UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K/A





|[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

|[  ] | 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        x
company |  |  |  | 

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 $22,291,905 (1,486,127 shares at $15.00) .

The number of shares outstanding of the
registrants common stock as of July 30, 2010 was 106,910,730 shares of common stock, all of one class.



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Explanatory Note

We originally filed our Annual Report on Form 10-K for the year ended December 31, 2009 with the Securities and Exchange Commission
(SEC) on March 31, 2010.

We are filing this Amendment No. 1 to our Annual Report on Form 10-K (Amendment
No. 1) to restate our financial statements as of December 31, 2009, 2008 and 2007, and the results of operations for each of the years ended December 31, 2009, 2008 and 2007 and the period from inception (September 22, 2006) to
December 31, 2009 (collectively, the Company Financial Statements) that were included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009 and the Companys Annual Report on Form 10-K for
the year ended December 31, 2008 and to report the identification of a material weakness as of December 31, 2009.

The Company
Financial Statements included in this Amendment No. 1 have been restated to adjust the amounts or accounting treatment of certain transactions and to record a non-cash transaction. These adjustments can be summarized as follows:



| |  |  | In 2008 and 2007, the Board of Directors of PA LLC, granted 106 employees restricted ownership units in PA LLC. These ownership units generally vest
over a period of four years. At each grant date, the restricted ownership unit awards were accounted for based upon an incorrect fair value calculation. Revised grant values determined using corrected Company fair value estimates resulted in
additional compensation expense of approximately $2.0 million, $2.4 million and $277,000 in 2009, 2008 and 2007, respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The nature and amount of the Companys expenditures have changed and increased from inception (September 22, 2006) through December 31, 2009.
Consequently, it has been determined that a new category, Selling, General and Administrative (SG&A) expense, should be presented through this period. This category includes senior management and overhead costs, business development
expenditures, system infrastructure costs, accounting and legal costs and intellectual property management costs. Other costs, which are related to experimentation and development of the Companys technology, are presented as Research and
Development expense. The effect of this reclassification was to decrease Research and Development expense by $6.1 million, $1.7 million and $1.3 million and to increase SG&A expense by the same amount in 2009, 2008 and 2007, respectively, with
no net increase to expenses.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2008, an option to purchase ownership units in PA LLC was issued to XL Tech Group, LLC, a related party (XL), in connection with
continued borrowings under a Company debt facility outstanding with XL. This option, which remains outstanding, had a fair value of approximately $1.5 million and was not recorded at issuance. This transaction has now been accounted for as a
discount from the carrying amount of the related debt and the amortization of the discount added $562,000 and $516,000 to interest expense in 2009 and 2008, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2009, the Company issued common stock and warrants, with a fair value of $3.0 million, to an unrelated party that provided it with equity funding
and certain business development services. Cash proceeds from this equity issuance were received partially at December 31, 2009 ($0.8 million) and partially in January 2010 ($1.2 million). The $1.0 million balance of the fair value of the
securities issued was expensed as a business development cost within selling, general and administrative expense in 2009. The Company originally recorded the $3.0 million fair value of the securities issued as a 2009 research and development
expense. In addition, the Company received $2.0 million of additional cash in connection with this transaction, which is subject to repayment to the unrelated party at that partys option. This amount has been deposited in escrow and reported
in restricted cash and other liabilities at December 31, 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



i



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| |  |  | In 2009, the Company entered into a series of agreements with a third party for the design, engineering, and construction of a facility for the growth,
harvesting and processing of micro-crops. This facility was to be used to demonstrate our technology to potential customers. Company shares were issued in partial payment, in advance, for these services. The Company expensed $1.0 million related to
this transaction and reported the full amount at the inception of the transaction rather than as services were performed. The shares earned and retained by the third party have been adjusted to reflect their estimated fair value at issuance of
approximately $145,000 and have now been charged to research and development expense. The shares returned by the third party after year-end, which had an estimated value of $342,000, have now been added to other current assets. The net effect of
these adjustments reduced 2009 research and development expense by $855,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following items in this report have been amended to give effect to the restatement of the Company Financial Statements:

Item 7.  Managements Discussion and Analysis of Financial Condition and Results of Operations;

Item 8.  Financial Statements and Supplementary Data; and

Item 9A(T).  Controls and Procedures.

Item 11.  Executive Compensation.



ii



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PART II

ITEM 7.         MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND
RESULTS OF OPERATIONS (PENDING REVISION)

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.

Business

The Company is a renewable energy company currently licensing and deploying the leading biomass production platform to address, with renewable sources,
the existing and growing unmet needs in the global energy and agriculture markets. The Companys proprietary technology, consisting of light and environmental management systems, allows its customers to consistently grow aquatic microorganisms
at a rate that exceeds four times their natural growth rates. This enables the commercial-scale production of two end-products: a fuel feedstock and a protein, which the Company refers to as its biocrude and protein products. The fuel feedstock is
intended to be used principally in existing refineries, resulting in renewable fuels which are identical to the petroleum-based fuels they would replace. The high productivity afforded by the Companys technology leads to low cost fuel
feedstock which should increase the profitability of the refineries without the requirement for any government subsidies.

The Companys
current and prospective customer licensees are comprised primarily of well-capitalized national oil companies, independent refiners, power companies and multinational agriculture companies that have the ability to rapidly deploy one or more of its
standard license units, each consisting of a 5,000 hectare micro-crop production facility.

