UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM
10-K









x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the fiscal year ended: December 31, 2009




or




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




Commission
File Number: 0 - 24836







PetroAlgae
Inc.




(Exact
name of registrant as specified in its charter)









Delaware
                  (State or other jurisdiction of incorporation)
                33-0301060
                  (IRS Employer Identification No.)1901
      S. Harbor City Blvd., Suite 300
                  Melbourne,
      FL
                32901(Address
      of principal executive offices)
                (Zip
      Code)




Registrant’s
telephone number, including area code: 321-409-7500









Securities
registered under Section 12(b) of the Exchange Act:


None




Securities
registered under to Section 12(g) of the Exchange Act:


Common
Stock, $.001 Par Value


(Title of
Class)







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES  ̈ NO x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. YES  ̈ NO x




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




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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in the definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈




Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company (as defined in
Exchange Act Rule 12b-2).




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




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




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter
was approximately $2,005,144 (250,643 shares at $8.00).




The
number of shares outstanding of the registrant’s common stock as of March 25,
2010 was 106,454,480 shares of common stock, all of one class.




PETROALGAE
INC.




ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009




INDEX




PART I
                                
                                2ITEM
      1.
                                Business
                                2ITEM
      1A.
                                Risk
      Factors
                                8ITEM
      1B.
                                Unresolved
      Staff Comments
                                14ITEM
      2.
                                Properties
                                15ITEM
      3.
                                Legal
      Proceedings
                                16ITEM
      4.
                                (Removed
      and Reserved).
                                17PART
      II
                                
                                18ITEM
      5.
                                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                18ITEM
      6.
                                Selected
      Financial Data
                                20ITEM
      7.
                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                21ITEM
      7A.
                                Quantitative
      and Qualitative Disclosures about Market Risk
                                28ITEM
      8.
                                Financial
      Statements and Supplementary Data
                                29ITEM
      9.
                                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                47ITEM
      9A(T).
                                Controls
      and Procedures
                                48ITEM
      9B.
                                Other
      Information
                                50PART
      III
                                
                                51ITEM
      10.
                                Directors,
      Executive Officers and Corporate Governance
                                51ITEM
      11.
                                Executive
      Compensation
                                54ITEM
      12.
                                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                55ITEM
      13.
                                Certain
      Relationships and Related Transactions, and Director
      Independence
                                56ITEM
      14.
                                Principal
      Accounting Fees and Services
                                57PART IV
                                
                                59ITEM
      15.
                                Exhibits,
      Financial Statement Schedules
                                59




-i-




PART
I




ITEM
      1.
            BUSINESS




General




PetroAlgae
Inc. is a Melbourne, Florida-based Delaware corporation that develops and
commercializes new technologies to grow and harvest micro-crops used as
feedstock to commercial refineries and other energy producers which results in
the production of drop-in fuels. PetroAlgae’s technologies and processes also
result in a high valued protein co-product suitable for animal and potentially
human consumption.




When we
use the terms “PetroAlgae,” “the Company,” “we,” “us” and “our,” we mean the
combined business of PetroAlgae Inc., a Delaware corporation, and PA LLC, a
Delaware limited liability company.




Financial
information concerning our business for each of 2009 and 2008 is set forth in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” the consolidated financial statements and the notes thereto, and
the supplemental financial information, which are in Part II, Items 7, 7A
and 8 of our Annual Report on Form 10-K.




Our
internet address is www.petroalgae.com and the investor section of our web site
is located at https://investor.petroalgae.com/. We make available free of
charge, on the investor section of our web site, annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S.
Securities Exchange Act of 1934 (Exchange Act), as well as proxy statements, as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the U.S. Securities and Exchange Commission. Also posted on
our web site, and available in print upon request of any shareholder to our
Investor Relations Department, are our certificate of incorporation and by-laws
and our Code of Business Conduct and Ethics governing our directors, officers
and employees. Within the time period required by the SEC, we will post on our
web site any amendment to the Code of Business Conduct and Ethics and any waiver
applicable to any executive officer, director or senior financial officer (as
defined in the Code). Our Investor Relations Department can be contacted at
PetroAlgae Inc., 1901 S. Harbor City Blvd., Suite 300, Melbourne, FL 32901,
telephone: 321-409-7272, email: investorrelations@petroalgae.com.




Cautionary
Statement Pursuant to the U.S. Private Securities Litigation Reform Act of
1995




We have
included or incorporated by reference in this Annual Report on Form 10-K, and
from time to time our management may make, statements that may constitute
“forward-looking statements” within the meaning of the safe harbor provisions of
the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking
statements are not historical facts but instead represent only our beliefs
regarding future events, many of which, by their nature, are inherently
uncertain and outside our control. These statements include statements other
than historical information or statements of current condition and may relate to
our future plans and objectives and results, among other things, as well as
statements about trends in or growth opportunities for our business, in Part II,
Item 7 of this Annual Report on Form 10-K. By identifying these statements for
you in this manner, we are alerting you to the possibility that our actual
results and financial condition may differ, possibly materially, from the
anticipated results and financial condition indicated in these forward-looking
statements. Important factors that could cause our actual results and financial
condition to differ from those indicated in the forward-looking statements
include, among others, those discussed under “Risk Factors” in Part I, Item 1A
of this Annual Report on Form 10-K.




History




PetroAlgae
LLC, now called PA LLC, was founded in 2006 in Melbourne, FL as a private
company focused on developing enabling technologies for the renewable energy
market. In August of 2008, PetroTech Holdings Corp. (“PetroTech Holdings”)
acquired all of the equity in PA LLC held by XL TechGroup, Inc. in exchange for
the release of certain accumulated debt obligations.




-2-




In
December 2008, PetroTech Holdings (i) acquired Dover Glen Inc. ("Dover Glen"), a
shell company listed on the OTC Bulletin Board, (ii) assigned its entire
interest in PA LLC to Dover Glen, and (iii) changed Dover Glen’s name to
PetroAlgae Inc. As a result of the acquisition and assignment, the business of
PA LLC became  the sole line of business of PetroAlgae.




PetroAlgae
(as its predecessor Dover Glen) was originally incorporated in the state of
California on April 15, 1988, and it changed its domicile to Delaware on August
12, 2008.




PetroTech
Holdings is owned by Valens U.S. SPV I, LLC, a Delaware limited liability
company (“Valens U.S.”), Valens Offshore SPV I, Ltd., a Cayman Islands limited
company (“Valens SPV I”), Valens Offshore SPV II, Corp., a Delaware corporation
(“Valens SPV II”), Laurus Master Fund, Ltd. (In Liquidation), a Cayman Islands
limited company (the “Fund”), Calliope Capital Corporation, a Delaware
corporation (“CCC”) and PSource Structured Debt Limited, a Guernsey company
(“PSource”). The Fund, CCC and PSource are each managed by Laurus Capital
Management, LLC, a Delaware limited liability company (“LCM”). Valens U.S.,
Valens SPV I and Valens SPV II are each managed by Valens Capital Management,
LLC (“VCM”). Eugene Grin and David Grin, through other entities, are the
controlling principals of LCM and VCM and share sole voting and investment power
over all securities of the Company held by PetroTech Holdings. Eugene Grin and
David Grin disclaim beneficial ownership of the securities of the Company held
by PetroTech Holdings, except to the extent of such person’s pecuniary interest
in PetroTech Holdings, if any.




During
the course of 2009, the Company issued and sold PetroAlgae common stock and
warrants to purchase common stock in a series of private placement transactions,
including:




·
            308,813
      shares of common stock to Valens U.S. for the purchase price of $8.00
      per share, and 5 year warrants to purchase 308,813 shares of PetroAlgae’s
      common stock at an exercise price of $15.00 per
  share;




·
            253,687
      shares of common stock to Valens SPV I for the purchase price of $8.00 per
      share, and 5 year warrants to purchase 253,687 shares of PetroAlgae’s
      common stock at an exercise price of $15.00 per
  share;




·
            375,000
      shares of common stock to Green Alternative Energy USA, LLC for the
      purchase price of $8.00 per share, and a 5 year warrant to purchase
      375,000 shares of PetroAlgae’s common stock at an exercise price of $15.00
      per share;




·
            500,000
      shares of its common stock to UBS AG for the purchase price of $8.00 per
      share, and a 5 year warrant to purchase 500,000 shares of PetroAlgae’s
      common stock at an exercise price of$15.00 per
  share;




·
            357,143
      shares of common stock to Green Science Energy LLC in return for thirty
      percent (30%) of the outstanding equity interests, on a fully diluted
      basis, in Green Science Energy LLC, and a 5 year warrant to purchase
      357,143 shares of PetroAlgae’s common stock at an exercise price of $15.00
      per share, along with an option, which expires on June 30, 2010, to
      purchase: (i) 250,000 shares of PetroAlgae’s common stock at an exercise
      price of $8.00 per share, and (ii) a warrant to purchase 250,000 shares of
      PetroAlgae’s common stock at an exercise price of $15.00 per
      share.




The
proceeds from these private placements are used for working capital
purposes.




– 3
–




The
diagram below sets forth a simplified presentation of our corporate structure,
as of December 31, 2009, immediately following the transactions described
above.









PetroAlgae
Inc.




Company
Overview




PetroAlgae
develops new technologies to economically grow, harvest and process micro-crops.
The Company’s primary business model is to license this technology to large
customers who will commercially produce this biomass, which in turn is separated
into two co-products 1) renewable fuel feedstock and 2) protein for animal feed
and potentially a human supplement.  The renewable fuel product is
intended to be used as a direct feedstock to energy producers, including
existing refineries. In the case of commercial refineries, this is expected to
result in drop-in fuels such as diesel and jet fuel. When used in existing
fermentation facilities, it is expected to directly result in ethanol
production. When used as a feedstock for other energy producers, particularly
power generators, it is a renewable input source for co-firing with fossil
fuels.




PetroAlgae
believes that use of PetroAlgae’s proprietary technology will allow the user to
achieve a greater level of productivity than can be realized with other standard
biomass growing techniques, and believes that this increased growth optimization
is critical to the ability to produce products that can profitably be grown at
commercial commodity scale without requiring subsidies.




In 2009,
the Company completed a working demonstration facility in Florida showing the
Company’s technology, processes and yield, with two reactors of commercial scale
(approximately one hector each).  The growth reactors on this site are
designed to be modular to support rapid deployment with a relatively high
predictive cost and productivity.  The processing segment of this
facility demonstrates the functionality of the required equipment used to
process the harvested biomass into the products that the Company’s customers
could derive from their licensed systems.  For certain segments of
this facility PetroAlgae has obtained independent audits and third-party
verification for product composition, product applications and use, and facility
yields. The Company expects that many more studies and audits will be conducted
to further commercialization efforts.




– 4
–




For this
reason, the Company has attracted a sizable number of prospective customers who
have the capability to license the PetroAlgae technology in return for licensee
fees and royalties.




Market
Background




There is
a pressing worldwide demand for alternative fuel solutions which is both large
and immediate. Predicted future shortages of petroleum oil, and in particular,
of residuum, the heavy fraction of crude, and continued pricing uncertainty in
petroleum oil supply have led to significant growth in the need for biomass
feedstock. Global consumption of petroleum diesel fuel (as one example) exceeds
200 billion gallons annually and continues to grow at a rate that exceeds
improvements in production. The gap between supply and demand is widening and
drove prices during 2008 to historically high levels. Beyond the economic issues
associated with petroleum, there are also significant environmental challenges:
petroleum fuels are non-renewable, produce many pollutants and release large
quantities of carbon dioxide into the atmosphere when burned.




PetroAlgae
is developing a commercial, scalable solution to meet this need through the
commercial-scale production of biomass which can be used as feedstock in
existing refineries to produce drop-in fuel such as diesel and jet fuel. 
The fuels are called “drop-in” because they are functionally identical to
the petroleum based versions they supplement, and hence, drop-in to the existing
infrastructure (pipeline, tankers, etc.). PetroAlgae’s system is designed to
provide quality feedstocks at prices which compete directly with petroleum
residuum, with a production system that is operational in a much shorter time
frame than other natural or synthetic methods of biomass production. The
Company’s production processes are intended to be sustainable and
resource-efficient. When these development processes are optimized,
significantly less land would be required than most biofuel feedstocks. Since
arable land is not required, farm land and rain forests do not need to be
negatively impacted.




PetroAlgae’s
technology also produces a high quality protein as a co-product which is
suitable as an ingredient in animal feed and potentially human food. Currently,
the availability of protein (especially in developing countries) that meets cost
and nutrition requirements is lacking. A parallel problem in the food market is
the growing concern of pesticides from conventionally grown protein sources that
remain in feed to animals are then transferred to human food products. The
annual market for animal feed is estimated by PetroAlgae to be approximately
$15-20 billion dollars and is projected to grow at a compounded annual growth
rate of 28% (as estimated by FAOSTAT).




Business
Development




PetroAlgae’s
business model is primarily based on licensing and/or joint ventures with
partners who will share both the risk and the reward. As the proprietor of the
technologies and processes, PetroAlgae assumes the development risk and
optimizes its production processes. Licensing and joint venture partners will
assume the costs of capital equipment at their sites. Profits will then be
shared between parties through payments to PetroAlgae in the form of milestone
payments during construction, licensing fees, and royalties thereafter. We
believe partners are interested in this model for the following
reasons:




·
            First,
      we believe we have the highest likelihood of being the first to achieve
      commercial success in the marketplace due to the technical progress made
      to date.




·
            Second,
      we believe we are the most likely to be producing biomass at an
      economically viable rate as evidenced by the production results already
      realized.




·
            Third,
      we intend to provide deployment processes to partners as part of the
      licensing agreements which further reduces deployment risk for our
      partners.




With this
business model, revenues and profit sharing generated by PetroAlgae would
consist of a combination of upfront payments, licensing fees, milestone payments
and royalties, and in some cases, sharing of profits. Royalties would be earned
by PetroAlgae from the sale of biocrude and protein from the licensee to the
marketplace.




– 5
–




Our
commercialization strategy focuses on maximizing licensing opportunities
worldwide based on the licensee’s need for a solution and ability to implement
PetroAlgae’s technology. This includes discussions with hundreds of potential
licensees spanning 40 countries whose combined needs for large-scale biomass
production are significant.




Since
inception, we have been subject to tax by both federal and state taxing
authorities. Until the respective statutes of limitations expire, we are subject
to income tax audits in the jurisdictions in which we operate. We are no longer
subject to U.S. federal tax examinations for fiscal years prior to 2005, and we
are not subject to audits prior to the 2005 fiscal year for the state
jurisdiction.




While
sales cycles for large licensing deals are traditionally long, the market’s
growing acceptance of our technology continues to increase as reflected by the
successful signing of a number of non-binding Memorandums of Understanding
(“MOU”) from among many qualified business discussions.  Under the
MOUs, PetroAlgae and the potential licensee agree to negotiate a final license
contract.  However, key contract terms set forth in the MOU may change
pending final negotiations and the negotiations may not always result in a final
contract.




In March
2009, PetroAlgae entered into a Master Licensing Agreement with GTB Power
Enterprise Ltd. to construct and operate at least ten separate 5,000 hectares
(12,355 acres) license units for the production of micro-crop biomass in
China.  Recently the Company entered into a MOU with CECIC Chongqing
Industry Co., Ltd (CECIC-CQ), an operating subsidiary of the China Energy
Conservation Investment Corporation (CECIC), the state owned company which has
completed over 3,000 energy conservation projects in
China.   This MOU contemplates that the Master License Agreement
for China held by GTB Power Enterprise Ltd. would be transferred to CECIC, or
that CECIC would otherwise become PetroAlgae’s exclusive licensee in China in
conjunction with the termination of the license with GTB Power Enterprise
Ltd.  Our intent, in support of the foregoing, is to accelerate
PetroAlgae’s penetration of China’s renewable energy market.




In
December 2009,PetroAlgae signed an MOU
intended to result in the license of the Company’s technology to a large
conglomerate in Indonesia. This prospect’s various businesses cover a range of
activities including palm oil, property development, leisure and agriculture.
The MOU contemplates that this group would initially build a partial license
unit to demonstrate the commercial viability of producing renewable fuels in
Indonesia with the remaining portion of the full license unit 5,000 hectares to
follow.




In
November 2009, PetroAlgae entered into an MOU with Indian Oil Corporation
Limited (“IOCL”), a Fortune 500 company and one of the largest commercial
enterprises in India, to potentially license PetroAlgae’s technology. Under the
terms of the MOU, IOCL would build a pilot facility to demonstrate the
commercial viability of producing renewable fuels from micro-crops in India.
Upon achieving success, the pilot facility would be expected to lead to the
deployment of a licensed unit for large-scale production of renewable fuels by
IOCL.




Technology
and Intellectual Property




PetroAlgae
has made significant progress in 2009 with respect to its
technology.  The Company’s biomass has been, and continues to be,
tested for suitability as a coker feedstock for existing petroleum
refineries.  Independent pilot-scale testing indicates that the biomass can
be practically processed in the coker, and that the resulting fuel yields are
sufficient to economically compete with residuum (the current feedstock used in
fuel production).




In
December 2009, PetroAlgae entered into an MOU which contemplates a strategic
partnership with Foster Wheeler USA Corporation, a global leader in energy
engineering solutions, to develop and co-market end-to-end market solutions for
the large-scale production of green renewable gasoline, diesel, and jet fuel in
existing petroleum refineries.  Foster Wheeler USA Corporation is also
providing PetroAlgae access to commercial cokers for future conversion
testing.




– 6
–




In
complement to the development in the coker application, recent and ongoing
combustion tests indicate that the biomass could be an effective renewable
drop-in offset in coal-fired power plants and boilers.




With
regard to PetroAlgae’s protein co-product,several
significant advances have also occurred during the course of the year. First,
third party laboratory testing has confirmed a favorable amino acid profile as
compared with soy protein, the current industry standard.  The amino
acid profile is an important price driver for the sale of protein. Second,
recent animal feed trials of PetroAlgae’s protein in poultry demonstrate that
digestibility is comparable to concentrated soy protein.  In addition, in
November 2009, the Company’s protein was successfully cleared by the Indonesian
Ministry of Agriculture as an approved raw material to be used and/or imported
for use as an ingredient in animal feed.




In
anticipation of this progress, PetroAlgae has implemented an aggressive strategy
to secure its intellectual property.  This strategy comprises pursuing
patent protection, intentionally guarding trade secrets and implementing
remotely-controlled security devices.  The Company’s technology and
processes include, but are not limited to optimized nutritional schemes, light
management, selective harvesting, and distinct extraction processes. In addition
to the intellectual property strategy, we have pursued trademarks designed to
protect our marketing and branding efforts. To accomplish its technical success,
PetroAlgae bolsters its own development efforts by utilizing third-party
technology contributors where appropriate.




Raw
Materials




The
company uses primarily 4 categories of raw materials in its pilot demonstration
facility, micro-crop species, fertilizer, water, and naturally available
elements such as sunlight and CO2.  The
micro-crops are natural and indigenous to the Florida region. The Company grows
the crops on site from small cultures to large quantities used to inoculate the
Company’s commercial-scale bioreactors.  Water is sourced locally and
recycled.  Fertilizer is readily available and optimized with other
readily available micronutrients that are used commonly in
agriculture.  Similar processes and use of raw materials will be
applied with each customer, applicable to their specific geographic
location.




Competition




As the
world searches for viable petroleum replacements, biofuels have attracted
significant interest. At first glance, biofuels in general appear to have very
desirable characteristics such as being renewable, sustainable and
environmentally friendly.  However, many current biofuel feedstocks do
not meet these criteria. Although many crops are renewable, many also happen to
be staples of the food supply. Thus, there is now serious competition for both
the food and fuel industries. Further compounding the problem is the fact that
yields for other plant-based crops are very low, whereas demand for fuel is very
high. Using traditional feedstocks, there is not enough available land to
satisfy the projected mandated demand. Furthermore, efforts to create additional
crop land have had a very damaging effect on the environment. For example, in
certain countries, tropical rainforests are being burned so that palm
plantations can be expanded.




