
Warrants should be classified as a liability at fair value on the date the FDS
Additional Warrants were to be issued.  We determined the fair value
of the FDS Additional Warrants at May 30, 2009 and June 30, 2009 to be
$1,069,199 and $964,594, respectively using the Black-Scholes option pricing
model with the following assumptions:  (1) expected life of 7 years;
(2) volatility of 130%; (3) risk free interest of 3.06% and 3.18%, respectively
and (4) dividend rate of 0%.  At the date of default, the fair value
of $1,069,199 and $964,594 was recorded as “accrued derivative liabilities”
in the accompanying consolidated balance sheets and included as “interest and
financing costs” in the consolidated statements of operations.





Performance
Bond





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





Bank
Financing





On July
16, 2009, we entered into a transaction to restructure its debts by using what
in Peru is called a sale/leaseback but under U.S. law is more appropriately
called a financing transaction with Interbank Peru.  Under the
Interbank Peru Financing, Interbank Peru acquired all the assets that comprise
our Supply Plant, and in turn leased the Supply Plant back to
us.  However, the assets remain on our books as still owned by
us.





To
guarantee the Interbank Peru Financing, it was required to remove the existing
lien on our property in favor of Plainfield. Once these liens were removed the
following agreements were executed as part of the guarantee to
Interbank Peru (i) a mortgage on the land of the Company’s Supply Plant, (ii) a
surface right over the land on which the Supply Plant stands and (iii) a
conditional assignment of contractual position regarding the lease of our
biodiesel plant located in Chorrillos.





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





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




41




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




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





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


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


·
            $2,200,000
      of the convertible notes


·
            $169,508
      of interest





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





Uncertainties and
Going-Concern





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





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





Commitments and
Contingencies





We
entered into the following agreements:






a)
            On
      August 13, 2007, Pure Biofuels del Peru entered into a services agreement
      with Ocean Marine, whereby Ocean Marine agreed to render consulting,
      management and logistical support services with respect to executive
      office duties and responsibilities.  Pure Biofuels del Peru pays
      Ocean Marine $408,000 annually for these services.  The term of
      this agreement is from August 13, 2007 through August 12,
      2009.





b)
            On
      September 12, 2007, the Company entered into a registration rights
      agreement (the “ARC Registration Rights Agreement”) withARC Investment
      Partners, LLC, Tapirdo Enterprises, LLC (an affiliate of Adam Roseman),
      and SGM Capital, LLC (an affiliate of Steven Magami) (collectively, the
      “ARC Holders”) in which the Company granted to each of the ARC Holders the
      right to request two demand registrations. In addition, the ARC Holders
      were granted certain shelf registration and piggyback registration
      rights.






c)
            During
      the six months ended June 30, 2009, the Company entered into additional
      agreements with Plainfield.





Leases


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




42




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





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





Contractual
Obligations





Our
significant contractual obligations are as follows:





Payments
      due by PeriodLess
      than
              
              
              One
      to
              
              
              Three
      to
              
              
              More
      ThanOne
      Year
              
              
              Three
      Years
              
              
              Five
      Years
              
              
              Five
      Years
              
              
              TotalPromissory
      notes
              
              $
              1,287,500
              
              
              $
              -
              
              
              $
              57,160,589
              
              
              $
              -
              
              
              $
              58,448,089Sale
      Lease back
              
              
              -
              
              
              
              17,400,000
              
              
              
              25,600,000
              
              
              
              -
              
              
              
              43,000,000Operating
      lease obligations
              
              
              19,138
              
              
              
              16,500
              
              
              
              -
              
              
              
              -
              
              
              
              35,638Total
              
              $
              1,306,638
              
              
              $
              17,416,500
              
              
              $
              82,760,589
              
              
              $
              -
              
              
              $
              101,483,727




Off-Balance Sheet
Arrangements





Performance
Bond





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





Critical Accounting
Policies





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




43




Use of
Estimates





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





Accrued Derivative
Liabilities





The
Company applies FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.”  EITF 07-5 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 SFAS 133 paragraph 11(a) scope
exception. 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 EITF 07-5, 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 “change in fair value of accrued derivative
liabilities.”





Fair Value
Measurements





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





On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, and establishes a three-level
valuation hierarchy for disclosures of fair value measurement that enhances
disclosure requirements for fair value measures. The carrying amounts reported
in the consolidated balance sheets for receivables and current liabilities each
qualify as financial instruments and are a reasonable estimate of their fair
values because of the short period of time between the origination of such
instruments and their expected realization and their current market rate of
interest. The three levels of valuation hierarchy are defined as
follows:





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




44




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





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




The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”





We did
not identify any other non-recurring assets and liabilities that are required to
be presented on the consolidated balance sheets at fair value in accordance with
SFAS 157.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. SFAS 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
We adopted SFAS 159 on January 1, 2008. We chose not to elect the option to
measure the fair value of eligible financial assets and
liabilities.