The Company generates licensing fees and royalties
from customer licensees in the global energy and agriculture markets. The Companys licensing approach is designed to provide the Company with a steady, highly-profitable and reliable revenue stream, while requiring only minimal capital
expenditures as its customer licensees incur the costs associated with the development and construction of bioreactors and the associated processing facilities. On occasion, the Company may also enter into joint venture arrangements, where its
capital contribution would consist of a license for its technology. In such situations, the Company would generally reduce or eliminate its license fees in return for a share of the operations profits. Typically, the Company expects these
joint ventures to be more profitable versus the standard license agreement over the life of the contract.

The End-Products Produced By
the Companys Technology

The Companys biocrude is a renewable hydrocarbon feedstock that it has demonstrated can be
efficiently converted to diesel, jet fuel, and other fuel products in the existing refinery infrastructure. The Companys biocrude is also suitable as a feedstock for the production of py oil, as a combustible fuel for power generation, and as
a feedstock for fermentation into ethanol, butanol and other fuels. The resulting end-products are drop-in fuel products that are functionally compatible with petroleum-based fuels and can be used in the existing petroleum distribution
infrastructure. The Companys biocrude addresses the growing energy needs within the approximately $2.5 trillion fuels market.

The
Companys protein product is a high quality protein source for animal feed and eventually human nutrition. Subject to the receipt of requisite regulatory approvals, the Companys current protein product can be delivered directly into the
existing supply chains for animal feed and the Company is developing a protein product for human consumption, which will allow its customer licensees to access the $49 billion global protein market, which is estimated will grow to $126 billion by
2015.

The Companys processes efficiently allow its customers to produce biocrude and protein end-products simultaneously. Because the
Company believes each product can be sold into established and readily accessible markets, its technology and processes result in biocrude produced at a low marginal cost. As a result, the Company believes that the biocrude produced by the licensees
of its technology will be cost-competitive even with crude oil prices as low as $20/barrel.



---

Revenues

The Company expects to generate revenues from license fees and royalties that it will earn from license agreements, pursuant to which customer licensees
will license from the Company the right to build and operate the bioreactors and associated processing facilities that make up the Companys technology platform. The Company expects these license agreements will provide for the payment of
license fees generally over the three year construction period of its customer licensees facility. As these facilities become operational, the Company would also expect to earn royalties on its customer licensees sales of the biocrude
and protein end-products produced by its technology.

Development

The Company has achieved a number of significant milestones since it was founded in September 2006. The Companys focus has been on the creation and
development of growth and harvesting technologies for the commercial-scale production of micro-organism biomass that could be processed for sale into existing energy and agriculture markets. To do this, the Company committed significant resources to
research and development efforts, including completing a working demonstration facility in June 2009 to test, refine and exhibit the Companys technology and processes. Since the completion of its working demonstration facility, the Company has
conducted extensive internal and third party testing of its technology and the biocrude and protein end-products to validate their commercial viability. Although the Company continues to test and refine its technology and processes, the Company is
now also focused on building its customer pipeline and entering into MOUs, and subsequently license agreements, with its prospective customer licensees.

The Companys key milestones to date are as follows:



| |  |  | Over the past four years, the Company has spent $35.0 million on the research and development of its growth and harvesting technologies. The Company
spent these funds on experimentation and testing, developing processes and equipment, and building the infrastructure and databases necessary to support its technology, including the construction of our working demonstration facility.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2007 and 2008, the Company developed its proprietary growth algorithmsthe complex mathematical formulas it uses to determine the correct
harvesting density and sunlight exposure of the biomass.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2009, the Company developed its proprietary remote sensing system (consisting of multi-spectral cameras and imaging algorithms) that enables the
Company to measure micro-crop density. In addition, during that time the Company identified the approximately 150 micro-crop species that are most suitable for its processes from among over 5,000 species that could be used for the commercial
generation of biomass.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2009, the Company built its business development team and signed its first MOU with a prospective customer licensee.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | In June 2009, the Company completed its working demonstration facility consisting of two full-scale bioreactors (approximately one hectare each) that
display its technology and processes and demonstrate the micro-crop yield that each bioreactor can generate.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In November 2009, the Indonesian Ministry of Agriculture cleared the Companys protein product as an approved raw material for use in animal feed.
The Company is in the process of obtaining additional animal feed approvals in other jurisdictions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2009 and 2010, independent laboratories tested the following technology and processes with positive results:
| | - |  | -------------------------------------------------------------------------------------------------------------------



| | Ø | combustion test firing of the Companys biocrude;
| | - | -------------------------------------------------



| | Ø | coker testing of the Companys biocrude at a U.S.-based testing facility jointly owned and managed by over 30 large refiners and industry participants;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | Ø | pyrolysis testing on a preliminary basis;
| | - | -----------------------------------------



| | Ø | initial fermentation testing conducted using tailored enzymes;
| | - | --------------------------------------------------------------



| | Ø | protein yield and composition testing; and
| | - | ------------------------------------------



| | Ø | protein testing for digestibility, palatability and efficacy.
| | - | -------------------------------------------------------------

Sales Cycle

In order to be
successful, the Company will need to demonstrate to prospective customer licensees that the economic returns from a standard license unit are sufficient to justify the significant capital required to construct its licensed facilities. Because of the



2



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significant financial commitment required by its customer licensees, the Company expects that its sales cycle will often exceed 12 months and will generally include:



| |  |  | extensive due diligence by its prospective customer licensees; including site visits to the Companys working demonstration facility, a review of
the technical aspects of the Companys technology and processes, an economic analysis that provides an understanding of operational growth, harvest and processing, and customer specific deployment considerations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the entry into an MOU that sets forth the basic commercial terms of the Companys potential relationship;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the Companys participation and assistance with customer-specific site selection and the preparation of a tailored operational and economic model
that takes into account local environmental conditions, costs of labor and other material expenses; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the entry into a final license agreement that sets forth final terms to enable the Companys customer licensees to begin constructing its license
units.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

At least for the Companys early customer licensees, the Company may agree to the establishment of various
technical milestones validating the productivity of its technology and processes at commercial scale. In such instances, those initial customer licensees would generally only be obligated to pay the Company license fees if its technology and
processes meet contractually prescribed criteria, such as targeted growth rates, during an initial validation phase.