The
micro-crop based solution from PetroAlgae has potential to successfully address
all of these issues. Not surprisingly, there are many new entrants in the algae
and micro-crop market, some of whom have started to build demonstration
facilities and sign preliminary agreements with potential customers. Of the
approximately 200 algae/micro-crop companies (worldwide), the overwhelming
majority are focused on the production of biodiesel/ethanol specifically, rather
than drop-in fuels that can utilize existing refining and pipeline
infrastructure.  A small subset of these companies indicates an
understanding of the drop-in-fuel approach as well as the advantage in providing
a new protein source rather than depleting the current
food-supply.  Moreover, no competitors, to our knowledge, have
demonstrated economic feasibility at commercial scale without depending on
government subsidies.




Employees




PetroAlgae
has been successful in recruiting experienced, cross-disciplined professionals
to develop the company to date. The Company employed 113 full-time individuals
as of December 31, 2009. During 2010, PetroAlgae anticipates continued growth
and is planning to appropriately build out its human infrastructure necessary to
accomplish the Company’s goals as it is successful in obtaining customer license
projects.  This includes, but is not limited to, sustaining aggressive
research and development and continuing the business efforts of developing and
supporting potential and secured licensees.




– 7
–




ITEM
      1A.
              RISK
      FACTORS




We
face a variety of risks that are substantial and inherent in our business,
including market, liquidity, credit, operational, legal and regulatory risks.
The following are some of the more important factors that could affect our
business and should be considered carefully. In addition, these statements
constitute our cautionary statements under the Private Securities Litigation
Reform Act of 1995.




Risks
Related to Our Business




We
may be unable to solve technical and engineering challenges that would make the
production of micro-crops systems non-scalable at economically attractive
metrics.




Although
we have successfully built a pilot scale demonstration facility, and have
extracted small field scale quantities of biocrude and protein for technical
validation, the fully automated commercial design and engineering of a larger
production system is still under design and cost-analysis.  The risk
exists that the completion of this process design and engineering may face
delays, failures, or unexpected costs and that we may not be able to
successfully design a scalable, cost-effective system for the growth and
harvesting of micro-crops. Even in the event that we are able to design and
engineer a complete micro-crop production system, the risk exists that once a
licensee begins to scale up and replicate such a system, unforeseen factors and
issues may arise which makes any such system uneconomical, thus causing
additional delays or outright failure.




We
face significant challenges in successfully and rapidly scaling-up a pilot
facility.




Additional
capital expenditures are required for the micro-crop production facility. We
will need to successfully scale-up the pilot facility to produce larger
quantities and measure production yields. The risk exists that failure to
successfully scale-up the demonstration facility will result in new technical
hurdles and/or delayed commercialization efforts.




We,
or our potential licensees, may be unable to deploy our system at
scale.




To date,
neither PetroAlgae nor its existing licensee has constructed a facility
utilizing PetroAlgae’s proprietary system of growing and harvesting micro-crops
on the commercial scale currently anticipated (i.e. 5000 hectares per
unit).  Therefore, it has yet to be proven whether PetroAlgae’s system
may be deployed on a full commercial scale or operate in a commercially viable
manner.  Additionally, it is unknown whether key performance metrics,
such as (by way of example) growth and production rates, may be maintained at a
full scale commercial level. While PetroAlgae intends to be actively involved in
the construction of the facilities by PetroAlgae’s licensees, and only license
its technology to potential licensees which it believes can effectively build
and operate facilities utilizing its system, such licensees may ultimately lack
the expertise or the resources, or otherwise be unable, to do so.




We
may be unable to acquire and/or retain licensees.




PetroAlgae’s
main source of revenue will be in the form of licensing fees and royalties from
its future licensees. Therefore, obtaining new licensees is critical for
PetroAlgae’s continued growth and operation. There is a risk that PetroAlgae
will be unable to acquire and/or retain licensees due to (by way of example) the
proposed licensing fees, royalties, capital expenditures or technical
feasibility of the PetroAlgae micro-crop system.  For example, the
growth from the PetroAlgae micro-crop production system and the relevant
processes and methodologies being considered for operating the system may not
yield a result that is commercially attractive to potential licensees (on a
single unit cost compared to competitive products or otherwise), or to potential
licensees in certain targeted markets. Our micro-crop production system requires
large fixed capital costs, which could render the system cost prohibitive for
potential licensees, or potential licensees in certain target markets. Failure
to secure licensees in a timely manner could have a material adverse effect on,
or cause us to cease, our continued operations.




– 8
–




Our
licensing methodology may not be accepted by potential licensees.




Our
revenue projections are based on a model for licensing agreements which may not
be accepted by our potential licensees.  Specifically, without
limitation, potential licensees may be unwilling to pay the projected licensing
fees prior to or during construction of the PetroAlgae system and/or full
commercial deployment of such system. While one licensee has agreed to do so, it
is unknown whether future licensees would be so willing, or even whether the
existing licensee will be able to fulfill its payment obligations. Therefore,
even if we are successful at attracting new licensees for our system, we may not
realize revenue from such licensees in the form or time frame we currently
anticipate. Even if licensees execute licensing agreements in the form currently
anticipated, there is no guarantee that such licensees will make payments in the
time frame to which they may agree. If potential licensees are unwilling or
unable to pay as anticipated, the projected timing of our revenues and incoming
cash flows could have a material adverse effect on, or cause us to cease, our
continued operations.




Licensees
who are or have been retained may be unable to perform their obligations to
PetroAlgae.




PetroAlgae’s
main source of revenue will be in the form of licensing fees and royalties from
its future licensees. Although PetroAlgae has signed its first licensing
agreement, PetroAlgae has yet to realize revenue from such licensee beyond the
initial payment as a master licensee.  If PetroAlgae does not begin to
realize revenues from licensee, or obtain new licensees, it may have a material
adverse effect on our revenues, our operations, or may cause us to cease
operations altogether.




The
market may not accept the products produced by our micro-crop production
system.




The
biomass produced by our micro-crop production system produces two primary
products, biocrude (feedstock) and protein.  These products will be
sold by licensees into existing markets and it is expected that oil prices and
protein prices will fluctuate. If they were to drop significantly, this may have
an effect on the licensee’s expected profitability or their ability to secure
end-customers. These products may also require industry and/or regulatory
testing in the country in which they are produced and/or sold.  This
may have an effect on the licensee’s ability to secure end customers and
potentially, PetroAlgae’s licensing fees and royalties. It has yet to be proven
that potential buyers for specific products produced by our system, including
without limitation refineries and feed companies, would ultimately purchase
these products produced by licensees of the PetroAlgae
system.  Failure to establish such a market or any significant
reduction in a licensee’s profitability may result in failure to pay PetroAlgae
the projected licensing fees and royalties. Any of these may have a material
adverse effect on our revenues and results of operations, or cause us to cease
operations altogether.




We
are dependent upon funding from our principal shareholder.




To date,
we have been dependent upon funding from PetroTech Holdings and its affiliates.
If available capital is expended, PetroTech Holdings and its affiliates may be
unable to continue to fund the Company as PetroTech Holdings and its affiliates
(including without limitation those funds currently managed by Valens Capital
Management, LLC), may not have the necessary resources
available.  Moreover, PetroTech Holdings and its affiliates may simply
be unwilling to continue to provide funding to the Company given the amount of
funds contributed to date.  In such case, the Company may need to
enter into agreements under less favorable terms, or borrow funds at higher
interest rates and under less favorable terms and conditions than historically
obtained from PetroTech Holdings and its affiliates.  There is no
certainty as to whether any new funding source would even be available. If
funding is not available when needed, or is available only on unfavorable terms,
we may be unable to implement our development plan, enhance our existing
business, complete acquisitions or otherwise take advantage of business
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on our production, revenues and results of operations,
or cause us to cease operations altogether.




We
may be unable to fully enforce our intellectual property in certain
countries.




We are
partially dependent on the enforceability of our intellectual property rights.
We expect to expand the use of our technology into countries that may not
provide adequate legal remedies in the event of a violation of the Company’s
technology. Although the Company has taken measures to secure the appropriate
patents and methods to protect trade secrets, we may not be able to fully
execute our business plan and/or may face significant competition if we fail to
adequately protect our processing technology. Lack of enforceability may lead to
significantly lower licensing fees which could have a material adverse effect on
our operations.




– 9
–




We
may not be able to recruit and retain the necessary specialist and experienced
individuals.




PetroAlgae
currently relies on key individuals in the management and operation of its
business.  In order to continue the research and design of the
PetroAlgae production system and move to larger commercial scaling and
deployment, it will be necessary for us to recruit a significant number of
additional qualified individuals including experienced management and specific
subject-matter experts. Additionally, technical support personnel will be needed
to support the licensees when we begin to commercially scale worldwide. Any
inability to retain key employees or obtain the appropriate resources through
hiring, outsourcing or through other contractors could delay or impair our
ability to achieve successful results.




We
have a history of losses and there is no guarantee we will achieve positive cash
flow.




PetroAlgae
has a history of operating losses since inception. The Company expects losses to
continue and does not expect positive cash flow from operations in the near
term. There is no guarantee that the Company will achieve cash flow positive
operations prior to expending its available capital.




We
may not be able to rapidly switch our industry-focus.




“Biofuel”
is a general term and comprises a wide variety of technologies that could be
considered “green” technologies. For the foreseeable future, we expect to be
completely focused specifically on the production and marketing of micro-crops
that produce a feedstock for the fuel industry and proteins for the animal and
human feed markets. Accordingly, an industry shift away from green feedstocks or
the emergence of new competing products may reduce the demand for our products.
The risk remains that we may be unable to shift our business focus to other
technologies/products rapidly to respond to any drastic shifts in the
industry.




If
a competitor were to achieve a technological breakthrough, our operations and
business could be negatively impacted.




There
currently exist a number of businesses that are pursuing the use of algae,
bacteria and other micro-crops and other methods for creating biomass and/or
alternative fuels. Should a competitor achieve an R&D, technological or
biological breakthrough where production costs are significantly reduced, or if
the costs of similar competing products were to fall substantially, we may have
difficulty attracting licensees. Additionally, competition from other
technologies considered “green technologies” could lessen the demand for our
products. Furthermore, competitors may have access to larger resources (capital
or otherwise), that propel their progress in the market place, resulting in a
negative impact on PetroAlgae’s business. Any of these competitive forces may
inhibit our ability to attract and/or retain licensees and there is no guarantee
that we could sustain our expected licensing fees or royalties on an on-going
basis. This could have a material adverse effect on, or cause us to cease, our
operations.




– 10
–




Minority
shareholder interest in PA LLC (which is the operating entity of PetroAlgae
Inc.) could materially affect the operation of the Company or investment in the
Company.




Our
operations are currently conducted through PA LLC. We own an approximate 81.3%
ownership interest in the membership interests of PA LLC. Other than membership
interests issued as part of our employee compensation plans, Arizona Science
& Technology Enterprises, LLC ("AZTE") owns the remaining membership
interests in PA LLC. The operating agreement of PA LLC provides AZTE with
anti-dilution protection and other minority investor rights (including consent
rights over certain corporate actions, such as mergers between PA LLC and any
other entity if PetroAlgae Inc. would not own a majority of the voting power of
the resulting entity) which could have the effect of impairing our ability to
operate the business if we do not secure the cooperation of AZTE. If this were
to happen, any investment in PetroAlgae Inc. could materially
suffer.




We
may be sued or become a party to litigation




While we
have no knowledge of any threatened litigation matters, we may be subject to
lawsuits from time to time arising in the ordinary course of our business. We
may be forced to incur costs and expenses in connection with defending ourselves
with respect to such litigation and the payment of any settlement or judgment in
connection therewith if there is an unfavorable outcome. The expense of
defending litigation may be significant. The amount of time to resolve lawsuits
is unpredictable and defending ourselves may divert management’s attention from
the day-to-day operations of our business, which could adversely affect our
business, results of operations and cash flows. In addition, an unfavorable
outcome in any such litigation could have a material adverse effect on our
business, results of operations and cash flows.




None
of the directors of the Company are independent directors.




All of
the members of the board of directors of the Company have a direct or indirect
material financial relationship with the Company and are also currently either
employed or engaged by the Company, PetroTech Holdings, or affiliates thereof.
These relationships may interfere with the ability of the directors to exercise
independent judgment with respect to the Company.




Risks
Related to Our Common Stock




The
market price of our common stock is likely to be highly volatile and subject to
wide fluctuations.




The
market price of our common stock and the market prices for securities of
biotechnology companies in general, are expected to be highly volatile. The
following factors, in addition to the other risk factors described, and the
potentially low volume of trades in our common stock, may have a significant
impact on the market price of our common stock, some of which are beyond our
control: announcements of technological innovations and discoveries by us or our
competitors; developments concerning any research and development,
manufacturing, and marketing collaborations; new products or services that we or
our competitors offer; actual or anticipated variations in operating results and
expenses; the initiation, conduct and/or outcome of intellectual property and/or
litigation matters; conditions or trends in our industry; regulatory
developments in the United States and other countries; changes in the economic
performance and/or market valuations of other biofuel companies; our
announcement, or competitors’ announcements, of significant acquisitions,
strategic partnerships, joint ventures or capital commitments; additions or
departures of key personnel; dilution caused by our issuance of additional
shares of common stock and other forms of equity securities, which we expect to
make in connection with future capital financings to fund operations and growth,
to attract and retain valuable personnel and in connection with future strategic
partnerships with other companies; changes in expectations as to our business,
prospects, financial condition, and results of operations; significant sales of
our common stock, including sales by selling stockholders and by future
investors in any future offerings we may make to raise additional capital;
changes in the accounting methods used in or otherwise affecting our industry;
changes in the valuation of similarly situated companies, both in our industry
and in other industries; fluctuations in interest rates and the availability of
capital in the capital markets; and global unrest, terrorist activities, and
economic and other external factors.




– 11
–




The stock
market in general has recently experienced relatively large price and volume
fluctuations. In particular, market prices of securities of biofuel companies
have experienced fluctuations that often have been unrelated or disproportionate
to the operating results of these companies. Continued market fluctuations could
result in extreme volatility in the price of the common stock, which could cause
a decline in the value of the common stock. Price volatility may be worse if the
trading volume of the common stock is low.




These and
other factors are largely beyond our control, and the impact of these risks,
singly or in the aggregate, may result in material adverse changes to the market
price of our common stock and our results of operations and financial
condition.




Future
sales of common stock or the issuance of securities senior to the common stock
or convertible into, or exchangeable or exercisable for, common stock could
materially adversely affect the trading price of the common stock, and our
ability to raise funds in new equity offerings.




Future
sales of substantial amounts of our common stock or other equity-related
securities in the public market or privately, or the perception that such sales
could occur, could adversely affect prevailing trading prices of our common
stock and could impair our ability to raise capital through future offerings of
equity or other equity-related securities. We can make no prediction as to the
effect, if any, that future sales of shares of common stock or equity-related
securities, or the availability of shares of common stock for future sale, will
have on the trading price of our common stock.




It
is not anticipated that there will be an active public market for the common
stock in the near term and shareholders may have to hold common stock for
an indefinite period of time.




Although
our common stock is eligible for trading on the OTCBB, there currently is not an
active public or other trading market for the common stock, and we cannot assure
that any market will develop or be sustained. It is not anticipated that there
will be an active public market for the common stock in the near term
and shareholders may have to hold their common stock for an indefinite
period of time. As of December 31, 2009, PetroTech Holdings was the record owner
of 100,000,000 shares of our common stock, which represented approximately
91.75% of the total voting power of the Company on a fully-diluted basis.
Because our common stock is expected to be thinly traded, shareholders
cannot expect to be able to liquidate their investment in case of an emergency
or if they otherwise desire to do so. It may be difficult to
for shareholders to resell a large number of your shares of common stock in
a short period of time or at or above their purchase price.




Because
PetroAlgae became public by means of an assignment into a public shell, it may
not be able to attract the attention of major brokerage firms.




There may
be risks associated with PetroAlgae becoming public through an assignment into a
public shell. Securities analysts of major brokerage firms may not provide
coverage of the company since there is no incentive for brokerage firms to
recommend the purchase of our common stock. No assurance can be given that
brokerage firms will, in the future, want to conduct any secondary offerings on
our behalf.




Because
of the concentration of voting power in our Company, the ability of a
shareholder to influence the management of the Company will be extremely
limited.




Because
of the concentration of voting power in our Company, the ability of a
shareholder to influence the management of the Company may be extremely limited.
As of December 31, 2009, total securities of the Company held by PetroTech
Holding, Valens SPV I and Valens U.S. represent approximately 95.7% of the total
voting power of the Company on a fully-diluted basis.  As a
result, the ability of a shareholder to influence the management of the
Company may be extremely limited.




– 12
–




There
are no automated systems for negotiating trades on the OTCBB and it is possible
for the price of a stock to go up or down significantly during a lapse of time
between placing a market order and its execution, which may affect trades
in our securities.




Because
there are no automated systems for negotiating trades on the OTCBB, they are
conducted via telephone. In times of heavy market volume, the limitations of
this process may result in a significant increase in the time it takes to
execute investor orders. Therefore, when investors place market orders, an order
to buy or sell a specific number of shares at the current market price, it is
possible for the price of a stock to go up or down significantly during the
lapse of time between placing a market order and its execution.




Our
stock may be considered a “penny stock” if it trades below $5.00 per
share.




As of
December 31, 2009, our common stock trades in excess of $5.00 per share, but
there can be no assurance that this price will be maintained in the future. If
the trading price of our common stock falls below $5.00 per share, trading in
our common stock will be subject to the requirements of Rule 15g-9 under the
Securities Exchange Act of 1934. Under this rule, broker-dealers who recommend
low-priced securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements. The broker-dealer
must make an individualized written suitability determination for the purchaser
and receive the purchaser’s written consent prior to the
transaction.




SEC
regulations also require additional disclosure in connection with any trades
involving a “penny stock,” including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. In addition, broker-dealers must disclose commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities they offer. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from
recommending transactions in our securities, which could severely limit the
liquidity of our securities and consequently adversely affect the market price
for our securities. In addition, few broker-dealers are likely to undertake
these compliance activities. Other risks associated with trading in penny stocks
could also be price fluctuations and the lack of a liquid market.




We
do not anticipate payment of dividends, and investors will be wholly dependent
upon the market for the common stock to realize economic benefit from their
investment.




Holders
of our common stock will only be entitled to receive those dividends that are
declared by our Board of Directors out of retained earnings. We do not expect to
have retained earnings available for declaration of dividends in the foreseeable
future. There is no assurance that such retained earnings will ever materialize
to permit payment of dividends to shareholders. Our Board of Directors will
determine future dividend policy based upon our results of operations, financial
condition, capital requirements, reserve needs and other
circumstances.




A
portion of our cash flow must be used to service our debt obligations, and we
are vulnerable to interest rate fluctuations.




Fixed
rate borrowings may have their fair market value adversely impacted from changes
in interest rates. Floating rate borrowings will lead to additional interest
expense if interest rates increase. PetroAlgae enters into loan arrangements
when needed. At December 31, 2009, the principal balance on the Company’s
outstanding long-term notes was $35.5 million, of which $17.8 million was
outstanding at a floating rate of 2% over the prime interest rate and $17.7
million was outstanding at a fixed rate of 12%.  Our borrowings are
subject to interest rate risk.  Changes in economic conditions could
result in higher interest rates, thereby increasing our interest expense and
reducing our funds available to make payments of interest and principal on the
notes and for capital investment, operations or other purposes.