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 SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” 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





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




45




Revenue
Recognition





In
accordance with the Securities and Exchange Commission’s (“SEC”) Staff
Accounting Bulletin (“SAB”) No. 104, “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 SFAS No. 123(R), “Share-Based
Payment” (“SFAS 123R”). SFAS 123R 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 SFAS
123R, 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 of the time of
grant.





We used
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 our employee stock options. Although
the fair value of employee stock options is determined in accordance with SFAS
123R 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, our board of directors amended and restated our stock option plan to
increase the number of available options from a total of 18,000,000 to
21,000,000 options that enables it to grant options to employees, including its
officers and directors, and its subsidiaries and other persons who contribute
efforts to the Company.  The board of directors administers the stock
option plan. The stockholders approved the stock option plan on November 19,
2007.





Recent
Pronouncements





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It is intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling interests by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160 also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that does not result in deconsolidation, requires that
a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated, requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others.  We adopted SFAS 160 effective January 1,
2009.  We have determined the adoption of SFAS 160 did not have a
material impact to our consolidated financial statements.




46




In April
2009, the FASB issued three related FASB Staff Positions: (i) FSP FAS No. 115-2
and FAS No. 124-2, “Recognition of Presentation of Other-Than-Temporary
Impairments” (“FSP FAS 115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and APB No.
28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS
107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4, “Determining the Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”), which are effective for interim and annual reporting periods ending
after June 15, 2009. FSP FAS 115-2 and FAS 124-2 modifies the requirement for
recognizing other-than-temporary impairments, changes the existing impairment
model, and modifies the presentation and frequency of related disclosures. FSP
FAS 107-1 and APB 28-1 requires disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. FSP FAS 157-4 provides additional guidance for estimating fair value
in accordance with SFAS 157. The adoption of these FASB Staff Positions did not
have a material impact on our consolidated financial statements.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM
and the Hierarchy of Generally Accepted Accounting Principles a Replacement
of FASB Statement No. 162” (“SFAS 168”). This Standard establishes
the FASB Accounting Standards CodificationTM (the “Codification”) as the
source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim
and annual periods ending after September 15, 2009, and as of the
effective date, all existing accounting standard documents will be
superseded. The Codification is effective for us in the third quarter of 2009,
and accordingly, our Quarterly Report on Form 10-Q for the quarter ending
September 30, 2009 and all subsequent public filings will reference
the Codification as the sole source of authoritative
literature.


47
  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 June 30,
2009. Based upon such evaluation, the Chief Executive Officer and Chief
Financial Officer has concluded that, as of June 30, 2009, the Company’s
disclosure controls and procedures were ineffective. This conclusion by the
Company’s Chief Executive Officer and Chief Financial Officer does not
relate to reporting periods after June 30, 2009.





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.




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. The Company is in the process of complying
with SOX 404 during 2009 and will be implementing additional internal controls
over accounting and financial reporting.




Changes in Internal Control
Over Financial Reporting





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





PART
II - OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





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





ITEM 1A. RISK FACTORS





Not applicable.




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





None.




48




ITEM 3. DEFAULTS UPON SENIOR
SECURITIES





None.





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




None.





ITEM
5. OTHER
INFORMATION




(a)
            None.





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





Item
6. Exhibits





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




49





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/ Luis
      GoyzuetaLuis
      GoyzuetaChief
      Executive Officer and Director




Date:
August 14, 2009




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




Signature
              
              Title
              
              Date/s/
      Luis Goyzueta
              
              Chief
      Executive Officer and Director
              
              August
      14, 2009Luis
      Goyzueta
              
              (Principal
      Executive Officer)/s/ Alberto
      Pinto
              
              President
      and Director
              
              August
      14, 2009Alberto
      Pinto/s/
      Gustavo Goyzueta
              
              Chief
      Financial Officer
              
              August
      14, 2009Gustavo
      Goyzueta
              
              (Principal
      Financial Officer and
                Principal
      Accounting Officer)/s/
      C. Wendell Tewell
              
              Chairman
      of the Board of Directors
              
              August
      14, 2009C.
      Wendell Tewell/s/ Laurence
      Charney
              
              Director
              
              August
      14, 2009Laurence
      Charney


50