Our management
anticipates that initial customer licenses will begin deployment in 2010. As the number of license units being deployed worldwide will accelerate, we are able hire and train additional deployment teams. We believe that our capital light approach
will result in sufficient gross margins to us, enabling our expected rapid growth.

We expect to continue to incur 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 license agreements and receiving milestone payments from customers.

Results of Operations

Twelve Months Ended December 31, 2009 Compared to Twelve Months Ended December 31, 2008

Revenue. In December 2009, we received $2.0 million from an unrelated party in exchange for the right to market our technology licenses. This
amount was recorded as restricted cash and a liability since the third party has the right to return of these funds. If this party does not exercise its option to terminate the relationship, $2.0 million will be retained by the Company and reported
as revenue from the expired option in the first quarter of 2011. We expect to record and recognize revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred.

Total costs and expenses. Total costs and expenses increased by $16.7 million, or 83%, to $36.8 million in 2009 as compared to 2008, due to an
increase in both selling, general and administrative expenses, or SG&A, and research and development expenses as we expanded our operations.

Selling, general and administrative expenses. SG&A expenses increased $9.15 million, or 111%, to $17.4 million for the twelve months ended
December 31, 2009 from $8.25 million in 2008. SG&A expenses include our senior management and overhead costs, business development expenditures, system infrastructure support costs, finance and accounting costs, and intellectual property
management costs. In 2009, the increase was due to a significant increase in the scope of our business development activities as well as increased compensation expense related to our enlarged management team. During the period from inception to
August 1, 2008, a portion of our SG&A functions, including the majority of business development activities, were provided by XL TechGroup, Inc., a related party, and charged to us. The portion of SG&A expenses that arose from these
related party charges was $2.2 million in 2008.

Research and development expenses. Research and development expenses increased $5.22
million, or 53%, to $15.1 million in 2009 from $9.88 million in 2008. These costs include the research and experimentation of the various system components and the design and construction of the commercial-scale pilot system for customer
demonstration. In 2009, the increase was driven by greater number and cost of both external consultants and employees involved in relating to various components of the Companys system as well as higher materials and equipment costs related to
the bioreactor demonstration site.

Interest expense  related party. Interest expense on notes payable  related party
increased by $1.43 million, or 81%, to $3.20 million for 2009. This increase was due to additional funding of our operations through notes payable from related parties. The balance of these notes totaled $35.1 million at December 31, 2009 and
$23.6 million at December 31, 2008.



3



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Depreciation expense. Depreciation expense increased by $869,000, or 323%, to $1.14 million in 2009
as from $269,000 in 2008. The increase was due to an increase in property and equipment due to the purchase of more laboratory equipment, computer equipment, furniture, and leasehold improvements in 2009 as compared to 2008.

Non-controlling interest. As of December 31, 2009, non-controlling interest parties collectively owned approximately 18% of PA LLC and have
been attributed their respective portion of the loss of PA LLC. The amount of loss assigned to non-controlling interests was $6.55 million for the year ended December 31, 2009. Prior to January 1, 2009, non-controlling interests were
attributed $162,000 of our net losses.



Twelve Months Ended
December 31, 2008 Compared to Twelve Months Ended December 31, 2007

Revenues. No revenues were recognized or
received in 2008.

Total costs and expenses. Total costs and expenses increased by $11.80 million, or 141%, to $20.15 million in 2008
compared to 2007, primarily due the addition of personnel, facilities and consulting services as we scaled up our business platform and technology development activities.

Selling, general and administrative expenses. SG&A expenses increased $5.27 million, or 176%, to $8.25 million for the 12 months ended
December 31, 2008, from $2.98 million in 2007. The increase from 2008 as compared to 2007 was due to significant personnel and overhead additions as the company established its basic business platform. During the period from inception to
August 1, 2008, a portion of our general and administration activities included support and business development services provided by XL TechGroup, related party. Such related party SG&A expenses were $2.2 million and $2.0 million for the
periods ending December 31, 2008 and 2007, respectively.

Research and development expenses. Research and development expenses
increased $5.00 million, or 103%, to $9.86 million for the 12 months ended December 31, 2008, from $4.86 million in 2007. The increase in 2008, as compared to 2007, was driven by increased activities in research and experimentation of the
various system components and the design and construction of the commercial scaled pilot system for customer demonstration.

Interest
expense  related party. Interest expense on debt outstanding under notes payable  related party increased $1.32 million, or 298%, in 2008 compared to 2007. This increase reflects the initial large scale debt funding received from
related parties as we began to scale up our operation starting in late 2007 and accelerating in 2008.

Depreciation. Depreciation
expense increased $214,000, or 388%, to $269,000 in 2008 from $55,000 in 2007. The increase was due to substantial additions to property and equipment as we expanded our research and development facilities, including additional laboratory equipment
and equipment used in our initial technological development process.