– 13
–




ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS




Not
applicable.




– 14
–




ITEM
      2.
            PROPERTIES




Melbourne
Corporate Headquarters




Our
corporate headquarters are located in Melbourne, Florida. The headquarters house
the executive and administrative offices, as well as the finance, business
development, operations and information technology departments. It also includes
meeting space and PetroAlgae’s computer network and communications
infrastructure. This is a
sublease agreement that can be terminated with 30 day written
notice.


Kennedy
Space Center Space Life Sciences Lab




PetroAlgae
leases approximately 1000 square feet of laboratory and controlled-environment
space in the Kennedy Space Center Life Sciences Laboratory. The facility has
broad analysis capabilities for chemistry, molecular biology, microscopy and
microbiology. The controlled environmental chambers allow PetroAlgae to control
and manipulate environmental parameters such as climate, temperature, day/night
cycles and seasonal cycles to simulate growing conditions for research purposes
as well as to understand other climates throughout the world. PetroAlgae
benefits from access to NASA engineering, scientific and analytical expertise
available through the Kennedy Space Center Life Sciences Laboratory. This is
an annual agreement that can be terminated with 90 day written notice. The
current lease expires Sept. 30, 2010.


Gateway
Research Lab Facility




PetroAlgae
has built a state-of-the-art laboratory in Melbourne, Florida designed for
chemical analyses, culture storage, backup inoculum growth, bench top research
experiments and fast turnaround analysis of field samples. In addition, the lab
has complete analysis capabilities. This is a
three year lease agreement which expires Sept. 30, 2010.


Fellsmere
Field-Scale R&D Facility




PetroAlgae
has constructed its primary field-scale development facility for the PetroAlgae
production process in Fellsmere, Florida (approximately 40 miles from
Melbourne). The facility provides demonstration-scale live processing of all
portions of the PetroAlgae process as well as indoor and outdoor empirical
testing, and laboratory analysis. It also houses the personnel that develop, run
and maintain the facility. This is
an annual agreement with a five year renewal option. The renewal/expiration date
is July 1, 2010.


– 15
–




ITEM
      3.
            LEGAL
      PROCEEDINGS




There are
no material pending legal proceedings to which PetroAlgae is a party or any of
its property is the subject.




– 16
–




ITEM
      4.
            (REMOVED
      AND RESERVED).




– 17
–




PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Our
common stock is quoted on the OTC Bulletin Board under the symbol “PALG.” As of
March 20, 2010, we had 670 stockholders of record of our common
stock.




The
following table sets forth, for the quarters indicated, the high and low sales
prices per share of the Company’s common stock.




Sales PriceHigh
                            
                            
                            LowFiscal 2008:Third
      Quarter(1)
                            
                            $
                            1.01
                            
                            
                            $
                            0.005Fourth
      Quarter
                            
                            $
                            7.00
                            
                            
                            $
                            0.25Fiscal 2009:First
      Quarter
                            
                            $
                            10.00
                            
                            
                            $
                            2.00Second
      Quarter
                            
                            $
                            11.00
                            
                            
                            $
                            2.65Third
      Quarter
                            
                            $
                            40.00
                            
                            
                            $
                            8.00Fourth Quarter
                            
                            $
                            24.95
                            
                            
                            $
                            15.00


(1)
Our common stock was initially quoted on the OTCBB (under the symbol “VOXQ” of a
predecessor company) on July 25, 2008.




On March
29, 2010, the last reported sales price for the Company’s common stock on the
OTC Bulletin Board was $22.50 per share.




Dividends




The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. We have never
declared or paid cash dividends. Our board of directors does not anticipate
declaring a dividend in the foreseeable future.




– 18
–




Equity
Compensation Plan




The
following table summarizes information as of December 31, 2009, relating to the
Company’s equity compensation plan pursuant to which grants of options,
restricted stock, or other rights to acquire shares may be granted from time to
time.




Plan Category
                    
                    Number of securitiesto
                      be issued upon
                      exercise price of
                      outstanding options,
                      warrants and rights (a)
                    
                    
                    Weighted-average
                      exercise price of
                      outstanding options,
                      warrants and rights (b)
                    
                    
                    Number of securities
                      remaining available
                      for future issuance
                      under equity
                      compensation plans
                      (excluding securities
                      reflected in column
                      (a) (c)Equity
      Compensation plans approved by security holders(1)
                    
                    
                    1,117,500
                    
                    
                    $
                    8.48
                    
                    
                    
                    2,882,500Equity
      Compensation plans not approved by security holders
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    
                    1,117,500
                    
                    
                    $
                    8.48
                    
                    
                    
                    2,882,500





(1)
Represents the Petroalgae Inc. 2009 Equity Compensation Plan.




Transfer
Agent and Registrar




The
transfer agent and registrar for our common stock is Island Stock Transfer, 100
Second Avenue, South, Suite 104N, St. Petersburg, Florida 33701, telephone (727)
289-0010, facsimile (727) 289-0069.




Issuer
Repurchases




There
were no issuer repurchases by the registrant or any affiliate purchaser during
the fiscal year ended December 31, 2009.




– 19
–




ITEM
      6.
            SELECTED
      FINANCIAL DATA








– 20
–




ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




The
following discussion contains forward-looking statements that involve numerous
risks and uncertainties, such as statements of our plans, objectives,
expectations, and intentions. Our actual results could differ materially from
those anticipated in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed in this report under
“Risk Factors,” as well as those discussed elsewhere in this report. You should
read the following discussion and analysis in conjunction with the Company’s
financial statements and related notes, each included elsewhere in this
report.




Overview




PetroAlgae
is a development stage company which is demonstrating, and commercializing for
license, new technologies to grow and harvest micro-crops that produce renewable
feedstocks for the petroleum industry and protein for the feed/food industries.
This is intended to result in fuels that are functionally interchangeable to
petroleum based and other transportation fuels. The corporate strategy is to
select the most suitable microorganism for each specific location (indigenous to
the region) and application, and then apply PetroAlgae’s distinct proprietary
processes to scale its growth rate (productivity) from that of a microorganism
to that of a high output-producing micro-crop. Micro-crops include algae,
diatoms, micro-angiosperms, cyanobacters and other small fuel and food-producing
organisms with extremely rapid growth potential.




Through
third-party testing, PetroAlgae has received encouraging, positive results for
the feedstock when used in test-cokers and when co-fired with coal directly as a
fuel source.  These results have led to key collaborations with
industry expert FosterWheeler.We look forward to continued development with
Foster Wheeler and anticipate future collaborations with other key industry
entities.




Along
with the feedstock for the petroleum industry, a complementary co-product
produced from these micro-crops, is a high-quality protein. The proteins
has been, and continues to be tested as an ingredient in animal feed with
encouraging, positive results in composition, purity and suitability as an
animal feed ingredient.  In fact, the Company has received its first
clearance (in Indonesia), to use the protein product for animal feed. We
anticipate more clearances to follow and will be seeking top-tier strategic
alliances in this market.




The
Company completed its pilot demonstration system in Florida. This site serves as
a pilot, with commercial-scale bioreactors that demonstrate end-to-end
processing from biomass growth, harvesting, dewatering, and through the
processing and drying of both protein and biomass feedstock from which
transportation fuels could then be produced. Utilizing commercial-scale
bioreactors, this site generates significant quantities of biomass, along with
representative products under measured production disciplines. These materials
are used for testing and customer samples, which management expects will provide
analytical results to further support the value proposition to our potential
license partners.




As the
Company is successful in developing these technologies, the Company will
continue to sell licenses for these technologies to partners in specific
geographic regions, for a specified area of production. The sales cycle for
these units can take many months while the license partners evaluate the
effectiveness and economics of applying this technology to their region. The
Company will assist in the deployment of this technology to licensees with
modular bioreactor systems that can be built and operated cost-effectively on a
very large commercial scale. Sizes of these licensed units will vary, but is
expected to be approximately 5,000 hectares (12,355 acres) per
“unit”.




The
Company previously announced, in March 2009, its first license agreement with
GTB Power Enterprise Ltd. for multiple system deployments in China. In December
2009, PetroAlgae entered into a strategic MOU with CECIC Chongqing Industry Co.,
Ltd (CECIC-CQ), an operating subsidiary of the China Energy Conservation
Investment Corporation (CECIC).  This MOU contemplates that the Master
License Agreement for China held by GTB Power Enterprise Ltd. would be
transferred to CECIC, or that CECIC would otherwise become PetroAlgae’s
exclusive licensee in China in conjunction with the termination of the license
agreement with GTB Power Enterprise Ltd.. Our intent, in support of the
foregoing, is to accelerate PetroAlgae’s penetration of China’s renewable energy
market.




– 21
–




At the
end of 2009 we entered into a Master License Agreement with Green Science Energy
LLC for the use of our proprietary technology to produce biofuels in Egypt. This
agreement generated $4 million in cash flow for PetroAlgae.
  In the
coming year, it is the goal of management to continue to sign multiple MOUs from
the current business development pipeline and convert a portion of these into
signed contracts. As contracts are signed, it is expected that initial pilot
deployments will immediately follow.
  PetroAlgae
has incurred losses since inception of operations on June 22, 2006 and has an
accumulated deficit of $58,860,269 as of December 31, 2009. PetroAlgae’s losses
have resulted principally from its continued research and development expenses
and construction of a multi-acre pilot demonstration system.
  As a
development stage company, we expect continued progress commercializing our
proprietary technologies and that in 2010 we will continue to realize early
license fees from customers. While we strive to maintain proper cost and
spending controls, our expenditures through the fourth quarter of 2009 reflect
the operation of the demonstration pilot system and increases in marketing and
business development expenses as the Company continues to prepare for customer
deployment.  It is management’s expectation that operating expenses
will increase modestly in 2010 to accommodate growing activity in business
development, commercial deployment and establishing infrastructure.
  Results
of Operations
  In
December 2009, PetroAlgae received its initial receipt of customer licensee
fees, however the recognition of these fees as revenues for the Company are
expected to begin in 2010. In general, the Company expects to record and
recognize revenue when persuasive evidence of an arrangement exists, services
have been rendered or product delivery has occurred.
  Twelve
Months Ended December 31, 2009 Compared to Twelve Months Ended December 31,
2008
  Total Costs and Expenses
increased $20.0 million (or 118%) primarily due to an increase in personnel
costs, consulting costs, and an increase in activity of research and development
as the Company continues to grow its operations.
  Research and Development
Expenses. Total research and development expenses increased $ 10.2
million (or 94%) to $21 million for the twelve months ended December 31, 2009,
from $10.9 million in the comparable period in 2008. The development costs
include the research and experimentation of the various system components and
for 2009 the design and construction of the commercial scaled pilot system for
customer demonstration. During the period from inception to August 1, 2008, a
portion of the Company’s research and development activities were provided by XL
TechGroup for support services and recorded as related party expenses separate
from direct and third party expenses. The portion of related party research and
development expenses were NIL and $468,000 for the periods ending December
31, 2009 and 2008, respectively.
  General and Administrative
Expenses. Total general and administrative expenses increased $4.5
million (or 94%) to $9.3 million for the twelve months ended December 31, 2009
from $4.8 million in the comparable period in 2008. General and administration
expenses include the Company’s business development, information technology, and
intellectual property management. During the period from inception to August 1,
2008, a portion of the Company’s general and administration activities were
provided by XL TechGroup for support services and recorded as related party
expenses separate from direct and third party expenses. The portion of related
party general and administration expenses were NIL and $1.7 million for the
periods ending December 31, 2009 and 2008, respectively.
  – 22
–
  Depreciation. Depreciation
expense increased $870,000 (or 323%) to $1.14 million for the twelve months
ended December 31, 2009 from $269,000 for the comparable period in 2008. The
increase was due to the addition of more laboratory equipment, computer
equipment, furniture, and leasehold improvements equipment during the twelve
months of 2009 compared with the comparable period of 2008.
  Interest Expense. Interest
expense on PetroAlgae’s debt outstanding under its note with PetroAlgae Inc
(PetroTech Holdings Corp. assumed the note from XL TechGroup in August 2008, and
PetroAlgae Inc assumed the note from PetroTech Holdings Corp in December 2008)
increased to $2.6 million (or 117%) for the twelve months ended December 31,
2009 from $1.2 million for the comparable period in 2008.
  Liquidity
and Capital Resources
  At
December 31, 2009 PetroAlgae had $4.7 million in cash and cash
equivalents.
  Net cash
used in operating activities was $25 million and $11.8 million in 2009 and 2008,
respectively. This was primarily attributed to expenditures used to fund
PetroAlgae’s research and product development activities and building its
operational and business development efforts.
  Net cash
used in investing activities, purchase of capital assets was $2.2 million and
$.8 million for the years ended December 31, 2009 and 2008, respectively. The
fluctuations from period to period are due to the continued growth and
expansion, primarily in the construction of its demonstration
facility.
  Net cash
provided by financing activities was $21.5 million in 2009, and $22.9 million in
2008 which consisted of advances from our principal lender and the sale of
common shares for cash.
  PetroAlgae’s
contractual payment obligations as of December 31, 2009 are as
follows:
  Total
                      
                      
                      Less than
                        1 year
                      
                      
                      1-3 years
                      
                      
                      3-5 years
                      
                      
                      More than
                        5 yearsOperating
      lease for facilities
                      
                      $
                      135,552
                      
                      
                      $
                      135,552
                      
                      
                      $
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      $
                      135,552
                      
                      
                      $
                      135,552
                      
                      
                      $
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
  PetroAlgae
has primarily financed its operations through loans or the sale of equity
securities from its principal shareholder that have resulted in aggregate
cumulative proceeds of approximately $35.5 million in debt and $14.5
million in equity, respectively.
  We expect
to continue to incur modest losses in 2010. The amount and timing of our
future losses are highly uncertain. Our ability to achieve and thereafter
sustain profitability will be dependent upon, among other things, entering into
partner license agreements, and receiving milestone payments from such partner
license agreements.
  We will
require substantial additional capital in order to continue our development and
product commercialization. While we believe that the proceeds from the recent
investments, combined with current capital resources and anticipated cash flows
from licensing activities, may not be sufficient to meet our capital and
operating requirements for the near term, we cannot assure you that we will not
require additional necessary financing. Our funding requirements may
significantly increase at any time due to technological advances or competition
from other companies. Our future capital requirements will also depend on
numerous other factors, including scientific progress in our research and
development programs, successful completion of our demonstration system, our
ability to attract advance licensing fees from customers, additional personnel
costs, and the costs in filing and prosecuting patent applications and enforcing
patent claims. We cannot assure you that adequate funding will be available to
us or, if available, that it will be available on acceptable terms. Any
shortfall in funding could result in our having to curtail our research and
development efforts, and cause us substantial difficulty in continuing to
operate as a going concern.
  – 23
–
  PetroAlgae
Inc. has never paid or declared dividends on its capital stock.
  Critical
Accounting Policies and Management Estimates
  The SEC
defines critical accounting policies as those that are, in management’s view,
important to the portrayal of our financial condition and results of operations
and demanding of management’s judgment. Our discussion and analysis of financial
condition and results of operation are based on PetroAlgae’ consolidated
financial statements, which have been prepared in, accordance with U.S.
generally accepted accounting principles, or GAAP. The preparation of these
financial statements requires PetroAlgae to make estimates on experience and on
various assumptions that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from those estimates.
  PetroAlgae’s
critical accounting polices include:
  Revenue
Recognition
  In
general, the Company records revenue when persuasive evidence of an arrangement
exists, services have been rendered or product delivery has occurred, the sales
price to the customer is fixed or determinable, and collectability is reasonably
assured. The following policies reflect specific criteria for the various
revenues streams of the Company:
  Revenue
is recognized at the time the product is delivered. Provision for sales returns
will be estimated based on the Company’s historical return experience. Revenue
will be presented net of returns.
  Cash
and Cash Equivalents and Cash Concentrations
  The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company at December 31, 2009,
has approximately $4,600,000 on deposit at a single financial
institution.
  Fair
Value of Financial Instruments
  Fair
value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31, 2009 and 2008.
The respective carrying value of certain on-balance-sheet financial instruments,
approximate their fair values. These financial instruments include cash,
accounts payable, accrued expenses, notes payable and due to affiliates. Fair
values were assumed to approximate carrying values for these financial
instruments because they are short term in nature and their carrying amounts
approximate fair values or they are receivable or payable on
demand.
  The
carrying value of the Company’s note payable approximated its fair value based
on the current market conditions for similar debt instruments.
  Property
and Equipment
  Property
and equipment is recorded at cost. Expenditures for major improvements and
additions are added to property and equipment, while replacements, maintenance
and repairs which do not extend the useful lives are expensed.
  – 24
–
  Long
Lived Assets
  The
carrying value of long-lived assets is reviewed on a regular basis for the
existence of facts and circumstances that suggest impairment. Should there be an
impairment the Company measures the amount of the impairment based on the amount
that the carrying value of the impaired asset exceeds the discounted cash flows
expected to result from the use and eventual disposal from the impaired assets.
There were no impairments in 2009 or 2008.
  Income
Taxes
  The
Company follows ASC 740 Income Taxes for recording the provision for income
taxes. Deferred tax assets and liabilities are computed based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability each
period. If available evidence suggests that it is more likely than not that some
portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of
change.
  PA LLC is
organized as a limited liability company under the state law of Delaware. As a
limited liability company that has elected to be taxed as a partnership, the
Company’s earnings pass through to the members and are taxed at the member
level. Accordingly, no income tax provision has been included in these financial
statements for the operations related to PA LLC.
  Equity-Based
Compensation
 