Liquidity and Capital Resources

Overview

To date, we
have financed our operations primarily through loans from, and debt securities issued to, our principal stockholder. We have also raised funds by issuing equity securities to unrelated third parties. Since our inception through March 31, 2010,
we have raised an aggregate $61.9 million in debt and equity investments, with $52.7 million of this total raised from our principal stockholder and $9.2 million raised from unrelated third parties.



4



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Cash and Cash Flow

At December 31, 2009 PetroAlgae had $2.7 million in unrestricted cash and cash equivalents.

Net cash used in operating activities was $27.6 million, $11.8 million and $4.7 million in 2009, 2008, and 2007, respectively. The increases in cash
usage were 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 comprised the purchase of capital assets with a cost of $2.4 million, $0.8 million and $0.5 million for the years
ended December 31, 2009, 2008 and 2007, respectively. The increases in these investments reflected the expansion of the Companys facilities to further its business plan, primarily in the construction of its demonstration facility.

Net cash provided by financing activities of $22.3 million, $22.9 million and $5.3 million in 2009, 2008 and 2007, respectively, and
consisted of advances from our principal stockholder and the sale of common shares for cash.



Senior Secured Debt Financing

All of
our borrowings have been provided by affiliates under a senior secured structure, as described in more detail below as of December 31, 2009:



|                                                                                                                    |  |   |            |  
|------------------------------------------------------------------------------------------------------------------- |  | - | ---------- | -
|Note Payable to Valens US                                                                                           |  | $ | 417,512    |  
|    Collateral  all assets of the Company                                                                         |  |   |            |  
|    Interest accrues monthly, at 12% per annum                                                                     |  |   |            |  
|    Note is due on June 30, 2012                                                                                   |  |   |            |  
|                                                                                                                    | 
|Note Payable to PetroTech Holdings Corp.                                                                            |  |   |            |  
|    Collateral  all assets of the Company                                                                         |  |   |            |  
|    Interest accrues monthly, at 12% per annum                                                                     |  |   | 7,222,089  |  
|    Note is due on June 30, 2012                                                                                   |  |   |            |  
|                                                                                                                    | 
|Convertible Note Payable to PetroTech Holdings Corp.                                                                |  |   |            |  
|    Collateral  all assets of the Company                                                                         |  |   |            |  
|    Interest accrues monthly, at 12% per annum                                                                     |  |   | 10,000,000 |  
|    Note is due on June 30, 2012 if not converted to common shares as described
below                              |  |   |            |  
|                                                                                                                    | 
|Up to $25,000,000 Note Payable to PetroTech Holdings Corp.                                                          |  |   |            |  
|    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) |  |   |            |  
|     Note is due on June 30, 2012                                                                                  |  |   | 17,849,495 |  
|                                                                                                                    |  |   |            |  
|     Permits additional draws to fund interest. Maximum balance of this note is limited to $25
million             |  |   |            |  
|                                                                                                                    | 
|Subtotal                                                                                                            |  |   | 35,489,096 |  
|Original Issue Discount                                                                                             |  |   | (375,000   | )
|                                                                                                                    |  |   |            |  
|                                                                                                                    | 
|Total                                                                                                               |  | $ | 35,114,096 |  



5



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The Convertible Note Payable allows the holder to convert all or any portion of the issued and outstanding
principal amount and/or accrued interest and fees then due into shares of common stock at a fixed conversion price of $5.43 per share.

Each
note payable and the related master security agreement and equity pledge and guaranty agreement contain provisions that specify events of default which could lead to acceleration of the maturity of the debt. These provisions prohibit the encumbrance
or sale of the assets of the Company and require maintenance and insurance of the assets of the Company. An event of default would also arise if the Company became insolvent, filed bankruptcy, allowed a change in control or had unresolved judgments
against the Companys assets. As of the balance sheet dates above, none of these events had occurred.

Interest charged to operations on
these notes, including amortization of original issue discount, was $3.2 million, $1.8 million, $0.4 million, and $5.4 million during the years ended December 31, 2009, 2008, 2007 and the period from inception to December 31, 2009, respectively.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2009:



|                              |  |       |            |                        |   |           |  |           |            |                   |   |   |  |   |  
|----------------------------- |  | ----- | ---------- | ---------------------- | - | --------- |  | --------- | ---------- | ----------------- | - | - |  | - | -
|                              |  |      
|                              |  |       |            | Payments Due by Period
|                              |  | Total |            | Less than 1 year       |   | 1-3 years |  | 3-5 years |            | More than 5
years
|                              |  |       |            |                        |   |          
|Debt (1)(2)                   |  | $     | 45,470,012 |                        |   |           |  | $         | 45,470,012 |                   |   |   |  |   |  
|Operating lease obligations   |  | $     | 135,552    |                        | $ | 135,552   |  |           |            |                   |   |   |  |   |  
|Total contractual obligations |  | $     | 45,605,564 |                        | $ | 135,552   |  | $         | 45,470,012 |                   | $ | - |  | $ | -



| | (1) | The obligation related to debt includes the outstanding principal balance of debt of $35.5 million plus additional amounts expected to be added to principal and accrued
interest on this debt through the maturity date of the debt, calculated assuming no change in interest rates.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | On July 24, 2009, we modified our debt agreements to extend the maturity of debt and related accrued interest to June 30, 2012.
| | --- | -------------------------------------------------------------------------------------------------------------------------------

We expect to continue to incur 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.

The Company is currently in the development stage at December 31, 2009 as it is continuing the development of its product and has not yet recognized
any revenues. 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.



6



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We have never been profitable and we have incurred significant losses and cash flow deficits. For the fiscal
years ended December 31, 2009, 2008, and 2007, we reported net losses of $30.3 million, $20.0 million, and $8.3 million, respectively, and negative cash flow from operating activities of $27.6 million, $11.8 million, and $4.7 million,
respectively. As of December 31, 2009, we have an aggregate accumulated deficit of $60.0 million. We anticipate that operations will continue to report losses and negative cash flow during 2010. As a result of these net losses and cash flow
deficits and other factors, there is a substantial doubt about our ability to continue as a going concern.

The financial statements do not
include any adjustments that might result from the outcome of this uncertainty. These adjustments would likely include substantial impairment of the carrying amount of our assets of $8.6 million (with the exception of cash and restricted cash of
$4.7 million) and potential contingent liabilities that may arise if we are unable to fulfill various operational commitments. In addition, the value of our securities, including common stock and warrants, would be greatly impaired. Our ability to
continue as a going concern is dependent upon generating sufficient cash flow from operations and obtaining additional capital and financing. The Company is currently seeking additional funding from its principal shareholder and unrelated third
parties. PetroAlgae Inc. has never paid or declared dividends on its capital stock.



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. We enter
into loan arrangements when needed. Our borrowings are subject to interest rate risk and changes in the prime interest rate will have an effect on interest rate expense.

Commodity Price Risk

Our technology, once commercialized, will be used to produce biocrude for the energy market and protein for the agriculture market, each of which may
directly or indirectly compete with existing commodities. In particular, we expect that the price our customer licensees will obtain from the sale of these products will most directly be impacted by market prices for crude oil and petroleum-based
fuels, and protein, respectively. These market prices, particularly for crude oil and petroleum-based fuels, can be volatile, and can be influenced by factors including global demand, availability of supply, weather, political events and the market
price of alternative forms of energy, all of which factors are beyond our control. Significant fluctuations in these commodity prices could impact the profitability of our technology to our customer licensees, and therefore the demand for our
technology, and could also affect the amount of royalty revenues we receive from our customer licensees.

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s 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 us 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.



7



---

PetroAlgaes critical accounting polices include:

Revenue Recognition

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. To the extent cash
is received in advance of the Companys performance or the availability of rights under a license agreement, such amounts are reported as deferred revenue.

Cash and Cash Equivalents and Cash Concentrations

The Company considers all highly liquid investments with an remaining maturity of three months or less when purchased to be cash equivalents. The Company
at December 31, 2009, has approximately $4.7 million on deposit at a single financial institution.

Restricted Cash

Restricted cash consists of cash received by the Company related to a license for intellectual property, which will be held in escrow until certain
actions are taken by the licensee.

Fair Value of Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of the three years
ended December 31, 2009. The respective carrying values 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 are assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate the amounts expected to be received or paid.

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 would measure 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 of the impaired assets. There were no impairments in the three years ended December 31, 2009.

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



8



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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.

Stock-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 stock-based transactions be recorded in the financial statements. The Statement establishes fair value as the measurement objective in accounting for stock-based payment arrangements 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 stock-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.

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



9



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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 resulted in a change in the description and classification of amounts formerly reported as minority
interest.

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



10



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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.



The Companys common stock is traded on the Over the Counter Bulletin Board or
OTCBB. The Company shares became public through a reverse acquisition and a very small percentage of the issued and outstanding shares are available for active trading since a large majority of shares are held by affiliates. Due to the very limited
number of shares held by non-affiliates and the resulting low trading volume in our common stock, our public shares are susceptible to unusual swings in price based on very few trades. Consequently, we determined that the OTCBB trading price of the
common stock was no longer a reasonable indicator of the fair value of shares when not issued for cash. Instead, the fair value of our common stock was estimated using a Level 3 fair value measurement. Specifically, fair value of our equity has been
estimated by applying discounted cash flow valuation techniques to the Companys estimate of future cash flows from its business as of the valuation date.



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



11



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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.



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 which is effective for calendar year reporting entities beginning after January 1, 2010. 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 effect of this new guidance on the Companys revenues, which in turn
depends upon the final structure of the Companys contracts with customers, is still being analyzed.



12



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ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

PetroAlgae Inc.

We have audited the
accompanying consolidated balance sheets of PetroAlgae Inc. (A Development Stage Entity), a Delaware Corporation, and Subsidiary as of December 31, 2009, 2008 and 2007, and the related consolidated statements of operations and cash flows for
the years then ended and for the cumulative period from inception (September 22, 2006) to December 31, 2009, and the statement of stockholders deficit for the cumulative 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). 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of PetroAlgae
Inc. (A Development Stage Entity) and Subsidiary as of December 31, 2009, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 and for 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 consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2,
the Company incurred significant losses from operations and has a working capital deficit and no revenue generating operations. These factors, among others, as discussed in Note 2, raise substantial doubt about the Companys ability to continue
as a going concern. Managements plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 3, errors were discovered by management of the Company resulting in the need to restate its previously filed financial statements.
Accordingly, the accompanying consolidated balance sheets of PetroAlgae Inc. and Subsidiary as of December 31, 2009, 2008 and 2007, and the related consolidated statements of operations and cash flows for the years then ended and for the
cumulative period from inception (September 22, 2006) to December 31, 2009, and the statement of stockholders deficit for the cumulative period from inception (September 22, 2006) to December 31, 2009 have been restated as a result
of these corrections.