 The
Company accounts for stock based compensation in accordance with ASC 718 Stock
Compensation. This Statement requires that the cost resulting from all
share-based transactions be recorded in the financial statements. The Statement
establishes fair value as the measurement objective in accounting for
share-basedpayment arrangements and requires all entities to apply a
fair-value-based measurement in accounting for share-based payment transactions
with employees. The Statement also establishes fair value as the measurement
objective for transactions in which an entity acquires goods or services from
non-employees in share based payment transactions.
  Recent
Accounting Pronouncements
  Adoption
of New Accounting Standards
  Accounting
Standards Codification
  In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (the “Codification”). This standard replaces SFAS
No. 162, The Hierarchy of Generally Accepted Accounting Principles, and
establishes only two levels of U.S. generally accepted accounting principles
(“GAAP”), authoritative and nonauthoritative. The FASB ASC has become the source
of authoritative, nongovernmental GAAP, except for rules and interpretive
releases of the SEC, which are sources of authoritative GAAP for SEC
registrants. All other nongrandfathered, non-SEC accounting literature not
included in the Codification will become nonauthoritative. This standard is
effective for financial statements for interim or annual reporting periods
ending after September 15, 2009. The adoption of the Codification changed the
Company’s references to GAAP accounting standards but did not impact the
Company’s results of operations, financial position or liquidity.
  Participating
Securities Granted in Share-Based Transactions
  Effective
January 1, 2009, the Company adopted a new accounting standard included in ASC
260, Earnings Per Share (formerly FASB Staff Position (“FSP”) Emerging Issues
Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities).  The
new guidance clarifies that non-vested share-based payment awards that entitle
their holders to receive nonforfeitable dividends or dividend equivalents before
vesting should be considered participating securities and included in basic
earnings per share. The Company’s adoption of the new accounting standard did
not have a material effect on previously issued or current earnings per
share.
  – 25
–
  Business
Combinations and Noncontrolling Interests
  Effective
January 1, 2009, the Company adopted a new accounting standard included in ASC
805, Business Combinations (formerly SFAS No. 141(R), Business
Combinations).  The new standard applies to all transactions or other
events in which an entity obtains control of one or more businesses.
Additionally, the new standard requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement date for all assets acquired and liabilities assumed; and requires
the acquirer to disclose additional information needed to evaluate and
understand the nature and financial effect of the business combination. The
Company’s adoption of the new accounting standard did not have a material effect
on the Company’s consolidated financial statements.
  Effective
January 1, 2009, the Company adopted a new accounting standard included in ASC
810, Consolidations (formerly SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements).  The new accounting standard establishes
accounting and reporting standards for the noncontrolling interest (or minority
interests) in a subsidiary and for the deconsolidation of a subsidiary by
requiring all noncontrolling interests in subsidiaries be reported in the same
way, as equity in the consolidated financial statements. As such, this guidance
has eliminated the diversity in accounting for transactions between an entity
and noncontrolling interests by requiring they be treated as equity
transactions. The Company’s adoption of this new accounting standard did not
have a material effect on the Company’s consolidated financial
statements.
  Fair
Value Measurement and Disclosure
  Effective
January 1, 2009, the Company adopted a new accounting standard included in ASC
820, Fair Value Measurements and Disclosures (“ASC 820”) (formerly FASB FSP No
157-2, Effective Date of FASB Statement No. 157), which delayed the effective
date for disclosing all non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value on a recurring
basis (at least annually). This standard did not have a material impact on the
Company’s consolidated financial statements.
  In April
2009, the FASB issued new guidance for determining when a transaction is not
orderly and for estimating fair value when there has been a significant decrease
in the volume and level of activity for an asset or liability. The new guidance,
which is now part of ASC 820 (formerly FSP 157-4,  Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly ),
requires disclosure of the inputs and valuation techniques used, as well as any
changes in valuation techniques and inputs used during the period, to measure
fair value in interim and annual periods. In addition, the presentation of the
fair value hierarchy is required to be presented by major security type as
described in ASC 320, Investments — Debt and Equity Securities . The provisions
of the new standard were effective for interim periods ending after June 15,
2009. The adoption of the new standard on April 1, 2009 did not have a material
on the Company’s consolidated financial statements.
  In April
2009, the Company adopted a new accounting standard included in ASC 820,
(formerly FSP 107-1 and Accounting Principles Board (“APB”) 28-1, Interim
Disclosures about Fair Value of Financial Instruments).  The new
standard requires disclosures of the fair value of financial instruments for
interim reporting periods of publicly traded companies in addition to the annual
disclosure required at year-end. The provisions of the new standard were
effective for the interim periods ending after June 15, 2009. The Company’s
adoption of this new accounting standard did not have a material effect on the
Company’s consolidated financial statements.
  In August
2009, the FASB issued new guidance relating to the accounting for the fair value
measurement of liabilities. The new guidance, which is now part of ASC 820,
provides clarification that in certain circumstances in which a quoted price in
an active market for the identical liability is not available, a company is
required to measure fair value using one or more of the following valuation
techniques: the quoted price of the identical liability when traded as an asset,
the quoted prices for similar liabilities or similar liabilities when traded as
assets, or another valuation technique that is consistent with the principles of
fair value measurements. The new guidance clarifies that a company is not
required to include an adjustment for restrictions that prevent the transfer of
the liability and if an adjustment is applied to the quoted price used in a
valuation technique, the result is a Level 2 or 3 fair value measurement. The
new guidance is effective for interim and annual periods beginning after August
27, 2009. The Company’s adoption of the new guidance did not have a material
effect on the Company’s consolidated financial statements.
  – 26
–
  Derivative
Instruments and Hedging Activities
  Effective
January 1, 2009, the Company adopted a new accounting standard included in ASC
815, Derivatives and Hedging (SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No.133). The new
accounting standard requires enhanced disclosures about an entity’s derivative
and hedging activities and is effective for fiscal years and interim periods
beginning after November 15, 2008. Since the new accounting standard only
required additional disclosure, the adoption did not impact the Company’s
consolidated financial statements.
  Other-Than-Temporary
Impairments
  In April
2009, the FASB issued new guidance for the accounting for other-than-temporary
impairments. Under the new guidance, which is part of ASC 320, Investments —
Debt and Equity Securities (formerly FSP 115-2 and 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments), and other-than-temporary
impairment is recognized when an entity has the intent to sell a debt security
or when it is more likely than not that an entity will be required to sell the
debt security before its anticipated recovery in value.  The new
guidance does not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities and is effective for
interim and annual reporting periods ending after June 15, 2009. The Company’s
adoption of the new guidance did not have a material effect on the Company’s
consolidated financial statements.
  Subsequent
Events
  In May
2009, the FASB issued new guidance for subsequent events. The new guidance,
which is part of ASC 855, Subsequent Events  (formerly SFAS No.
165,  Subsequent Events)  is intended to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. Specifically, this guidance sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The new
guidance is effective for fiscal years and interim periods ended after June 15,
2009 and will be applied prospectively. The Company’s adoption of the new
guidance did not have a material effect on the Company’s consolidated financial
statements. The Company evaluated subsequent events through the date the
accompanying financial statements were issued, which was March 30,
2010.
  Accounting
Standards Not Yet Effective
  Accounting
for the Transfers of Financial Assets
  In June
2009, the FASB issued new guidance relating to the accounting for transfers of
financial assets. The new guidance, which was issued as SFAS No. 166, Accounting
for Transfers of Financial Assets,  an amendment to SFAS
No.  140, was adopted into Codification in December 2009 through the
issuance of Accounting Standards Updated (“ASU”) 2009-16. The new standard
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. The new guidance is effective for fiscal years beginning after November
15, 2009. The Company will adopt the new guidance in 2010 and is evaluating the
impact it will have to the Company’s consolidated financial
statements.
  Accounting
for Variable Interest Entities
  In June
2009, the FASB issued revised guidance on the accounting for variable interest
entities. The revised guidance, which was issued as SFAS No. 167, Amending FASB
Interpretation No. 46(R), was adopted into Codification in December 2009 through
the issuance of ASU 2009-17. The revised guidance amends FASB Interpretation No.
46(R), Consolidation of Variable Interest Entities, in determining whether an
enterprise has a controlling financial interest in a variable interest entity.
This determination identifies the primary beneficiary of a variable interest
entity as the enterprise that has both the power to direct the activities of a
variable interest entity that most significantly impacts the entity’s economic
performance, and the obligation to absorb losses or the right to receive
benefits of the entity that could potentially be significant to the variable
interest entity. The revised guidance requires ongoing reassessments of whether
an enterprise is the primary beneficiary and eliminates the quantitative
approach previously required for determining the primary beneficiary. The
Company does not expect that the provisions of the new guidance will have a
material effect on its consolidated financial statements.
  Revenue
Recognition
  In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue
Arrangements. The new standard changes the requirements for establishing
separate units of accounting in a multiple element arrangement and requires the
allocation of arrangement consideration to each deliverable based on the
relative selling price. The selling price for each deliverable is based on
vendor-specific objective evidence (“VSOE”) if available, third-party evidence
if VSOE is not available, or estimated selling price if neither VSOE or
third-party evidence is available. ASU 2009-13 is effective for revenue
arrangements entered into in fiscal years beginning on or after June 15,
2010. The Company does not expect that the provisions of the new guidance will
have a material effect on its consolidated financial statements.
  – 27
–
  ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest
Rate Risk
  Our
exposure to interest rate risk is related to our borrowings. Fixed rate
borrowings may have their fair market value adversely impacted from changes in
interest rates. Floating rate borrowings will lead to additional interest
expense if interest rates increase.
  PetroAlgae
enters into loan arrangements when needed. At December 31, 2009, the principal
balance on the Company’s outstanding long-term  note  was
$35.5 million, of which $17.8  million was outstanding at a floating
rate of 2% over the prime interest rate and $17.7 million was outstanding at a
fixed rate of 12%.
  Our
borrowings are subject to interest rate risk. Changes in the prime interest rate
will have an affect on interest rate expense. The trend in the prime interest
rate has recently been depressed with no indications of a meaningful reversal.
Our financial instrument holdings have been analyzed to determine their
sensitivity to interest rate change. In this sensitivity analysis, we used a two
hundred and fifty basis point parallel shift in the interest rate curve for all
maturities and for all instruments; all other factors were held constant.
However, if there were a two hundred and fifty basis point increase in interest
rates, the expected adverse impact to our financial statements would be
immaterial.
  Exchange
Rate Risk
  We are
currently not subject to foreign exchange risk as a result of exposures to
changes in currency exchange rates.
  Commodity
Price Risk
  The
result of deploying our technology, once commercialized, will be the creation of
feedstock for the fuel and animal feed markets which may directly or indirectly
compete with existing commodities. Biodiesel fuel is a commodity whose price is
determined based on in part the price of petroleum diesel, world demand, supply
and other factors, all of which are beyond our control. We expect that petroleum
prices will continue to fluctuate in the future. Significant fluctuations in
these commodity prices could impact the economic profitability of our products
and services. However, given that we are still at the development stage, we are
currently not subject to commodity price risk.
  – 28
–
  ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Shareholders
and Board of Directors
  We have
audited the accompanying consolidated balance sheets of PetroAlgae Inc. (a
Development Stage Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ (deficit) equity and cash
flows for the years ended December 31, 2009, and 2008, and the period from
inception (September 22, 2006) to December 31, 2009. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion the financial statements referred to above present fairly, in all
material respects, the financial position of PetroAlgae Inc. (a Development
Stage Company) as of December 31, 2009 and 2008, and the results of operations
for the years ended December 31, 2009, and 2008, and the period from inception
(September 22, 2006) to December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.
  The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has incurred significant losses from
operations and has a working capital deficit and no revenue generating
operations. These factors raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to this matter are
also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
 Kingery
      & Crouse PA/s/ Kingery
      & Crouse PACertified
      Public AccountantsTampa,
      FloridaMarch
      30, 2010
  – 29
–
  PetroAlgae
Inc.
 (A
Development Stage Company)
 Consolidated
Balance Sheets
  December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008ASSETSCurrent
      assets:Cash
                  
                  $
                  4,679,302
                  
                  
                  $
                  10,416,823Prepaid
      expenses
                  
                  
                  129,333
                  
                  
                  
                  110,277Total
      current assets
                  
                  
                  4,808,635
                  
                  
                  
                  10,527,100Property
      and equipment
                  
                  
                  3,653,225
                  
                  
                  
                  1,390,712Accumulated
      depreciation
                  
                  
                  (1,416,350
                  )
                  
                  
                  (324,507
                  )Net
      property and equipment
                  
                  
                  2,236,875
                  
                  
                  
                  1,066,205Long-term
      deposits
                  
                  
                  5,200
                  
                  
                  
                  5,000Total
      assets
                  
                  $
                  7,050,710
                  
                  
                  $
                  11,598,305Liabilities
      and Stockholders' (Deficit)Current
      liabilities:Accounts
      payable
                  
                  $
                  536,328
                  
                  
                  $
                  1,043,285Accrued
      expenses
                  
                  
                  1,617,191
                  
                  
                  
                  1,786,341Accrued
      expenses - related party
                  
                  
                  2,144,840
                  
                  
                  
                  349,779Note
      payable - related party
                  
                  
                  -
                  
                  
                  
                  7,639,601Stock
      price quaranty
                  
                  
                  7,500,000
                  
                  
                  
                  -Deferred
      revenue
                  
                  
                  2,800,000
                  
                  
                  
                  -Total
      current liabilities
                  
                  
                  14,598,359
                  
                  
                  
                  10,819,006Note
      payable - related party
                  
                  
                  35,489,096
                  
                  
                  
                  16,921,243Other
      long term liabilities
                  
                  
                  758,917
                  
                  
                  
                  758,917Total
      liabilities
                  
                  
                  50,846,372
                  
                  
                  
                  28,499,166Stockholders
      (deficit):Preferred
      stock - $.001 par value, 25,000,000 shares authorized, no shares
      issued or outstanding
                  
                  
                  -
                  
                  
                  
                  -Series
      B - 10,000,000 shares authorizedUndesignated
      - 15,000,000 shares authorizedCommon
      stock - $.001 par value, 300,000,000 shares authorized 106,229,356
      and 104,274,189 shares issued and outstanding
                  
                  
                  106,229
                  
                  
                  
                  104,274Paid
      in capital
                  
                  
                  22,133,497
                  
                  
                  
                  13,466,546Deferred
      compensation
                  
                  
                  (1,531,250
                  )
                  
                  
                  (3,106,250
                  )Deficit
      accumulated during the development stage
                  
                  
                  (58,860,269
                  )
                  
                  
                  (27,365,431
                  )(38,151,793
                  )
                  
                  
                  (16,900,861
                  )Noncontrolling
      interest
                  
                  
                  (5,643,869
                  )
                  
                  
                  -Total
      stockholders' (deficit) equity
                  
                  
                  (43,795,662
                  )
                  
                  
                  (16,900,861
                  )Total
      liabilities and stockholders' (deficit) equity
                  
                  $
                  7,050,710
                  
                  
                  $
                  11,598,305
 
 See the
accompanying notes to the financial statements.
  – 30
–
  PetroAlgae
Inc.
 (A
Development Stage Company)
 Consolidated
Statements of Operations
  For
      thePeriod
      FromSeptember
      22,2006(Inception)Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  ThroughDecember
      31,
                  
                  
                  December
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008
                  
                  
                  2009Revenue
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Costs
      and expenses:General
      and administrative
                  
                  
                  9,293,799
                  
                  
                  
                  3,083,555
                  
                  
                  
                  12,780,565General
      and administrative - related party
                  
                  
                  -
                  
                  
                  
                  1,699,047
                  
                  
                  
                  3,023,739Research
      and development
                  
                  
                  21,052,390
                  
                  
                  
                  10,399,670
                  
                  
                  
                  38,833,254Research
      and development - related party
                  
                  
                  -
                  
                  
                  
                  467,607
                  
                  
                  
                  1,130,975Purchased
      research and development
                  
                  
                  3,018,144
                  
                  
                  
                  -
                  
                  
                  
                  3,018,144Interest
      expense - related party
                  
                  
                  2,636,642
                  
                  
                  
                  1,248,039
                  
                  
                  
                  4,328,153Depreciation
      expense
                  
                  
                  1,137,733
                  
                  
                  
                  268,691
                  
                  
                  
                  1,462,240Total
      costs and expenses
                  
                  
                  37,138,708
                  
                  
                  
                  17,166,609
                  
                  
                  
                  64,577,070Net
      loss before non controlling interest
                  
                  
                  (37,138,708
                  )
                  
                  
                  (17,166,609
                  )
                  
                  
                  (64,577,070
                  )Non-controlling
      interest
                  
                  
                  5,643,869
                  
                  
                  
                  40,211
                  
                  
                  
                  5,716,800Net
      loss
                  
                  $
                  (31,494,839
                  )
                  
                  $
                  (17,126,398
                  )
                  
                  $
                  (58,860,270
                  )Basic
      and diluted common shares outstanding
                  
                  
                  104,840,703
                  
                  
                  
                  100,362,021Basic
      and diluted loss per share
                  
                  $
                  (0.30
                  )
                  
                  $
                  (0.17
                  )
 
 See the
accompanying notes to the financial statements.
  – 31
–
  PetroAlgae
Inc.
 (A
Development Stage Company)
 Consolidated
Statement of Changes in Stockholders' (Deficit)Period From Inception
(September 22, 2006) to December 31, 2009
 
 DeficitAccumulatedDuring
      theCommon
      Stock
                        
                        
                        
                        
                        
                        Paid
      in
                        
                        
                        Deferred
                        
                        
                        Non
      Controlling
                        
                        
                        DevelopmentShares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Compensation
                        
                        
                        Interest
                        
                        
                        Stage
                        
                        
                        TotalShares
      issued at inception for cash
                        
                        
                        100,000,000
                        
                        
                        $
                        100,000
                        
                        
                        $
                        388,532
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        488,532Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,410,724
                        )
                        
                        
                        (1,410,724
                        )Balance
      - December 31, 2006
                        
                        
                        100,000,000
                        
                        
                        
                        100,000
                        
                        
                        
                        388,532
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,410,724
                        )
                        
                        
                        (922,192
                        )Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (8,828,309
                        )
                        
                        
                        (8,828,309
                        )Balance
      - December 31, 2007
                        
                        
                        100,000,000
                        
                        
                        
                        100,000
                        
                        
                        
                        388,532
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (10,239,033
                        )
                        
                        
                        (9,750,501
                        )Recapitalization
                        
                        
                        99,586
                        
                        
                        
                        99
                        
                        
                        
                        (67,811
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (67,712
                        )Shares
      issued for cash at $3.15 per share
                        
                        
                        3,174,603
                        
                        
                        
                        3,175
                        
                        
                        
                        9,996,825
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,000,000Shares
      issued for deferred services at $3.15 per share
                        
                        
                        1,000,000
                        
                        
                        
                        1,000
                        
                        
                        
                        3,149,000
                        
                        
                        
                        (3,150,000
                        )
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        -Amortization
      of deferred services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        43,750
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        43,750Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (17,126,398
                        )
                        
                        
                        (17,126,398
                        )Balance
      - December 31, 2008
                        
                        
                        104,274,189
                        
                        
                        
                        104,274
                        
                        
                        
                        13,466,546
                        
                        
                        
                        (3,106,250
                        )
                        
                        
                        -
                        
                        
                        
                        (27,365,431
                        )
                        
                        
                        (16,900,861
                        )Shares
      issued for services at $6.62 per share
                        
                        
                        151,057
                        
                        
                        
                        151
                        
                        
                        
                        999,849
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,000,000Shares
      issued for cash at $8.00 per share
                        
                        
                        1,437,500
                        
                        
                        
                        1,438
                        
                        
                        
                        11,498,562
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        11,500,000Shares
      issued for services at $8.00 per share
                        
                        
                        9,467
                        
                        
                        
                        9
                        
                        
                        
                        51,397
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        51,406Shares
      issued for purchased research and development at $8.00 per
      share
                        
                        
                        357,143
                        
                        
                        
                        357
                        
                        
                        
                        2,856,787
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,857,144Amortization
      of deferred services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,575,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,575,000Fair
      value of options and warrants issued
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        760,356
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        760,356Derivative
      liability
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,500,000
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,500,000
                        )Loss
      attributable to non controlling interest
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,643,869
                        )
                        
                        
                        -
                        
                        
                        
                        (5,643,869
                        )Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (31,494,838
                        )
                        
                        
                        (31,494,838
                        )Balance
      - December 31, 2009
                        
                        
                        106,229,356
                        
                        
                        $
                        106,229
                        
                        
                        $
                        22,133,497
                        
                        
                        $
                        (1,531,250
                        )
                        
                        $
                        (5,643,869
                        )
                        
                        $
                        (58,860,269
                        )
                        
                        $
                        (43,795,662
                        )
 
 See the
accompanying notes to the financial statements.





– 32
–





PetroAlgae
Inc.


(A
Development Stage Company)


Consolidated
Statements of Cash Flows




For
      thePeriod
      FromSeptember 22,2006(Inception)Year
      Ended
                
                
                Year
      Ended
                
                
                ThroughDecember
      31,
                
                
                December
      31,
                
                
                December
      31,2009
                
                
                2008
                
                
                2009Cash
      flows from operating activities:Net
      loss
                
                $
                (31,494,838
                )
                
                $
                (17,126,398
                )
                
                $
                (58,860,269
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Loss
      attributable to non controlling interest
                
                
                (5,643,869
                )
                
                
                -
                
                
                
                (5,643,869
                )Amortization
      of license agreement
                
                
                -
                
                
                
                -
                
                
                
                758,917Common
      shares issued for services
                
                
                3,225,762
                
                
                
                43,750
                
                
                
                3,269,512Common
      shares issued for purchased research and development
                
                
                3,018,144
                
                
                
                -
                
                
                
                3,018,144Expenses
      paid and interest added to note payable - related party
                
                
                2,723,313
                
                
                
                2,558,191
                
                
                
                9,089,556Depreciation
                
                
                1,137,733
                
                
                
                268,691
                
                
                
                1,462,240Net
      liabilities related to recapitalization
                
                
                -
                
                
                
                (67,712
                )
                
                
                (67,712
                )(Increase)
      in prepaid expenses
                
                
                (19,056
                )
                
                
                (103,933
                )
                
                
                (129,333
                )Increase
      (decrease) in deposits
                
                
                (10,902
                )
                
                
                2,700
                
                
                
                (15,902
                )Increase
      (decrease) in accounts payable
                
                
                (575,297
                )
                
                
                712,384
                
                
                
                467,988Increase
      (decrease) in accrued liabilities
                
                
                (158,448
                )
                
                
                1,863,064
                
                
                
                1,977,672Increase
      in deferred revenue
                
                
                2,800,000
                
                
                
                -
                
                
                
                2,800,000Net
      cash (used in) operating activities
                
                
                (24,997,458
                )
                
                
                (11,849,263
                )
                
                
                (41,873,056
                )Cash
      flows from investing activities:Acquisition
      of property and equipment
                
                
                (2,240,063
                )
                
                
                (812,660
                )
                
                
                (3,630,775
                )Net
      cash (used in) investing activities
                
                
                (2,240,063
                )
                
                
                (812,660
                )
                
                
                (3,630,775
                )Cash
      flows from financing activities:Proceeds
      from notes payable - related party
                
                
                10,000,000
                
                
                
                12,894,601
                
                
                
                28,194,601Common
      shares issued for cash
                
                
                11,500,000
                
                
                
                10,000,000
                
                
                
                21,988,532Net
      cash provided by financing activities
                
                
                21,500,000
                
                
                
                22,894,601
                
                
                
                50,183,133Net
      increase in cash
                
                
                (5,737,521
                )
                
                
                10,232,678
                
                
                
                4,679,302Cash
      - beginning of period
                
                
                10,416,823
                
                
                
                184,145
                
                
                
                -Cash
      - end of period
                
                $
                4,679,302
                
                
                $
                10,416,823
                
                
                $
                4,679,302Cash
      paid for:Interest
                
                $
                -
                
                
                $
                -
                
                
                $
                -Income
      taxes
                
                $
                -
                
                
                $
                -
                
                
                $
                -Non
      cash investing and financing activities:Reclassification
      of equity to derivative liability
                
                $
                7,500,000
                
                
                $
                -
                
                
                $
                7,500,000Common
      shares issued for deferred services
                
                $
                -
                
                
                $
                3,150,000
                
                
                $
                3,150,000





See the
accompanying notes to the financial statements.





– 33
–





PetroAlgae
Inc.




(A
Development Stage Company)


Notes to
Consolidated Financial Statements


December
31, 2009 and 2008





Note
1   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




Organization




On
December 16, 2008, Corporate Services International, a Delaware
corporation, sold 9,000,000 shares of Series B preferred stock of the Dover
Glen, Inc. and 10,000,000 shares of common stock of Dover Glen, Inc. to
PetroTech Holdings Corp., a Delaware corporation (“PetroTech Holdings”), for
$350,000 in a private placement transaction.




On
December 16, 2008, PetroTech Holdings submitted a conversion notice to the
Dover Glen, Inc. for its 9,000,000 shares of Series B preferred stock. Each
share of Series B preferred stock of the Company converted into 10 shares of
common stock of the Company.




As a
result of the acquisition of shares and subsequent conversion, PetroTech
Holdings was the owner of 100,000,000 shares of common stock of the Dover Glen,
Inc. which, as of December 16, 2008, represented 99.9% of the total issued
and outstanding common stock of the Dover Glen, Inc.




On
December 19, 2008, PetroTech Holdings assigned its entire interest in
PetroAlgae LLC (“PA LLC”), representing approximately 81.3% of the membership
interests on a fully diluted basis of PA LLC, to  Dover Glen, Inc. for
no consideration. This assignment had the effect of causing Dover Glen, Inc. to
cease being a shell company. As a result of the assignment, the business of PA
LLC has become the sole line of business of Dover Glen, Inc. Also, on
December 19, 2008, the Dover Glen, Inc. changed its name to “PetroAlgae
Inc.




As the former members of PA LLC control
PetroAlgae Inc. after the transaction, the merger was accounted for as a reverse
acquisition under which, for accounting purposes, PA LLC is deemed to be the
acquirer and PetroAlgae Inc., the legal acquirer, is deemed to be the acquired
entity. No goodwill was recognized as PetroAlgae Inc. was a “shell” company. The
former shareholders of PetroAlgae Inc. retained an aggregate of 99,586 shares of
common stock and the excess of the liabilities assumed over the assets received
at the acquisition date of $67,712 has been reclassified to
equity.




PA LLC
was created on September 22, 2006, in the state of Delaware to develop a
commercial, scalable solution comprising a proprietary library of algae that
combines the characteristics of rapid growth rate and high oil content. The
algae are cultivated in modular bioreactors that can be operated
cost-effectively at commercial scale with harvesting occurring on a continuous
basis.




The
Company is currently in the development stage.




Basis of
Presentation




The
Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business.




The
Company has experienced significant losses from operations aggregating
$58,860,269 since inception. In addition, the Company had a working capital
deficit at December 31, 2009, of $9,800,426 and has no significant revenue
generating operations.




The
Company's ability to continue as a going concern is contingent upon its ability
to secure additional financing, increase ownership equity and attain profitable
operations. In addition, the Company's ability to continue as a going concern
must be considered in light of the problems, expenses and complications
frequently encountered in a competitive business environment.





– 34
–





The
Company is pursuing financing for its operations and seeking additional
investments. In addition, the Company is seeking to establish a revenue base.
Failure to secure such financing or to raise additional equity capital and to
establish a revenue base may result in the Company depleting its available funds
and not being able pay its obligations.




The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.




Principles
of Consolidation




The
consolidated financial statements presented herein include the accounts of the
Company and its consolidated subsidiary PA, LLC of which the Company owns
approximately 82% on a fully diluted basis.




All
intercompany transactions and balances have been eliminated in
consolidation.




Reclassifications




Certain
amounts presented in the 2008 financial statements have been reclassified to
conform to current year presentation.




Use of
Estimates




The
accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America which require
management to make estimates and assumptions. These estimates and assumptions
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 revenue and expense. Actual results may differ from
these estimates.




Revenue
Recognition




In
general, the Company records revenue when persuasive evidence of an arrangement
exists, services have been rendered or product delivery has occurred, the sales
price to the customer is fixed or determinable, and collectability is reasonably
assured. The following policies reflect specific criteria for the various
revenues streams of the Company:




Revenue
is recognized at the time the product is delivered. Provision for sales returns
will be estimated based on the Company's historical return experience. Revenue
will be presented net of returns.




Cash and
Cash Equivalents and Cash Concentrations




The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company at December 31, 2009,
has approximately $4,600,000 on deposit at a single financial
institution.




Fair
Value of Financial Instruments




Fair
value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31, 2009 and 2008.
The respective carrying value of certain on-balance-sheet financial instruments,
approximate their fair values. These financial instruments include cash,
accounts payable, accrued expenses and notes payable. Fair values were assumed
to approximate carrying values for these financial instruments because they are
short term in nature and their carrying amounts approximate fair values or they
are receivable or payable on demand.





– 35
–





The
carrying value of the Company’s note payable approximated its fair value based
on the current market conditions for similar debt instruments.




Property
and Equipment




Property
and equipment is recorded at cost. Expenditures for major improvements and
additions are added to property and equipment, while replacements, maintenance
and repairs which do not extend the useful lives are expensed.




Long
Lived Assets




The
carrying value of long-lived assets is reviewed on a regular basis for the
existence of facts and circumstances that suggest impairment. Should there be an
impairment the Company measures the amount of the impairment based on the amount
that the carrying value of the impaired asset exceeds the discounted cash flows
expected to result from the use and eventual disposal from the impaired assets.
There were no impairments in 2009 or 2008.




Income
Taxes




The
Company follows ASC 740 Income Taxes for recording the provision for income
taxes. Deferred tax assets and liabilities are computed based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability each
period. If available evidence suggests that it is more likely than not that some
portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of
change.




Beginning
January 1, 2007, we adopted ASC 740-10-05 Accounting for Uncertainty in Income
Taxes. The Interpretation prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits
to be recognized, a tax position must be more-likely-than-not to
be sustained upon examination by taxing authorities. The amount recognized
is measured as the largest amount of benefit that is greater than 50 percent
likely of being realized upon ultimate settlement.




PA LLC is
organized as a limited liability company under the state law of Delaware. As a
limited liability company that has elected to be taxed as a partnership, the
Company’s earnings pass through to the members and are taxed at the member
level. Accordingly, no income tax provision has been included in these financial
statements for the operations related to PA LLC.




Loss Per
Share




Basic
earnings (loss) per share are calculated by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares and dilutive common stock equivalents
outstanding. During periods in which the Company incurs losses common stock
equivalents, if any, are not considered, as their effect would be anti
dilutive.




Equity-Based
Compensation




The
Company accounts for stock based compensation in accordance with ASC 718 Stock
Compensation. This Statement requires that the cost resulting from all
share-based transactions be recorded in the financial statements. The Statement
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a
fair-value-based measurement in accounting for share-based payment transactions
with employees. The Statement also establishes fair value as the measurement
objective for transactions in which an entity acquires goods or services from
non-employees in share-based payment transactions.




Recently
Issued Accounting Pronouncements




Adoption
of New Accounting Standards




Accounting
Standards Codification





– 36
–





In
June 2009, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles  (the
“Codification”). This standard replaces SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles, and establishes only two levels of
U.S. generally accepted accounting principles (“GAAP”), authoritative and
nonauthoritative. The FASB ASC has become the source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the SEC,
which are sources of authoritative GAAP for SEC registrants. All other
nongrandfathered, non-SEC accounting literature not included in the Codification
will become nonauthoritative. This standard is effective for financial
statements for interim or annual reporting periods ending after
September 15, 2009. The adoption of the Codification changed the Company’s
references to GAAP accounting standards but did not impact the Company’s results
of operations, financial position or liquidity.




Participating
Securities Granted in Share-Based Transactions




Effective
January 1, 2009, the Company adopted a new accounting standard included in
ASC 260, Earnings Per Share (formerly FASB Staff Position (“FSP”) Emerging
Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities).  The
new guidance clarifies that non-vested share-based payment awards that entitle
their holders to receive nonforfeitable dividends or dividend equivalents before
vesting should be considered participating securities and included in basic
earnings per share. The Company’s adoption of the new accounting standard did
not have a material effect on previously issued or current earnings per
share.




Business
Combinations and Noncontrolling Interests




Effective
January 1, 2009, the Company adopted a new accounting standard included in
ASC 805, Business Combinations (formerly SFAS No. 141(R), Business
Combinations).  The new standard applies to all transactions or other
events in which an entity obtains control of one or more businesses.
Additionally, the new standard requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement date for all assets acquired and liabilities assumed; and requires
the acquirer to disclose additional information needed to evaluate and
understand the nature and financial effect of the business combination. The
Company’s adoption of the new accounting standard did not have a material effect
on the Company’s consolidated financial statements.




Effective
January 1, 2009, the Company adopted a new accounting standard included in
ASC 810, Consolidations (formerly SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements).  The new accounting standard
establishes accounting and reporting standards for the noncontrolling interest
(or minority interests) in a subsidiary and for the deconsolidation of a
subsidiary by requiring all noncontrolling interests in subsidiaries be reported
in the same way, as equity in the consolidated financial statements. As such,
this guidance has eliminated the diversity in accounting for transactions
between an entity and noncontrolling interests by requiring they be treated as
equity transactions. The Company’s adoption of this new accounting standard did
not have a material effect on the Company’s consolidated financial
statements.




Fair
Value Measurement and Disclosure




Effective
January 1, 2009, the Company adopted a new accounting standard included in
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) (formerly FASB FSP
No 157-2, Effective Date of FASB Statement No. 157), which delayed the
effective date for disclosing all non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value on
a recurring basis (at least annually). This standard did not have a material
impact on the Company’s consolidated financial statements.




In
April 2009, the FASB issued new guidance for determining when a transaction
is not orderly and for estimating fair value when there has been a significant
decrease in the volume and level of activity for an asset or liability. The new
guidance, which is now part of ASC 820 (formerly FSP
157-4,  Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly ), requires disclosure of the inputs and
valuation techniques used, as well as any changes in valuation techniques and
inputs used during the period, to measure fair value in interim and annual
periods. In addition, the presentation of the fair value hierarchy is required
to be presented by major security type as described in ASC 320, Investments —
Debt and Equity Securities . The provisions of the new standard were effective
for interim periods ending after June 15, 2009. The adoption of the new
standard on April 1, 2009 did not have a material on the Company’s
consolidated financial statements.





– 37
–





In
April 2009, the Company adopted a new accounting standard included in ASC
820, (formerly FSP 107-1 and Accounting Principles Board (“APB”) 28-1, Interim
Disclosures about Fair Value of Financial Instruments).  The new
standard requires disclosures of the fair value of financial instruments for
interim reporting periods of publicly traded companies in addition to the annual
disclosure required at year-end. The provisions of the new standard were
effective for the interim periods ending after June 15, 2009. The Company’s
adoption of this new accounting standard did not have a material effect on the
Company’s consolidated financial statements.




In
August 2009, the FASB issued new guidance relating to the accounting for
the fair value measurement of liabilities. The new guidance, which is now part
of ASC 820, provides clarification that in certain circumstances in which a
quoted price in an active market for the identical liability is not available, a
company is required to measure fair value using one or more of the following
valuation techniques: the quoted price of the identical liability when traded as
an asset, the quoted prices for similar liabilities or similar liabilities when
traded as assets, or another valuation technique that is consistent with the
principles of fair value measurements. The new guidance clarifies that a company
is not required to include an adjustment for restrictions that prevent the
transfer of the liability and if an adjustment is applied to the quoted price
used in a valuation technique, the result is a Level 2 or 3 fair value
measurement. The new guidance is effective for interim and annual periods
beginning after August 27, 2009. The Company’s adoption of the new guidance
did not have a material effect on the Company’s consolidated financial
statements.




Derivative
Instruments and Hedging Activities




Effective
January 1, 2009, the Company adopted a new accounting standard included in
ASC 815, Derivatives and Hedging (SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of SFAS No.133). The
new accounting standard requires enhanced disclosures about an entity’s
derivative and hedging activities and is effective for fiscal years and interim
periods beginning after November 15, 2008. Since the new accounting
standard only required additional disclosure, the adoption did not impact the
Company’s consolidated financial statements.




Other-Than-Temporary
Impairments




In
April 2009, the FASB issued new guidance for the accounting for
other-than-temporary impairments. Under the new guidance, which is part of ASC
320, Investments — Debt and Equity Securities (formerly FSP 115-2 and 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments), and
other-than-temporary impairment is recognized when an entity has the intent to
sell a debt security or when it is more likely than not that an entity will be
required to sell the debt security before its anticipated recovery in
value.  The new guidance does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities and is effective for interim and annual reporting periods ending
after June 15, 2009. The Company’s adoption of the new guidance did not
have a material effect on the Company’s consolidated financial
statements.




Subsequent
Events




In
May 2009, the FASB issued new guidance for subsequent events. The new
guidance, which is part of ASC 855, Subsequent Events  (formerly SFAS
No. 165,  Subsequent Events)  is intended to establish
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. Specifically, this guidance sets forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. The new
guidance is effective for fiscal years and interim periods ended after
June 15, 2009 and will be applied prospectively. The Company’s adoption of
the new guidance did not have a material effect on the Company’s consolidated
financial statements.





– 38
–





Accounting
Standards Not Yet Effective




Accounting
for the Transfers of Financial Assets




In
June 2009, the FASB issued new guidance relating to the accounting for
transfers of financial assets. The new guidance, which was issued as SFAS
No. 166, Accounting for Transfers of Financial Assets,  an
amendment to SFAS No.  140, was adopted into Codification in
December 2009 through the issuance of Accounting Standards Updated (“ASU”)
2009-16. The new standard eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets, and requires additional disclosures in order to enhance information
reported to users of financial statements by providing greater transparency
about transfers of financial assets, including securitization transactions, and
an entity’s continuing involvement in and exposure to the risks related to
transferred financial assets. The new guidance is effective for fiscal years
beginning after November 15, 2009. The Company will adopt the new guidance
in 2010 and is evaluating the impact it will have to the Company’s consolidated
financial statements.




Accounting
for Variable Interest Entities




In
June 2009, the FASB issued revised guidance on the accounting for variable
interest entities. The revised guidance, which was issued as SFAS No. 167,
Amending FASB Interpretation No. 46(R), was adopted into Codification in
December 2009 through the issuance of ASU 2009-17. The revised guidance
amends FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities, in determining whether an enterprise has a controlling financial
interest in a variable interest entity. This determination identifies the
primary beneficiary of a variable interest entity as the enterprise that has
both the power to direct the activities of a variable interest entity that most
significantly impacts the entity’s economic performance, and the obligation to
absorb losses or the right to receive benefits of the entity that could
potentially be significant to the variable interest entity. The revised guidance
requires ongoing reassessments of whether an enterprise is the primary
beneficiary and eliminates the quantitative approach previously required for
determining the primary beneficiary. The Company does not expect that the
provisions of the new guidance will have a material effect on its consolidated
financial statements.




Revenue
Recognition




In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue
Arrangements. The new standard changes the requirements for establishing
separate units of accounting in a multiple element arrangement and requires the
allocation of arrangement consideration to each deliverable based on the
relative selling price. The selling price for each deliverable is based on
vendor-specific objective evidence (“VSOE”) if available, third-party evidence
if VSOE is not available, or estimated selling price if neither VSOE or
third-party evidence is available. ASU 2009-13 is effective for revenue
arrangements entered into in fiscal years beginning on or after June 15,
2010. The Company does not expect that the provisions of the new guidance will
have a material effect on its consolidated financial statements.




Note
2   Property and Equipment




Property
and equipment and related accumulated depreciation and amortization consist
of:




31-Dec
                                      
                                      Estimated2009
                                      
                                      
                                      2008
                                      
                                      useful lives*Leasehold
      improvements
                                      
                                      $
                                      613,864
                                      
                                      
                                      $
                                      365,160
                                      
                                      5-10 yearsFurniture
      and fixtures
                                      
                                      
                                      81,716
                                      
                                      
                                      
                                      22,567
                                      
                                      3-7 yearsAutomobiles
                                      
                                      
                                      62,641
                                      
                                      
                                      
                                      32,344
                                      
                                      2-5 yearsComputer
      and office equipment
                                      
                                      
                                      230,068
                                      
                                      
                                      
                                      127,019
                                      
                                      1-7 yearsEngineering
      equipment
                                      
                                      
                                      2,276,908
                                      
                                      
                                      
                                      607,050
                                      
                                      2-7 yearsSoftware
      and networking
                                      
                                      
                                      388,029
                                      
                                      
                                      
                                      236,572
                                      
                                      1-5 yearsTotal
      cost basis
                                      
                                      $
                                      3,653,226
                                      
                                      
                                      $
                                      1,390,712Less
      accumulated depreciation and amortization
                                      
                                      
                                      (1,416,350
                                      )
                                      
                                      
                                      (324,507
                                      )$
                                      2,236,876
                                      
                                      
                                      $
                                      1,066,205







*
            All depreciation is
      calculated using the straight line method




– 39
–





Depreciation
expense was $1,137,733, $268,691 and $1,462,240 for the years ended December 31,
2009 and 2008 and the period from inception to December 31, 2009.