/s/ GRANT THORNTON LLP

Orlando, Florida

August 5, 2010



13



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PetroAlgae Inc.

(A Development Stage Company)

Consolidated Balance Sheets



|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|------------------------------------------------------------------------------------ |  | ------------------------------- | ----------- | - | ------------------------------ | - | ----------- | ------------------------------ |  | - | ---------- | -
|                                                                                     |  | December 31,
2009
(as restated) |             |   | December 31,2008
(as restated) |   |             | December 31,2007
(as restated) | 
|                                                                                     |  |                                 |             |  
|Assets:                                                                              |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|Current assets:                                                                      |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|Cash and cash equivalents                                                            |  | $                               | 2,679,302   |   |                                | $ | 10,416,823  |                                |  | $ | 184,145    |  
|Restricted cash                                                                      |  |                                 | 2,000,000   |   |                                |   | -           |                                |  |   | -          |  
|Prepaid expenses                                                                     |  |                                 | 129,333     |   |                                |   | 110,277     |                                |  |   | 6,344      |  
|Receivable                                                                           |  |                                 | 1,200,000   |   |                                |   | -           |                                |  |   | -          |  
|Other current assets                                                                 |  |                                 | 341,726     |   |                                |   | -           |                                |  |   | -          |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Total current assets                                                                 |  |                                 | 6,350,361   |   |                                |   | 10,527,100  |                                |  |   | 190,489    |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Property and equipment                                                               |  |                                 | 3,653,225   |   |                                |   | 1,390,712   |                                |  |   | 578,052    |  
|Accumulated depreciation                                                             |  |                                 | (1,416,350  | ) |                                |   | (324,507    | )                              |  |   | (55,816    | )
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Net property and equipment                                                           |  |                                 | 2,236,875   |   |                                |   | 1,066,205   |                                |  |   | 522,236    |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Deposits                                                                             |  |                                 | 5,200       |   |                                |   | 5,000       |                                |  |   | 7,700      |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Total assets                                                                         |  | $                               | 8,592,436   |   |                                | $ | 11,598,305  |                                |  | $ | 720,425    |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|Liabilities and stockholders deficit:                                               |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|Current liabilities:                                                                 |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|Accounts payable                                                                     |  | $                               | 536,328     |   |                                | $ | 1,043,285   |                                |  | $ | 330,901    |  
|Accrued expenses                                                                     |  |                                 | 1,617,191   |   |                                |   | 1,786,341   |                                |  |   | 409,824    |  
|Accrued expenses - related party                                                     |  |                                 | 2,144,840   |   |                                |   | 349,779     |                                |  |   | 63,491     |  
|Liability related to equity issuance                                                 |  |                                 | 7,500,000   |   |                                |   | -           |                                |  |   | -          |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Total current liabilities                                                            |  |                                 | 11,798,359  |   |                                |   | 3,179,405   |                                |  |   | 804,216    |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Other liability                                                                      |  |                                 | 2,000,000   |   |                                |   |             |                                |  |   |            |  
|Note payable - related party                                                         |  |                                 | 35,114,096  |   |                                |   | 23,623,844  |                                |  |   | 8,907,793  |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Total liabilities                                                                    |  |                                 | 48,912,455  |   |                                |   | 26,803,249  |                                |  |   | 9,712,009  |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Commitments and contingencies                                                        |  |                                 | -           |   |                                |   | -           |                                |  |   | -          |  
|Stockholders deficit:                                                               |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|Common stock - $.001 par value, 300,000,000 shares authorized                        |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|106,229,356, 104,274,189 and 100,000,000 shares issued and outstanding, respectively |  |                                 | 106,229     |   |                                |   | 104,274     |                                |  |   | 100,000    |  
|Paid in capital                                                                      |  |                                 | 24,115,788  |   |                                |   | 14,398,134  |                                |  |   | 665,518    |  
|Deficit accumulated during the development stage                                     |  |                                 | (60,012,830 | ) |                                |   | (29,744,952 | )                              |  |   | (9,757,102 | )
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|PetroAlgae Inc. stockholders deficit                                                |  |                                 | (35,790,813 | ) |                                |   | (15,242,544 | )                              |  |   | (8,991,584 | )
|                                                                                     |  |                                 |            
|Non-controlling interest                                                             |  |                                 | (4,529,206  | ) |                                |   | 37,600      |                                |  |   | -          |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Total stockholders deficit                                                          |  |                                 | (40,320,019 | ) |                                |   | (15,204,944 | )                              |  |   | (8,991,584 | )
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  
|                                                                                     |  |                                 |            
|Total liabilities and stockholders deficit                                          |  | $                               | 8,592,436   |   |                                | $ | 11,598,305  |                                |  | $ | 720,425    |  
|                                                                                     |  |                                 |            
|                                                                                     |  |                                 |             |   |                                |   |             |                                |  |   |            |  

See accompanying notes to the consolidated financial statements.



14



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PetroAlgae Inc.

(A Development Stage Company)

Consolidated Statements of Operations

|                                                  |  |                                 |             |   |                                 |   |             |                                 |  |   |                                                                                            |   |  |   |             |  
|------------------------------------------------- |  | ------------------------------- | ----------- | - | ------------------------------- | - | ----------- | ------------------------------- |  | - | ------------------------------------------------------------------------------------------ | - |  | - | ----------- | -
|                                                  |  | December, 31
2009
(as restated) |             |   | December, 31
2008 (as
restated) |   |             | December, 31
2007 (as
restated) |  |   | For the Period
From
September 22,
2006
(Inception)
Through
December 31,
2009 (as
restated) |  
|                                                  |  |                                 |             |  
|                                                  |  |                                 |             |  
|Revenue                                           |  | $                               | -           |   |                                 | $ | -           |                                 |  | $ | -                                                                                          |   |  | $ | -           |  
|                                                  |  |                                 |             |  
|                                                  |  |                                 |             |  
|Costs and expenses:                               |  |                                 |             |   |                                 |   |             |                                 |  |   |                                                                                            |   |  |   |             |  
|Selling, general and administrative               |  |                                 | 17,400,801  |   |                                 |   | 8,251,676   |                                 |  |   | 2,984,416                                                                                  |   |  |   | 28,816,514  |  
|Research and development                          |  |                                 | 15,085,060  |   |                                 |   | 9,865,844   |                                 |  |   | 4,863,382                                                                                  |   |  |   | 31,044,681  |  
|Interest expense - related party                  |  |                                 | 3,198,642   |   |                                 |   | 1,764,039   |                                 |  |   | 443,472                                                                                    |   |  |   | 5,406,153   |  
|Depreciation                                      |  |                                 | 1,137,733   |   |                                 |   | 268,691     |                                 |  |   | 55,108                                                                                     |   |  |   | 1,462,240   |  
|                                                  |  |                                 |             |  
|                                                  |  |                                 |             |  
|Total costs and expenses                          |  |                                 | 36,822,236  |   |                                 |   | 20,150,250  |                                 |  |   | 8,346,378                                                                                  |   |  |   | 66,729,588  |  
|                                                  |  |                                 |             |  
|                                                  |  |                                 |             |  
|Net loss before non-controlling interest          |  |                                 | (36,822,236 | ) |                                 |   | (20,150,250 | )                               |  |   | (8,346,378                                                                                 | ) |  |   | (66,729,588 | )
|                                                  |  |                                 |             |  
|Net loss attributable to non-controlling interest |  |                                 | 6,554,358   |   |                                 |   | 162,400     |                                 |  |   | -                                                                                          |   |  |   | 6,716,758   |  
|                                                  |  |                                 |             |  
|                                                  |  |                                 |             |  
|Net loss attributable to PetroAlgae Inc.          |  | $                               | (30,267,878 | ) |                                 | $ | (19,987,850 | )                               |  | $ | (8,346,378                                                                                 | ) |  | $ | (60,012,830 | )
|                                                  |  |                                 |             |  
|                                                  |  |                                 |             |  
|Basic and diluted common shares outstanding       |  |                                 | 104,866,065 |   |                                 |   | 100,362,021 |                                 |  |   | 100,000,000                                                                                |   |  |   |             |  
|                                                  |  |                                 |             |   |                                 |   |             |                                
|                                                  |  |                                 |             |  
|Basic and diluted loss per share                  |  |                                 | ($0.29)     |   |                                 |   | ($0.20)     |                                 |  |   | ($0.08)                                                                                    |   |  |   |             |  
|                                                  |  |                                 |             |   |                                 |   |             |                                

See accompanying notes to the consolidated financial statements.



15



---

PetroAlgae Inc.

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders Deficit

(as restated)