Note
3   Notes Payable – Related Party




On July
24, 2009, the Company entered into agreements with its principle lender to
restructure all of the Company’s loans. The Company, PA LLC, PetroTech Holdings
Corp., and LV Administrative Services, Inc., as administrative and collateral
agent for PetroTech Holdings Corp., fully executed an Omnibus Amendment, Joinder
and Reaffirmation Agreement, which amended (i) the demand notes issued by PA LLC
to PetroTech Holdings Corp. dated August 21, 2008, September 3, 2008, September
18, 2008 and September 25, 2008 in the aggregate principal amount of $7,222,089,
(ii) the convertible demand notes issued by PA LLC to PetroTech Holdings Corp.
dated April 24, 2009 and May 11, 2009 in the aggregate principal amount of
$10,000,000, (iii) the demand note issued by PA LLC to Valens US SPV I, LLC in
the principal amount of $417,512 dated August 8, 2008, ((iv) the promissory note
dated June 12, 2008 issued by PA LLC in favor of XL Techgroup, Inc. and assigned
to PetroTech Holdings Corp. in the principal amount of $25,000,000 and (v) a
master security agreement dated August 21, 2008 by PA LLC in favor of LV
Administrative Services, Inc. on behalf of PetroTech Holdings Corp. The Company
also delivered an equity pledge agreement and a guaranty in connection with the
Omnibus Amendment, Joinder and Reaffirmation Agreement. Principally, the
maturity of the loans was changed to three years from this date.





– 40
–





Notes
payable consist of the following at December 31, 2009 and 2008:




2009
                  
                  
                  2008Note
      Payable to Valens US
                  
                  $
                  417,512
                  
                  
                  $
                  417,512·Collateral – all assets of the Company·Interest accrues monthly, at 12% per annum·Note is due on July 24, 2012Notes
      Payable to PetroTech Holdings Corp.·Collateral – all assets of the Company·Interest accrues monthly, at 12% per annum·Notes are due on July 24, 2012
                  
                  
                  7,222,089
                  
                  
                  
                  7,222,089Notes
      Payable to PetroTech Holdings Corp.·Collateral – all assets of the Company·Interest accrues monthly, at 12% per annum·Notes are due on July 24, 2012
                  
                  
                  10,000,000
                  
                  
                  
                  -Up
      to $25,000,000 collateralized note dated January 1, 2007·collateral – all assets of the Company·Interest payable monthly, and is drawn into note on a monthly basis
      at Prime + 2%
                    (5.25%
      at December 31, 2009)·Funding provided as needed.·Note is due on July 24, 2012
                  
                  
                  17,849,495
                  
                  
                  
                  16,921,243Total
                  
                  
                  35,489,096
                  
                  
                  
                  24,560,844Less
      current portion
                  
                  
                  -
                  
                  
                  
                  7,639,601Long-term
      portion
                  
                  $
                  35,489,096
                  
                  
                  $
                  16,921,243




The note
agreements are collectively secured by all of the Company’s assets.




A portion
of the notes payable at December 31, 2007, were held by XL TechGroup, Inc.
During 2007 and 2008 the Company received funding from XL TechGroup, Inc. in the
form of a note with the interest rate at prime + 2%, with the interest drawing
into the note after each month. During 2007 and 2008, cash advances totaled
$5,300,000 and $5,255,000, and non cash advances totaled $3,607,793 and
$2,758,450. In August 2008, the note held by XL TechGroup, Inc. was acquired by
PetroTech Holdings Corp, The balance of this note at December 31, 2009 and 2008,
was $17,849,495 and $16,921,243. The balance of the notes are also held by
PetroTech Holdings Corp. or Valens US. These entities are affiliates of the
Company.




Interest
charged to operations on these notes was $2,636,642, $1,248,039 and $4,328,153
during the years ended December 31, 2009 and 2008 and the period from inception
to December 31, 2009.




Note
4   Leases




The
Company has non-cancellable operating leases for office space that expire
through 2010. In addition, XL TechGroup, Inc. currently sub leases office space
to PetroAlgae Inc. on a month to month basis, at a current rate of $41,321 per
month.




Rental
expense for all operating leases during 2009 and 2008 was $749,890 and
$436,592.





– 41
–





Future
minimum lease payments under non-cancellable operating leases (with initial or
remaining lease terms in excess of one year) as of December 31, 2009
are:


Year
      ending December 31, 2010
                    
                    $
                    24,011




Note
5   Stockholders’ (Deficit) Equity




The
Company’s equity consists of the following:




300,000,000
shares of $.001 par value common stock




25,000,000
shares of $.001 par value preferred stock of which 15,000,000 shares are
undesignated and 10,000,000 shares are designated as series B. Each share of
series B preferred stock is entitled to 10 votes on all matters voted on and is
convertible into 10 shares of common stock at the option of the
holder.




At
Inception the Company issued 100,000,000 shares of common stock in exchange for
cash of $488,532.




During
December 2008 the Company issued 3,174,603 shares of common stock for cash of
$3.15 per share aggregating $10,000,000 pursuant to a private
placement.




During
December 2008 the Company issued 1,000,000 shares of common stock for consulting
services to be performed through December 2010. The shares were valued at $3.15
per share aggregating $3,150,000 based on the sale of common stock described
above which approximated fair market value on the date it was agreed the shares
would be issued. The $3,150,000 was recorded as deferred compensation and
$1,575,000 and $43,750 was amortized during 2009 and 2008.




On
January 15, 2009, PetroAlgae Inc.(the “Company”) entered into a Stock Purchase
Agreement with Engineering Automation and Design Inc., a Nebraska corporation
(“EAD”), pursuant to which the Company issued 151,057 shares of common stock,
par value $0.001 per share, of the Company as partial consideration, in advance,
for certain services relating to the design and engineering, and construction of
facilities for the growth and harvesting of algae for the production of algae
oil provided by a wholly-owned subsidiary of EAD to the Company’s subsidiary, PA
LLC. The fair value of the shares was approximately $6.62 per share based
on the trading price of the Company's common shares or $1,000,000 in the
aggregate.




During
August through October 2009 the Company sold 1,437,500 units consisting of one
share of common stock and a warrant to purchase a share of common stock at
$15.00 for a period of 5 years for $8.00 per unit ($5.43 per common share and
$2.57 per warrant) or $11,500,000 as follows:




562,500 units to an
affiliate


875,000 units to third
parties




The units
sold to the third parties included an additional 875,000 warrants exercisable at
$8.00 per share for a period of 6 months and 875,000 warrants exercisable at
$15.00 per share for a period of 6 months. These additional warrants expired on
January 9, 2010.





– 42
–





The
562,500 units sold to the affiliate and 375,000 of the units sold to a third
party contained share price and warrant exercise price guarantees. The purchase
price of the common stock and the exercise price of the warrants will be
adjusted in the event that the Company issues common stock or warrants at a
price below $8.00 for common shares or a $15.00 exercise price for warrants for
a period of six months from the purchase date. Because of these potential
adjustments, the shares issued and the warrants are accounted for as liabilities
in accordance with ASC guidance. The cash proceeds received of $7,500,000 were
allocated between the common stock and the warrants and the fair values of the
common stock and warrants of $5,090,625 ($5.43 per share) and $2,409,375 ($2.57
per warrant), respectively, were recorded as liabilities. For the warrants,, the
Company estimated the fair value using the Black-Scholes valuation model, based
on the estimated fair value of the common stock on the valuation date, an
expected dividend yield of 0%, a risk-free interest rate based on constant
maturity rates published by the U.S. Federal Reserve applicable to the remaining
term of the instruments, an expected life equal to the remaining term of the
instruments and an implicit volatility of 82%. Because of the limited historical
trading period of the Company’s common stock, the limited number of shares held
by non-affiliates and the very small trading volume of its common stock, the
fair value of the common stock was estimated at $5.43 per share based on the
conversion price of the $10,000,000 note described in Note 3 and the implicit
volatility of 82% was determined based on the aggregate cash proceeds received.
The Company is required to re-measure the fair value of these liabilities at
each reporting period. At the expiration of the six month price guarantee
period, it is expected that the common stock and warrants will no longer be
required to be accounted for as liablities and will be reclassified to
equity.




During
December 2009 the Company issued 357,143 units consisting of one share of common
stock and a warrant to purchase a share of common stock at $15.00 for a period
of 5 years in exchange for a 30% interest in Green Sciences Energy, LLC, a
subsidiary of Congoo, LLC. The units were valued at $8.00 per unit or $2,857,144
which was the value at which the Company sold common shares and warrants during
the period immediately preceding this issuances discussed above. In addition the
Company issued an additional 250,000 warrants exercisable at $8.00 per share for
a period of 6 months and 250,000 warrants exercisable at $15.00 per share for a
period of 6 months. These additional warrants expire on June 30, 2010. The
Company has used the Black-Scholes option pricing model using the following
assumptions to value these 500,000 additional options:




Volatility 82%, Dividend rate 0%, risk
free interest rate 0.18%




The fair
value of the options of $161,000 and the fair value of the units of $2,857,144
has been charged to operations as purchased research and
development.




During
December 2009 the Company issued 9,467 shares of common stock valued at $51,406
for services. The shares were valued at $5.43 per share which was the fair value
of the shares sold as described above.




Noncontrolling
Interest and PA LLC Equity Incentive Plan





During
2007 the Company issued 5% of the Class A voting units (1,000,000 units) of
PA LLC valued at $25,713 as partial consideration for a license to AzTE. AzTE
has been granted anti-dilution and is entitled to 5% of the fully diluted
capitalization of PA LLC. Pursuant to the non dilution clause, the Company will
be required to issue AzTE an additional 172,149 units as of
December  31, 2009.




PA LLC
has an equity compensation plan which allows employees and consultants awards of
Class B units and is limited to 14% of the total outstanding units.




PA LLC
granted 3,142,071 units to various employees through unit grant agreements. The
unit grants generally vest over four years of continual service. The fair value
of these grants was determined by the Company as $95,402 at the grant date, and
related charges of $7,385 and $12,544 were included in operating expenses at
December 31, 2009, and 2008. The fair value of the unit grants was determined
using the transaction that took place in 2006 where XL TechGroup, Inc.
contributed $488,532 into PA LLC, and in return, received 19,000,000 units of PA
LLC ($.03 per unit). As of December 31, 2009, the total unrecognized
compensation cost for non-vested unit grants granted under the Plan was $48.795
which will be amortized over the remaining vesting periods. In addition to the
amortization of the fair value of units, the Company also recognizes an
operational expense of $.01 per unit granted to employees. This has resulted in
an additional expense of $29.345 through December 31. 2009




As of
December 31, 2009, non-controlling interest parties collectively owned
approximately 18% of PA LLC, and have absorbed their respective portion of the
loss of PA LLC. The amount of loss absorbed is $5,643,869 for the year ended
December 31, 2009. Prior to January 1, 2009, minority interests absorbed $72,931
of the Company’s net losses.





– 43
–





Stock
Options




On June
17, 2009, the Company adopted the 2009 Equity Compensation Plan. The plan is
intended to provide employees, consultants and others the opportunity to receive
incentive stock options. The plan is administered by the Board of Directors and
is limited to 4,000,000 shares of the Company’s common stock. The exercise price
shall be equal to or greater than the fair value of the underlying common stock
on the date the option is granted and its term shall not exceed ten years.
Awards shall not vest in full prior to the third anniversary of the award
date.




On June
17 and July 16, 2009 the Company granted an aggregate of 1,072,500 and 45,000
options to purchase common shares at an exercise price of $8.50 and $8.00,
respectively, per share. The options vest over a period of 4 years and expire 10
years from the grant date. The fair value of the options aggregated $4,818,000
and was calculated using the following assumptions – term 10 years, risk free
interest rate 3.31% volatility 82%, and dividend yield 0%. The fair value will
be charged to operations over the vesting period commencing on July 1, 2009.
During the year ended December 31, 2009, $600,000 was charged to operations
related to these options.




A summary
of stock option activity is as follows:




Number
                    of
                    shares
                  
                  
                  Weighted
                    average
                    exercise
                    price
                  
                  
                  Weighted
                    average
                    fair
                    valueBalance
      at December 31, 2008
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Granted
      June 17, 2009
                  
                  
                  1,072,500
                  
                  
                  $
                  8.50
                  
                  
                  $
                  4.18Granted
      July 16, 2009
                  
                  
                  45,000
                  
                  
                  $
                  8.00
                  
                  
                  $
                  4.21Exercised/Forfeited
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Balance
      at December 31, 2009
                  
                  
                  1,117,500
                  
                  
                  $
                  8.50
                  
                  
                  $
                  4.18





The
following table summarizes information about fixed-price stock options at
December 31, 2009:




OutstandingExercise
                                    Prices
                                
                                Weighted
                                  Average
                                  Number
                                  Outstanding
                                
                                Weighted
                                  Average
                                  Contractual
                                  Life
                                
                                Weighted
                                  Average
                                  Exercise
                                  Price$8-8.50
                                
                                1,117,500
                                
                                10 years
                                
                                $
                                8.48




None of
the outstanding options are exercisable at December 31, 2009.




As of
December 31, 2009, the aggregate intrinsic value of all stock options
outstanding and expected to vest was $0.00 and the aggregate intrinsic value of
currently exercisable stock options was approximately $0.00.  The
Intrinsic value of each option share is the difference between the fair market
value of the common stock of $8.00 and the exercise price of such option share
to the extent it is “in-the-money”.  Aggregate Intrinsic value
represents the value that would have been received by the holders of
in-the-money options had they exercised their options on the last trading day of
the year and sold the underlying shares at the closing stock price on such
day.  The intrinsic value calculation is based on the price at which
the Company has been selling common shares during 2009.  There were no
in-the-money options outstanding and exercisable as of December 31,
2009.
  The total
intrinsic value of options exercised during the years ended December 31, 2009
and 2008, was $0.00 and $0.00, respectively.  Intrinsic value of
exercised shares is the total value of such shares on the date of exercise less
the cash received from the option holder to exercise the options.  The
total cash proceeds received from the exercise of stock options was $0.00 and
$0.00 for the years ended December 31, 2009 and 2008, respectively.
  The total
fair value of options granted during the years ended December 31, 2009 and 2008
was $4,818,000 and $0.00, respectively.  The total fair value of
option shares vested during the years ended December 31, 2009 and 2008 was $0.00
and $0.00.





– 44
–





Note
6   Licenses for Intellectual Property




During
2007, a minority member of PA LLC contributed licensed intellectual property to
PA LLC. In exchange for the licensed intellectual property, the member accepted
an ownership interest of 1,000,000 Class A Units (see Note 5), $1,550,000 in
cash, $500,000 in cash upon the initial commercial sale of licensed products, a
future stream of royalty payments of 3.5% (subject to certain minimums) of net
sales derived from the licensed products and 7% of certain other sales,
collectively fair valued at $2,334,629 on the transaction date. The Company is
unable to determine at this time if it will be able to commercially utilize the
intellectual property and has recorded research and development expense during
the year ended December 31, 2007,for the entire fair value of $2,334,629. As a
result of this transaction, the Company recorded a long-term liability and
realized research and development expense aggregating $758,917 related to the
present value of the estimated minimum future payments, which is included in the
fair value above.




Since
inception, we have been subject to tax by both federal and state taxing
authorities. Until the respective statutes of limitations expire, we are subject
to income tax audits in the jurisdictions in which we operate. We are no longer
subject to U.S. federal tax examinations for fiscal years prior to 2005, and we
are not subject to audits prior to the 2005 fiscal year for the state
jurisdiction. The
Company has received an initial payment of $2,800,000 during December 2009 and
recorded the payment as deferred revenue. The balance was received during
January 2010.




Note
7   Retirement Plan




Employees
of PA LLC can take advantage of the 401k retirement plan where if they
contribute a percentage of their gross pay toward a 401k plan, PA LLC will match
the contribution. The contribution is matched up to 4%. Matching contributions
were $220,263 and $97,228 during 2009 and 2008.




Note
8   Income Taxes




The
Company accounts for income taxes under SFAS 109, which requires use of the
liability method. SFAS 109 provides that deferred tax assets and liabilities are
recorded based on the differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as temporary differences. Deferred tax assets and liabilities at the
end of each period are determined using the currently enacted tax rates applied
to taxable income in the periods in which the deferred tax assets and
liabilities are expected to be settled or realized.




The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes
for the years ended December 31, 2009 and 2008. The sources and tax effects of
the differences are as follows:





– 45
–




Income
      tax provision at the federal statutory rate
                    
                    
                    34
                    %Effect
      of operating losses
                    
                    
                    (34
                    )%0
                    %




As of
December 31, 2009, the Company has a net operating loss carry forward of
approximately $32,000,000. This loss will be available to offset future taxable
income. If not used, this carry forward will expire through 2029. The deferred
tax asset of approximately $11,000,000 relating to the operating loss carry
forward has been fully reserved at December 31, 2009. The increase in the
valuation allowance related to the deferred tax asset was approximately
$6,000,000 during 2009. The principal difference between the accumulated deficit
for income tax purposes and the accumulated deficit for financial reporting
purposes results from the losses of PA LLC whose tax returns are not
consolidated with those of Petro Algae, Inc.




Since
inception, we have been subject to tax by both federal and state taxing
authorities. Until the respective statutes of limitations expire, we are subject
to income tax audits in the jurisdictions in which we operate. We are no longer
subject to U.S. federal tax examinations for fiscal years prior to 2005, and we
are not subject to audits prior to the 2005 fiscal year for the state
jurisdiction.


Since
inception, we have been subject to tax by both federal and state taxing
authorities. Until the respective statutes of limitations expire, we are subject
to income tax audits in the jurisdictions in which we operate. We are no longer
subject to U.S. federal tax examinations for fiscal years prior to 2005, and we
are not subject to audits prior to the 2005 fiscal year for the state
jurisdiction.


Note
9   Related Party Transactions




During
2008 and the period from inception to December 31, 2009, the Company paid XL
TechGroup, Inc. an aggregate of $1,699,047 and $3,023,739 as reimbursement for
general and administrative expenses and $467,607 and $1,130,975 as reimbursement
for research and development expenses.




The
Company currently sub leases office space from XL TechGroup, Inc. on a month to
month basis at a rate of $41,321 per month.




Note
10   Subsequent Events




From
February 6, 2010 to March 1, 2010, the Company sold 331,250 units consisting of
one share of common stock and a warrant to purchase a share of common stock at
$15.00 for a period of 5 years for $8.00 per unit ($5.43 per common share and
$2.57 per warrant) or $2,650,000 as follows:




312,500 units to
affiliates


18,750 units to third
parties




The
312,500 units sold to the affiliate contained share price and warrant exercise
price guarantees. The purchase price of the common stock and the exercise price
of the warrants will be adjusted in the event that the Company issues common
stock or warrants at a price below $8.00 for common shares or a $15.00 exercise
price for warrants for a period of six months from the purchase date. Because of
these potential adjustments, the shares issued and the warrants will be
accounted for as derivative instrument liabilities in accordance with ASC
guidance. The cash proceeds received of $2,500,000 will be allocated between the
common stock and the warrants and the fair values of the common stock and
warrants of $1,696,875 ($5.43 per share) and $803,125 ($2.57 per warrant),
respectively, will be recorded as derivative instrument liabilities. For the
warrants,, the Company estimated the fair value using the Black-Scholes
valuation model, based on the estimated fair value of the common stock on the
valuation date, an expected dividend yield of 0%, a risk-free interest rate
based on constant maturity rates published by the U.S. Federal Reserve
applicable to the remaining term of the instruments, an expected life equal to
the remaining term of the instruments and an implicit volatility of 82%. Because
of the limited historical trading period of the Company’s common stock, the
limited number of shares held by non-affiliates and the very small trading
volume of its common stock, the fair value of the common stock was estimated at
$5.43 per share based on the conversion price of the $10,000,000 note described
in Note 3 and the implicit volatility of 82% was determined based on the
aggregate cash proceeds received. The Company is required to re-measure the fair
value of these derivative instrument liabilities at each reporting period. At
the expiration of the six month price guarantee period, it is expected that the
common stock and warrants will no longer be required to be accounted for as
derivative instruments and will be reclassified to equity.




During
February 2010, 106,126 common shares which had previously been issued for
services were returned the Company and retired.





– 46
–


ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
  None.
  – 47
–
  ITEM
      9A(T).
              CONTROLS
      AND PROCEDURES
  Disclosure
Controls and Procedures
  Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (Exchange Act). Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report to ensure that information required to be disclosed by us
in the reports we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms and that our disclosure and controls are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
  Internal
Control over Financial Reporting
  Management’s
Annual Report on Internal Control Over Financial Reporting
  Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is a process designed under the supervision of the Company’s principal
executive officer and principal financial officer to provide reasonable
assurance regarding the (i) effectiveness and efficiency of operations, (ii)
reliability of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles, and (iii) compliance with applicable
laws and regulations.
  As of the
end of the Company’s 2009 fiscal year, management conducted an assessment of the
effectiveness of the Company’s internal control over financial reporting based
on the framework established in “Internal Control over Financial Reporting —
Guidance for Smaller Public Companies” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment,
management has determined that the Company’s internal control over financial
reporting as of December 31, 2009 was effective, although management did
identify certain significant deficiencies.
  The SEC
has defined “significant deficiency” as a deficiency, or a combination of
deficiencies, in internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit attention by those
responsible for oversight of the registrant’s financial reporting. In this
regard, we continue to have a small number of accounting and financial personnel
with fairly limited redundancies which redundancies could be considered
necessary to adequately support our financial reporting requirements. This
deficiency is due to our small size and limited operating history. During fiscal
2010, as we continue to implement our business plan, we expect to increase our
accounting resources to augment our financial reporting
requirements.
  We
understand that remediation of deficiencies in internal controls is a continuing
work in progress due to the issuance of new standards and promulgations.
However, remediation of any known deficiency is among our highest priorities.
Our management will periodically assess the progress and sufficiency of our
ongoing initiatives and make adjustments as and when necessary. As of the date
of this report, our management believes that the implementation of our business
plan and the concomitant increase in our accounting and financial resources will
remediate any deficiency in internal control over financial
reporting.
  Notwithstanding
the aforementioned deficiency, our management performed additional analyses,
reconciliations and other procedures and has concluded that the Company’s
consolidated financial statements for the periods covered by and included in
this annual report are fairly stated in all material respects in accordance with
generally accepted accounting principles in the U.S. for each of the periods
presented herein.
  – 48
–
  This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
  Changes
in Internal Controls
  During
our most recent fiscal quarter, there has not been any change in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
  Inherent
Limitations Over Internal Controls
  The
Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company’s internal control over
financial reporting includes those policies and procedures that:
  (i)
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the Company’s
      assets;
  (ii)
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that the Company’s receipts and expenditures
      are being made only in accordance with authorizations of the Company’s
      management and directors; and
  (iii)
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.
  Management,
including the Company’s principal executive officer and principal financial
officer, does not expect that the Company’s internal controls will prevent or
detect all errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of internal controls
can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected. Also, any evaluation of the effectiveness of
controls in future periods is subject to the risk that those internal controls
may become inadequate because of changes in business conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
  – 49
–
  ITEM
      9B.
                OTHER
      INFORMATION
  None.
  – 50
–
  PART
III
  ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  Directors
and Executive Officers
  The
following identifies each of the directors and executive officers of PetroAlgae
Inc.
  Name
              
              Age
              
              PositionsJohn
      S. Scott
              
              59
              
              Director,
      Chairman of the BoardIsaac
      D. Szpilzinger
              
              62
              
              DirectorSayan
      Navaratnam
              
              35
              
              DirectorDavid
      Szostak
              
              55
              
              President,
      Secretary and Treasurer
  Set forth
below is biographical information with respect to each of the aforementioned
individuals.
  John S. Scott, Ph.D. has been
the Chairman of the Board of Directors of the Company since December 16, 2008.
Dr. Scott founded XL TechGroup, Inc. in 2002 and has been a Director of XL
TechGroup, Inc. and its Chief Executive Officer since that date. Dr. Scott is an
entrepreneur and inventor who has founded and successfully grown eleven
technology companies within the past 25 years. Dr. Scott has authored business
theories surrounding the development of successful technology enterprises, and
lectures to business schools throughout the United States. Previously, he was a
professor at the universities of Maryland and Arizona, and a visiting professor
at the University of North Carolina. Dr. Scott has also been a consultant to the
United States and various European governments, and was a national research
council fellow at NASA. He earned a B.Sc in physics and astrophysics at Michigan
State University and a Ph.D in the astrophysics/physics dual program from the
University of Arizona’s Steward Observatory.
  Isaac D. Szpilzinger has been
a Director of the Company since December 16, 2008. He is an attorney in solo
private practice licensed in the state of New York. From 1987 until 2006, Mr.
Szpilzinger practiced with the law firm of Herzfeld & Rubin, P.C. where he
was named a partner in 1994. He began his legal career in 1985 with a clerkship
in the New York State Supreme Court, Appellate Division, Second Judicial
Department. Mr. Szpilzinger holds a B.S. in Chemistry, cum laude, from Brooklyn
College, and an M.A. in Chemistry and an Advanced Certificate in Educational
Administration and Supervision from Brooklyn College. He also holds a Juris
Doctor degree, cum laude, from New York Law School.
  Sayan Navaratnam has been a
Director of the Company since December 16, 2008. Since March 1, 2009, Mr.
Navaratnam has been a Senior Managing Director of Laurus Capital Management, LLC
and a Senior Managing Director of Valens Capital Management, LLC, entities
affiliated with our principal shareholder. Since 2004, he has been the Chairman
of Creative Vistas, Inc. (CVAS). From 2000 to 2003, Mr. Navaratnam was the Chief
Operating Officer of ASPRO Technologies Ltd. From 1997 to 2000, he was the Chief
Executive Officer of Satellite Communications Inc., and its research arm
Satellite Advanced Technologies. Mr. Navaratnam currently serves on the board of
a number of privately-held and publically held companies including AC Technical
Systems, Iview Digital Video Solutions, Cygnal Technologies, White Radio, and
Thinkpath. Mr. Navaratnam graduated from the University of Toronto with an
Honours Double Specialist degree in economics and political
science.
  – 51
–
  David Szostak has been
President, Secretary and Treasurer of the Company since December 16, 2008 and
the Chief Financial Officer of PA LLC since its inception in 2006. A certified
public accountant, he is currently the Chief Financial Officer and a Director of
XL TechGroup, Inc. Mr. Szostak began his career in Chicago, Illinois working as
an auditor (CPA) for a large size accountancy firm (Laventhol and Howarth) and
later other smaller accounting firms. In 1987, he was Corporate Controller at
Extel, Inc., a global manufacturer of electronic communication equipment for
industry and governments. When Extel acquired Hetra Computer, Inc., a
manufacturer of government specialty computers, in 1990, Mr. Szostak relocated
to Florida and accepted the position of Vice President and CFO of Hetra. In
1993, when XL Vision, the predecessor company to XL TechGroup, acquired Hetra,
Mr. Szostak continued in the same position with XL Vision. He earned his
Bachelor of Science in finance at Southern Illinois University, with graduate
studies at DePaul University in Chicago.
  The
following identifies the directors and significant employees of PA
LLC.
  Name
              
              Age
              
              PositionsJohn
      S. Scott
              
              59
              
              Director,
      Chairman of the BoardIsaac
      D. Szpilzinger
              
              62
              
              DirectorSayan
      Navaratnam
              
              35
              
              DirectorOttmar
      Dippold
              
              67
              
              Chief
      Executive OfficerDavid
      Szostak
              
              55
              
              Chief
      Financial OfficerJim
      McCreary
              
              51
              
              Chief
      Operating Officer
  Ottmar Dippoldbecame the CEO
of PA LLC in March 2008. Mr. Dippold joined Space Systems Laboratory in 1967
where he served as team leader for the design of next generation optical systems
for the US Air Force and NASA. He was the founder, Chairman, CEO and President
of Opto-Mecanik, Inc., a designer and manufacturer of infrared optical and
laser-based systems and served in this capacity for 27 years. Mr. Dippold also
served as Chairman of Applied Photonics, a provider of laser-based solutions to
the semiconductor and flat panel display industries. Mr. Dippold received a
degree in optical engineering from the Deroy Optical Institute, Munich,
Germany.
  Jim McCreary is currently PA
LLC’s Chief Operating Officer. He joined in 2006. Before joining PetroAlgae, he
was the founding CEO, CFO, or CTO of over a dozen different new venture
companies, most recently in software (ValueLogix), mobile communications
(ThisInstant) and medical devices (VirtualScopics, RTek Medical Systems). Mr.
McCreary has a Bachelor of Arts with Honors in Economics from Yale and an MBA
with Distinction from the Harvard Business School.
  Board
of Directors and Officers
  Each
director is elected until the next annual meeting of the registrant and until
his or her successor is duly elected and qualified. Officers are elected by, and
serve at the discretion of, the board of directors. The board of directors may
also appoint additional directors up to the maximum number permitted under our
by-laws. A director so chosen or appointed will hold office until the next
annual meeting of stockholders.
  Each
executive officer serves at the discretion of the board of directors and holds
office until his or her successor is elected or until his or her earlier
resignation or removal in accordance with our certificate of incorporation and
by-laws.
  Committees
of the Board of Directors
  We do not
have standing audit, nominating or compensation committees, or committees
performing similar functions. Our board of directors believes that it is not
necessary to have standing audit, nominating or compensation committees at this
time because the functions of such committees are adequately performed by our
board of directors.
  – 52
–
  Code
of Business Conduct and Ethics
  The
Company has adopted a Code of Business Conduct and Ethics for all directors,
officers and employees. The Code of Business Conduct and Ethics is available
under the investor section of the Company’s website at www.petroalgae.com. A
copy of the Code of Business Conduct and Ethics may also be obtained at no
charge by written request to the attention of the Investor Relations Department
at PetroAlgae Inc., 1901 S. Harbor City Blvd., Suite 300, Melbourne, FL 32901,
telephone: 321-409-7272, email:
investorrelations@petroalgae.com.
  – 53
–
  ITEM
      11.
              EXECUTIVE
      COMPENSATION
  The
following tables set forth information concerning all cash compensation awarded
to, earned by or paid to all individuals serving as PA LLC’s principal executive
officers during the last three completed fiscal years, and all non-cash
compensation awarded to those same individuals as of December 31,
2009.
  Summary
Compensation Table
  Name and Principal Position
                                                                      
                                                                      Year
                                                                      
                                                                      Salary
                                                                      
                                                                      
                                                                      Bonus
                                                                      
                                                                      
                                                                      Company
                                                                        Stock
                                                                        Awards
                                                                      
                                                                      
                                                                      Total
                                                                        CompensationOttmar
      Dippold,
                                                                      
                                                                      2007
                                                                      
                                                                      $210,000
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $210,000Chief
      Executive Officer
                                                                      
                                                                      2008
                                                                      
                                                                      $233,077
                                                                      
                                                                      
                                                                      $68,900
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $301,9772009
                                                                      
                                                                      $258,615
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $258,615Jim
      McCreary,
                                                                      
                                                                      2007
                                                                      
                                                                      $200,000
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $200,000Chief
      Operating Officer
                                                                      
                                                                      2008
                                                                      
                                                                      $200,000
                                                                      
                                                                      
                                                                      $53,000
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $253,0002009
                                                                      
                                                                      $215,358
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $215,358David
      Szostak,
                                                                      
                                                                      2007
                                                                      
                                                                      $300,000
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $300,000Chief
      Financial Officer
                                                                      
                                                                      2008
                                                                      
                                                                      $271,154
                                                                      
                                                                      
                                                                      $59,625
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $330,7792009
                                                                      
                                                                      $210,721
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $210,716John
      Scott,
                                                                      
                                                                      2007
                                                                      
                                                                      $500,000
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $500,021Chairman
      of the Board
                                                                      
                                                                      2008
                                                                      
                                                                      $451,923
                                                                      
                                                                      
                                                                      $99,375
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $551,2982009
                                                                      
                                                                      $445,673
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $445,673
  Equity
Awards in PA LLC
  The
following table sets forth information with respect to equity awards in PA LLC
held by PA LLC’s principal executive officers at December 31, 2009.
  Name
                                  
                                  Unvested
                                    Units
                                  
                                  
                                  Vested
                                    Units(2)
                                  
                                  
                                  Total
                                    Unit
                                    Awards
      ( 1
      )Ottmar
      Dippold
                                  
                                  104,718
                                  
                                  
                                  314,152
                                  
                                  
                                  418,870Jim
      McCreary
                                  
                                  140,000
                                  
                                  
                                  —
                                  
                                  
                                  140,000David
      Szostak
                                  
                                  270,000
                                  
                                  
                                  —
                                  
                                  
                                  270,000John
      Scott
                                  
                                  800,000
                                  
                                  
                                  —
                                  
                                  
                                  800,000
 
 (1)
              Incentive
      equity awards in PA LLC are in the form of Class B Membership Units.
      Employees holding Class B Membership Units will be able to exchange their
      Class B Membership Units for equity in PetroAlgae
  Inc.
  (2)
              As
      Class B Membership Unit restrictions are met, units will convert into
      Class A Membership Units (vested).
  – 54
–
  ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
  The
following table shows the number and percentage of shares of the Company’s
common stock owned of record and beneficially by each director and each officer
of the Company, and by each person beneficially owning more than five (5%)
percent of any class of the common stock, as of December 31, 2009. Except as
otherwise noted, the address of the referenced individual is c/o PetroAlgae
Inc., 1901 S. Harbor City Boulevard, Suite 300, Melbourne, FL
32901.
  As used
in the table below, the term “beneficial ownership” means
the sole or shared power to vote or direct the voting, or to dispose or direct
the disposition, of any security. A person is deemed as of any date to have
beneficial ownership of any security that such person has a right to acquire
within 60 days after such date. Except as otherwise indicated, the stockholders
listed below have sole voting and investment powers with respect to the shares
indicated.
 Name
                                                
                                                Title
      of Stock
                                                  Class
                                                
                                                Beneficial
                                                  Ownership
                                                
                                                
                                                Percent
                                                  of
                                                  Class (4)5%
      HoldersPetroTech Holdings
      Corp. (1)c/o
      Laurus Capital Management, LLC335
      Madison Avenue10th
      FloorNew
      York, New York 10017
                                                
                                                Common
      Stock
                                                
                                                
                                                100,000,000
                                                
                                                
                                                
                                                95.7%Officers
      and DirectorsSayan Navaratnam
      (2)
                                                
                                                Common
      Stock
                                                
                                                
                                                1,000,000
                                                
                                                
                                                
                                                0.92%John Scott (2)
                                                
                                                Common
      Stock
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Isaac Szpilzinger
      (2)
                                                
                                                Common
      Stock
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —David Szostak (3)
                                                
                                                Common
      Stock
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —All
      Directors and Officers as a Group (4 persons)
                                                
                                                Common
      Stock
                                                
                                                
                                                101,000,000
                                                
                                                
                                                
                                                0.96%


(1)
              PetroTech
      Holdings Corp. (“PetroTech”) is owned by Valens U.S. SPV I, LLC, a
      Delaware limited liability company (“Valens U.S.”), Valens Offshore SPV I,
      Ltd., a Cayman Islands limited company (“Valens SPV I”), Valens Offshore
      SPV II, Corp., a Delaware corporation (“Valens SPV II”), Laurus Master
      Fund, Ltd. (In Liquidation), a Cayman Islands limited company (the
      “Fund”), Calliope Capital Corporation, a Delaware corporation (“CCC”) and
      PSource Structured Debt Limited, a Guernsey company (“PSource”). The Fund,
      CCC and PSource are each managed by Laurus Capital Management, LLC, a
      Delaware limited liability company (“LCM”). Valens U.S., Valens SPV I and
      Valens SPV II are each managed by Valens Capital Management, LLC (“VCM”).
      Eugene Grin and David Grin, through other entities, are the controlling
      principals of LCM and VCM and share sole voting and investment power over
      all securities of the Company held by PetroTech. Eugene Grin and David
      Grin disclaim beneficial ownership of the securities of the Company held
      by PetroTech, except to the extent of such person’s pecuniary interest in
      PetroTech, if any.
  (2)
              Indicates
      director.
  (3)
              Indicates
      officer.
  (4)
              The
      percentage of common stock is calculated based upon 106,229,356 shares
      issued and outstanding as of December 31,
2009.
  – 55
–
  ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
  1.           Sublease
from XL TechGroup, Inc.
  PA LLC
currently subleases space from XL TechGroup, Inc. (“XL TechGroup”), on a month
to month basis, at a current rate of $41, 222 per month. Messrs. Scott and
Szostak serve as directors and/or executive officers of both XL TechGroup and PA
LLC. XL TechGroup founded and developed PA LLC from its inception.
  2.           Consulting
Agreement with Board Director
  As of
March 1, 2009, Sayan Navaratnam accepted a position with both Laurus Capital
Management, LLC (“Laurus Capital”) and Valens Capital Management, LLC (“Valens
Capital”). In addition, Nationwide Solutions, Inc., a Canadian corporation of
which Mr. Navaratnam is the sole shareholder, has entered into a consulting
agreement with both Valens Capital and Laurus Capital.
  3.           Issuance
of Shares to Entities Affiliated with Principal Shareholder
  On March
1, 2010, and October 9, September 29, September 14, September 4, and August 28,
2009, in private placement transactions exempt from the registration
requirements of the Securities Act pursuant to the exemption afforded by Section
4(2) thereof and/or Regulation D promulgated there under, PetroAlgae issued and
sold, in the aggregate, (i) [480,375] shares of common stock to Valens U.S. SPV
I, LLC  for the purchase price of $8.00 per share, and warrants to
purchase [480,375] shares of PetroAlgae’s common stock at an exercise price of
$15.00 per share and (ii) [394,625] shares of common stock to Valens Offshore
SPV I, Ltd. for the purchase price of $8.00 per share, and warrants to purchase
[394,625] shares of PetroAlgae’s common stock at an exercise price of $15.00 per
share.  The Company used the proceeds of these private placements to
fund the working capital needs of PA LLC.
  4.           Support
Agreement
 
 The
Company intends to enter into a Support Agreement with Valens Capital
Management, LLC ("VCM") that would provide a framework by which the Company
would benefit from the expertise, knowledge, and experience of VCM, and in
particular, certain of its executives. VCM is part of the group of entities that
controls PetroTech Holdings Corp.
 
 5.           Sharing
Agreement
 
 PetroTech
Holdings Corp. ("PetroTech") and XL TechGroup are parties to a letter agreement,
dated August 15, 2008, whereby PetroTech agreed it would pay XL TechGroup
fifteen percent (15%) of dividend or distribution amounts that would otherwise
be paid to holders of common stock of PetroTech following the payment of (a) the
full amount of any PetroTech preferred stock liquidation preference and all
accrued dividends thereon and (b) the aggregate amount of all liabilities of
PetroTech owing to Laurus Master Fund, Ltd., Valens Offshore SPV I, Ltd., Valens
U.S. SPV I, LLC, Valens U.S. SPV I, Ltd., PSource Structured Debt Limited and
all of their respective subsidiaries and affiliates (collectively, the
“Lenders”) and/or to any other person or entity (which amounts in (a) and (b)
are limited, in the aggregate, to 104,822,963.25), plus the amount of debt or
equity financing provided to DX Tech, LLC and and PA LLC by the Lenders or any
other entity in development of DX Tech, LLC’s and/or PA LLC’s respective
businesses.
  6.           Director
Independence
  None of
our directors are independent.
  – 56
–
  ITEM
      14.
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES
  Audit
and Non-Audit Fees
  The
following table presents fees for professional services rendered by Stark Winter
Schenkein & Co., LLP for the audit of the Company’s annual financial
statements for the year ended December 31, 2008, and fees billed for other
services rendered by Stark Winter Schenkein & Co., LLP during 2008 and
2009.
  2009
                  
                  
                  2008Audit
      fees (1)
                  
                  $
                  19,700
                  
                  
                  $
                  30,000Audit-related
      fees(2)
                  
                  $
                  0
                  
                  
                  $
                  0Tax
      fees(3)
                  
                  $
                  0
                  
                  
                  $
                  0All
      other fees(4)
                  
                  $
                  0
                  
                  
                  $
                  0Total
                  
                  $
                  19,700
                  
                  
                  $
                  30,000
  (1)
              Audit
      fees were principally for audit work performed on the consolidated
      financial statements and internal control over financial reporting, as
      well as statutory audits.
  (2)
              Stark
      Winter Schenkein & Co., LLP did not provide any “audit related
      services” during the period.
  (3)
              Stark
      Winter Schenkein & Co., LLP did not provide any “tax services” during
      the period.
  (4)
              Stark
      Winter Schenkein & Co., LLP did not provide any “other services”
      during the period.
  The
following table presents fees for professional services rendered by
Kingery & Crouse, PA for the audit of
the Company’s annual financial statements for the year ended December 31, 2009
and fees billed for other services
rendered by Kingery & Crouse, PA during that period.
 
 2009Audit
      fees (1)
                    
                    $
                    31,000Audit-related
      fees(2)
                    
                    $
                    0Tax
      fees(3)
                    
                    $
                    0All
      other fees(4)
                    
                    $
                    0Total
                    
                    $
                    31,000
 
 (1)
              Audit
      fees were principally for audit work performed on the consolidated
      financial statements and internal control over financial reporting, as
      well as statutory audits.
  (2)
              Kingery &
      Crouse, PA  did not provide any “audit related services” during
      the period.
  (3)
              Kingery &
      Crouse, PA did not provide any “tax services” during the
      period.
  (4)
              Kingery &
      Crouse, PA did not provide any “other services” during the
      period.
  – 57
–
  Policy
on Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Registered Public Accounting Firm
  The Board
of Directors of the Company has responsibility for appointing, setting
compensation and overseeing the work of the independent registered public
accounting firm. In recognition of this responsibility, the Board of Directors
has established a policy to pre-approve all audit and permissible non-audit
services provided by the independent registered public accounting
firm.
  Prior to
engagement of the independent registered public accounting firm for next year’s
audit, management will submit a list of services and related fees expected to be
rendered during that year within each of four categories of services to the
Board of Directors for approval.
  1.  Audit services include audit
work performed on the financial statements and internal control over financial
reporting, as well as work that generally only the independent registered public
accounting firm can reasonably be expected to provide, including comfort
letters, statutory audits, and discussions surrounding the proper application of
financial accounting and/or reporting standards.
  2.  Audit-Related services are for
assurance and related services that are traditionally performed by the
independent registered public accounting firm, including employee benefit plan
audits.
  3. Tax services include all
services, except those services specifically related to the audit of the
financial statements, performed by the independent registered public accounting
firm’s tax personnel, including tax analysis; assisting with coordination of
execution of tax-related activities, primarily in the area of corporate
development; and tax compliance and reporting.
  4. All Other services are those
services not captured in the audit, audit-related or tax categories. The Company
generally does not request such services from the independent registered public
accounting firm.
  Prior to
engagement, the Board of Directors pre-approves independent public accounting
firm services within each category and the fees for each category are budgeted.
The Board of Directors requires the independent registered public accounting
firm and management to report actual fees versus the budget periodically
throughout the year by category of service. During the year, circumstances may
arise when it may become necessary to engage the independent registered public
accounting firm for additional services not contemplated in the original
pre-approval categories. In those instances, the Board of Directors requires
specific pre-approval before engaging the independent registered public
accounting firm.
  The Board
of Directors may delegate pre-approval authority to one or more of its members.
The member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Board of Directors at its next
scheduled meeting.
  – 58
–
  PART
IV
  ITEM
      15.
              EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
  15(a)(1) Financial Statements.
The following consolidated financial statements, related notes, report of
independent registered public accounting firm and supplementary data are
incorporated by reference into Item 8 of Part II of this 2009 Form
10-K:
  ·
              Report
      of Independent Registered Public Accounting
Firm
  ·
              Consolidated
      Balance Sheets
  ·
              Consolidated
      Statements of Operations
  ·
              Consolidated
      Statements of Changes in Stockholders’
Equity
  ·
              Consolidated
      Statements of Cash Flows
  ·
              Notes
      to Consolidated Financial
Statements
  15(a)(2) Financial Statement
Schedules. Schedules are omitted because they are not required or because
the information is provided elsewhere in the financial statements.
 15(a)(3) Exhibits. These
exhibits are available upon request. Requests should be directed to the Investor
Relations Department at PetroAlgae Inc., 1901 S. Harbor City Blvd., Suite 300,
Melbourne, FL 32901, telephone:  321-409-7500, email:  investorrelations@petroalgae.com.
The exhibit numbers preceded by an asterisk (*) indicate exhibits physically
filed with this 2009 Form 10-K. All other exhibit numbers indicate exhibits
filed by incorporation by reference. Exhibit number 10.1 is the sole management
contract or compensatory plan or arrangement filed as an exhibit to this 2009
Form 10-K.
  3.1
                Restated
      Certificate of Incorporation of PetroAlgae Inc. (incorporated by reference
      to Exhibit 3.1 to the registrant’s annual report on Form 10-K,
      filed March 31, 2009)3.2
                Bylaws
      of PetroAlgae Inc. (incorporated by reference to Exhibit 3.2 to the
      registrant’s annual report on Form 10-K, filed March 31,
      2009)*4.1
                Warrant,
      dated March 1, 2010, with Valens Offshore SPV Ltd.*4.2
                Warrant,
      dated March 1, 2010, with Valens U.S. SPV I, LLC*4.3
                Warrant,
      dated December 24, 2009, with Green Science Energy LLC4.4
                Warrant,
      dated October 9, 2009, with Valens U.S. SPV I, LLC(incorporated by
      reference to Exhibit 10.6 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)4.5
                Warrant,
      dated October 9, 2009, with Valens Offshore SPV Ltd.(incorporated by
      reference to Exhibit 10.8 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)4.6
                Warrant,
      dated October 9, 2009, with Green Alternative Energy USA, LLC
      (incorporated by reference to Exhibit 10.4 to the registrant’s quarterly
      report on Form 10-Q, filed November 15, 2009)4.7
                Warrant,
      dated September 29, 2009, with Valens U.S. SPV I, LLC(incorporated by
      reference to Exhibit 10.10 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)4.8
                Warrant,
      dated September 29, 2009, with Valens Offshore SPV I, Ltd.(incorporated by
      reference to Exhibit 10.12 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)4.9
                Warrant,
      dated September 14, 2009, with Valens U.S. SPV I, LLC(incorporated by
      reference to Exhibit 10.14 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)4.10
                Warrant,
      dated September 14, 2009, with Valens Offshore SPV I, Ltd.(incorporated by
      reference to Exhibit 10.16 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)4.11
                Warrant,
      dated September 4, 2009, with Valens U.S. SPV I, LLC(incorporated by
      reference to Exhibit 10.18 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)4.12
                Warrant,
      dated September 4, 2009, with Valens Offshore SPV I, Ltd.(incorporated by
      reference to Exhibit 10.20 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)4.13
                Warrant,
      dated August 28, 2009, with Valens U.S. SPV I, LLC(incorporated by
      reference to Exhibit 10.22 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)4.14
                Warrant,
      dated August 28, 2009, with Valens Offshore SPV I, Ltd.(incorporated by
      reference to Exhibit 10.24 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)10.1
                2009
      Equity Compensation Plan (incorporated by reference to Exhibit 4 of the
      registrant’s registration on Form S-8 filed with the Securities and
      Exchange Commission on June 17,
2009)
  – 59
–
  *10.2
                Securities Purchase Agreement,
      dated March 1, 2010, with Valens U.S. SPV I, LLC*10.3
                Securities
      Purchase Agreement, dated March 1, 2010, with Valens Offshore SPV I,
      Ltd.*10.4
                Securities
      Issuance Agreement, dated December 24, 2009, with Green Science Energy
      LLC*10.5
                Master
      License Agreement, dated December 24, 2009, between PA LLC and Congoo,
      LLC*10.6
                Option
      Agreement, dated December 24, 2009, between PA LLC and Congoo,
      LLC10.7
                Securities
      Purchase Agreement, dated October 19, 2009, with UBS AG(incorporated by
      reference to Exhibit 10.1 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)10.8
                Securities
      Purchase Agreement, dated October 9, 2009, with Green Alternative Energy
      USA, LLC(incorporated by
      reference to Exhibit 10.3 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)10.9
                Securities
      Purchase Agreement, dated October 9, 2009, with Valens U.S. SPV I, LLC
      (incorporated by reference to Exhibit 10.5 to the registrant’s quarterly
      report on Form 10-Q, filed November 16, 2009)10.10
                Securities Purchase Agreement,
      dated October 9, 2009, with Valens Offshore SPV I, Ltd. (incorporated by reference to
      Exhibit 10.7 to the registrant’s quarterly report on Form 10-Q, filed
      November 16, 2009)10.11
                Securities
      Purchase Agreement, dated September 29, 2009, with Valens U.S. SPV I,
      LLC(incorporated by
      reference to Exhibit 10.9 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)10.12
                Securities
      Purchase Agreement, dated September 29, 2009, with Valens Offshore SPV I,
      Ltd.(incorporated by
      reference to Exhibit 10.11 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)10.13
                Securities
      Purchase Agreement, dated September 14, 2009, with Valens U.S. SPV I,
      LLC(incorporated by
      reference to Exhibit 10.13 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)10.14
                Securities
      Purchase Agreement, dated September 14, 2009, with Valens Offshore SPV I,
      Ltd.(incorporated by
      reference to Exhibit 10.15 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)10.15
                Securities Purchase Agreement,
      dated September 4, 2009, with Valens U.S. SPV I, LLC (incorporated by reference to
      Exhibit 10.17 to the registrant’s quarterly report on Form 10-Q, filed
      November 16, 2009)10.16
                Securities
      Purchase Agreement, dated September 4, 2009, with Valens Offshore SPV I,
      Ltd.(incorporated by
      reference to Exhibit 10.19 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)10.17
                Securities
      Purchase Agreement, dated August 28, 2009, with Valens U.S. SPV I,
      LLC(incorporated by
      reference to Exhibit 10.21 to the registrant’s quarterly report on Form
      10-Q, filed November 16, 2009)10.18
                Amended
      and Restated Master Security Agreement, dated July 28, 2009, among PA LLC
      and PetroAlgae Inc. in favor of LV Administrative Services, Inc. for the
      benefit of PetroTech Holdings Corp. (incorporated by reference to Exhibit
      10.5 to the registrant’s quarterly report on Form 10-Q, filed August 14,
      2009)
  – 60
–
  10.19
                Joinder
      Agreement, dated July 28, 2009, by PetroAlgae Inc. and PA LLC and
      delivered to LV Administrative Services, Inc., as administrative and
      collateral agent for PetroTech Holdings Corp. (incorporated by reference
      to Exhibit 10.6 to the registrant’s quarterly report on Form 10-Q, filed
      August 14, 2009)10.20
                Equity
      Pledge Agreement, dated July 28, 2009, among PetroAlgae Inc. and LV
      Administrative Services, Inc., as administrative and collateral agent for
      PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.7 to the
      registrant’s quarterly report on Form 10-Q, filed August 14,
      2009)10.21
                PetroAlgae
      Inc. Guaranty, dated July 28, 2009 (incorporated by reference to Exhibit
      10.8 to the registrant’s quarterly report on Form 10-Q, filed August 14,
      2009)10.22
                Omnibus
      Amendment, Joinder and Reaffirmation Agreement, dated July 28, 2009, among
      PetroAlgae Inc., PA LLC and LV Administrative Services, as administrative
      and collateral agent for Valens U.S. SPV I, LLC (incorporated by reference
      to Exhibit 10.9 to the registrant’s quarterly report on Form 10-Q, filed
      August 14, 2009)10.23
                Second
      Amended and Restated Term Note, dated July 28, 2009, in the principal
      amount of $417,511.92, issued by PA LLC to Valens U.S. SPV I, LLC
      (incorporated by reference to Exhibit 10.10 to the registrant’s quarterly
      report on Form 10-Q, filed August 14, 2009)10.24
                Amended
      and Restated Master Security Agreement, dated July 28, 2009, among PA LLC
      and PetroAlgae Inc. in favor of LV Administrative Services, Inc. for the
      benefit of Valens U.S. SPV I, LLC (incorporated by reference to Exhibit
      10.11 to the registrant’s quarterly report on Form 10-Q, filed August 14,
      2009)10.25
                Joinder
      Agreement, dated July 28, 2009, by PetroAlgae Inc., PA LLC and PetroTech
      Holdings Corp. and delivered to LV Administrative Services, Inc., as
      administrative and collateral agent for Valens U.S. SPV I, LLC
      (incorporated by reference to Exhibit 10.12 to the registrant’s quarterly
      report on Form 10-Q, filed August 14, 2009)10.26
                Second
      Amended and Restated Secured Term Note, dated July 28, 2009, in the
      principal amount of $7,222,089, issued by PA LLC to PetroTech Holdings
      Corp. (incorporated by reference to Exhibit 10.2 to the registrant’s
      quarterly report on Form 10-Q, filed August 14, 2009)10.27
                Omnibus
      Amendment, Joinder and Reaffirmation Agreement, dated July 28, 2009, by
      and among PetroAlgae Inc., PA LLC and LV Administrative Services, Inc., as
      administrative and collateral agent for PetroTech Holdings Corp.
      (incorporated by reference to Exhibit 10.1 to the registrant’s quarterly
      report on Form 10-Q, filed August 14, 2009)10.28
                Amended
      and Restated Secured Convertible Note, dated July 28, 2009, in the
      principal amount of $10,000,000, issued by PA LLC to PetroTech Holdings
      Corp. (incorporated by reference to Exhibit 10.3 to the registrant’s
      quarterly report on Form 10-Q, filed August 14, 2009)10.29
                Letter
      Agreement, dated May 12, 2009, with PetroTech Holdings Corp. (incorporated
      by reference to Exhibit 10.7 to the registrant’s quarterly report on Form
      10-Q, filed May 15, 2009)10.30
                Amendment
      One to Master License Agreement, dated April 30, 2009, by and between PA
      LLC and GTB Power Enterprise, Ltd. (portions of this exhibit have been
      omitted pursuant to a request for confidential treatment) (incorporated by
      reference to Exhibit 10.5 to the registrant’s quarterly report on Form
      10-Q, filed May 15, 2009)
  – 61
–
  10.31
                Side
      Letter to Master License Agreement, dated March 5, 2009, between PA LLC
      and GTB Power Enterprise, Ltd. (incorporated by reference to Exhibit 10.3
      to the registrant’s quarterly report on Form 10-Q, filed May 15,
      2009)10.32
                Master
      License Agreement, dated March 5, 2009, by and between PA LLC and GTB
      Power Enterprise, Ltd. (portions of this exhibit have been omitted
      pursuant to a request for confidential treatment) (incorporated by
      reference to Exhibit 10.2 to the registrant’s quarterly report on Form
      10-Q, filed May 15, 2009)10.33
                Stock
      Purchase Agreement, dated January 15, 2009, between PetroAlgae Inc. and
      Engineering Automation and Design, Inc. (incorporated by reference to
      Exhibit 10.1 to the registrant’s quarterly report on Form 10-Q, filed May
      15, 2009)10.34
                Demand
      Note, dated December 26, 2008, in the principal amount of $10,000,000,
      issued by PA LLC to PetroAlgae Inc. (incorporated by reference to
      Exhibit 10 to the registrant’s current report on Form 8-K, filed
      January 6, 2009)10.35
                Consulting
      Agreement, dated December 19, 2008, between PetroAlgae Inc. and Nationwide
      Solutions Inc. (incorporated by reference to Exhibit 10.3 to the
      registrant’s current report on Form 8-K, filed December 29,
      2008)10.36
                Substitute
      Membership Agreement, dated December 19, 2008, between PetroTech Holdings
      Corp. and PetroAlgae Inc. (incorporated by reference to Exhibit 10.4
      to the registrant’s current report on Form 8-K, filed
      December 29, 2008)10.37
                Consent
      Agreement, dated September 24, 2008, made by Arizona Sciences and
      Technology Enterprises, LLC (incorporated by reference to Exhibit 10.7 to
      the registrant’s annual report on Form 10-K, filed March 31,
      2009)10.38
                License
      Agreement, dated September 18, 2008, by and between Arizona Sciences and
      Technology Enterprises, LLC and PA LLC (portions of this exhibit have been
      omitted pursuant to a request for confidential treatment) (incorporated by
      reference to Exhibit 10.9 to the registrant’s annual report on
      Form 10-K, filed March 31, 2009)10.39
                Consent
      Agreement, dated August 14, 2008, by and among Arizona Sciences and
      Technology Enterprises, LLC, PA LLC, LV Administrative Services, Inc. and
      PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.6
      to the registrant’s current report on Form 8-K, filed
      December 29, 2008)
  – 62
–
  10.40
                Promissory
      Note, dated June 12, 2008, in the principal amount of $25,000,000, issued
      by PA LLC to XL TechGroup, Inc. and assigned to PetroTech Holdings Corp.,
      as amended by the Omnibus Amendment, Joinder and Reaffirmation Agreement,
      dated July 28, 2009, by and among PetroAlgae Inc., PA LLC and LV
      Administrative Services, Inc., as administrative and collateral agent for
      PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.4 to the
      registrant’s quarterly report on Form 10-Q, filed August 14,
      2009)10.45
                Amended
      and Restated Limited Liability Company Agreement of PA LLC, dated February
      16, 2007 (incorporated by reference to Exhibit 10.5 to the
      registrant’s current report on Form 8-K, filed December 29,
      2008)14.1
                Code
      of Business Conduct and Ethics (incorporated by reference to
      Exhibit 14.1 to the registrant’s annual report on Form 10-K,
      filed March 31, 2009)*21
                Subsidiary
      of the Registrant*31.1
                Rule
      13a-14(a) Certification by the Principal Executive
  Officer*31.2
                Rule
      13a-14(a) Certification by the Principal Financial
  Officer*32.1
                Certification
      by the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*32.2
                Certification
      by the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*99.1
                Letter
      Agreement, date August 15, 2008, between PetroTech Holdings Corp. and XL
      TechGroup, Inc.
 – 63
–
  SIGNATURES
  Pursuant
to the requirements of the 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.
  PETROALGAE
      INC.By:
                          /s/
      David
      SzostakName:
                          David
      SzostakTitle:
                          President(Principal Executive Officer,
      Principal
                            Financial Officer and
Principal
                            Accounting
  Officer)
  Date:
March 31, 2010
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.
  Signature
                      
                      Title
                      
                      Date/s/
      John
      Scott
                      
                      Chairman
      of the Board
                      
                      March
      31, 2010John
      Scott/s/
      Isaac
      Szpilzinger
                      
                      Director
                      
                      March
      31, 2010Isaac
      Szpilzinger/s/
      Sayan Navaratnam
                      
                      Director
                      
                      March
      31, 2010Sayan
      Navaratnam
  – 64
–