|                                                        |  |                     |  |        |         |                 |   |            |                          |  |   |                                          |   |  |       |             |   |  |   |             |  
|------------------------------------------------------- |  | ------------------- |  | ------ | ------- | --------------- | - | ---------- | ------------------------ |  | - | ---------------------------------------- | - |  | ----- | ----------- | - |  | - | ----------- | -
|                                                        |  |                     |  |        |         |                 |   | Deficit    |                          |  |   |                                         
|                                                        |  | Common Stock
Shares |  | Amount |         | Paid In Capital |   |            | Non Controlling
Interest |  |   | Accumulated
During the
Development
Stage |   |  | Total |            
|                                                        |  |                     | 
|Shares issued at inception for cash                     |  | 100,000,000         |  | $      | 100,000 |                 | $ | 388,532    |                          |  | $ | -                                        |   |  | $     | -           |   |  | $ | 488,532     |  
|Net loss                                                |  | -                   |  |        | -       |                 |   | -          |                          |  |   | -                                        |   |  |       | (1,410,724  | ) |  |   | (1,410,724  | )
|                                                        | 
|                                                        |  |                     | 
|Balance - December 31, 2006                             |  | 100,000,000         |  | $      | 100,000 |                 | $ | 388,532    |                          |  | $ | -                                        |   |  | $     | (1,410,724  | ) |  | $ | (922,192    | )
|                                                        |  |                     | 
|                                                        |  |                     |  |        |         |                 |   |            |                          |  |   |                                          |   |  |       |             |   |  |   | -           |  
|Issuance of PA LLC interests to employees               |  | -                   |  |        | -       |                 |   | 276,986    |                          |  |   | -                                        |   |  |       | -           |   |  |   | 276,986     |  
|Net loss                                                |  | -                   |  |        | -       |                 |   | -          |                          |  |   | -                                        |   |  |       | (8,346,378  | ) |  |   | (8,346,378  | )
|                                                        | 
|                                                        |  |                     | 
|Balance - December 31, 2007                             |  | 100,000,000         |  | $      | 100,000 |                 | $ | 665,518    |                          |  | $ | -                                        |   |  | $     | (9,757,102  | ) |  | $ | (8,991,584  | )
|                                                        |  |                     | 
|Issuance of PA LLC interests to employees               |  | -                   |  |        | -       |                 |   | 2,240,041  |                          |  |   | 200,000                                  |   |  |       | -           |   |  |   | 2,440,041   |  
|Shares issued for cash                                  |  | 3,174,603           |  |        | 3,175   |                 |   | 9,996,825  |                          |  |   | -                                        |   |  |       | -           |   |  |   | 10,000,000  |  
|Shares issued for unearned services                     |  | 1,000,000           |  |        | 1,000   |                 |   | (1,000     | )                        |  |   | -                                        |   |  |       | -           |   |  |   | -           |  
|Amortization of unearned services                       |  | -                   |  |        | -       |                 |   | 43,750     |                          |  |   | -                                        |   |  |       | -           |   |  |   | 43,750      |  
|Issuance of option as additional consideration for debt |  | -                   |  |        | -       |                 |   | 1,453,000  |                          |  |   | -                                        |   |  |       | -           |   |  |   | 1,453,000   |  
|Reverse merger                                          |  | 99,586              |  |        | 99      |                 |   | -          |                          |  |   | -                                        |   |  |       | -           |   |  |   | 99          |  
|Loss attributable to non controlling interest           |  | -                   |  |        | -       |                 |   | -          |                          |  |   | (162,400                                 | ) |  |       | -           |   |  |   | (162,400    | )
|Net loss                                                |  | -                   |  |        | -       |                 |   | -          |                          |  |   | -                                        |   |  |       | (19,987,850 | ) |  |   | (19,987,850 | )
|                                                        | 
|                                                        |  |                     | 
|Balance - December 31, 2008                             |  | 104,274,189         |  | $      | 104,274 |                 | $ | 14,398,134 |                          |  | $ | 37,600                                   |   |  | $     | (29,744,952 | ) |  | $ | (15,204,944 | )
|                                                        |  |                     | 
|                                                        |  |                     |  |        |         |                
|Shares issued for services                              |  | 160,524             |  |        | 160     |                 |   | 537,652    |                          |  |   | -                                        |   |  |       | -           |   |  |   | 537,812     |  
|Shares issued for cash                                  |  | 500,000             |  |        | 500     |                 |   | 3,999,500  |                          |  |   | -                                        |   |  |       | -           |   |  |   | 4,000,000   |  
|Shares issued with purchase price guaranty              |  | 937,500             |  |        | 938     |                 |   | (938       | )                        |  |   | -                                        |   |  |       | -           |   |  |   | -           |  
|Shares and warrants issued for other current assets     |  | 357,143             |  |        | 357     |                 |   | 3,017,787  |                          |  |   | -                                        |   |  |       | -           |   |  |   | 3,018,144   |  
|Issuance of PA LLC interests to employees               |  | -                   |  |        | -       |                 |   | -          |                          |  |   | 1,987,552                                |   |  |       | -           |   |  |   | 1,987,552   |  
|Issuance of options to employees                        |  | -                   |  |        | -       |                 |   | 588,653    |                          |  |   | -                                        |   |  |       | -           |   |  |   | 588,653     |  
|Amortization of unearned services                       |  | -                   |  |        | -       |                 |   | 1,575,000  |                          |  |   | -                                        |   |  |       | -           |   |  |   | 1,575,000   |  
|Loss attributable to non controlling interest           |  | -                   |  |        | -       |                 |   | -          |                          |  |   | (6,554,358                               | ) |  |       | -           |   |  |   | (6,554,358  | )
|Net loss                                                |  | -                   |  |        | -       |                 |   | -          |                          |  |   | -                                        |   |  |       | (30,267,878 | ) |  |   | (30,267,878 | )
|                                                        | 
|                                                        |  |                     | 
|Balance - December 31, 2009                             |  | 106,229,356         |  | $      | 106,229 |                 | $ | 24,115,788 |                          |  | $ | (4,529,206                               | ) |  | $     | (60,012,830 | ) |  | $ | (40,320,019 | )
|                                                        |  |                     | 

See accompanying notes to the consolidated financial statements.



16



---

PetroAlgae Inc.

(A Development Stage Company)

Consolidated Statements of Cash Flows



|                                                                             |  |                                           |             |   |                                           |   |             |                                          |  |   |                                                                                  |   |  |   |             |  
|---------------------------------------------------------------------------- |  | ----------------------------------------- | ----------- | - | ----------------------------------------- | - | ----------- | ---------------------------------------- |  | - | -------------------------------------------------------------------------------- | - |  | - | ----------- | -
|                                                                             |  | Year EndedDecember 31,
2009
(as restated) |             |   | Year EndedDecember 31,
2008
(as restated) |   |             | Year EndedDecember 31,2007
(as restated) |  |   | Period FromSeptember 22,
2006
(Inception)
ThroughDecember 31,
2009
(as restated) |  
|                                                                             |  |                                           |             |  
|Cash flows from operating activities:                                        |  |                                           |             |   |                                           |   |             |                                          |  |   |                                                                                  |   |  |   |             |  
|Net loss                                                                     |  | $                                         | (36,822,236 | ) |                                           | $ | (20,150,250 | )                                        |  | $ | (8,346,378                                                                       | ) |  | $ | (66,729,588 | )
|Adjustments to reconcile net loss to net
 cash used in operating
activities: |  |                                           |             |   |                                           |   |             |                                          |  |   |                                                                                  |   |  |   |             |  
|Amortization of original issue discount                                      |  |                                           | 562,000     |   |                                           |   | 516,000     |                                          |  |   | -                                                                                |   |  |   | 1,078,000   |  
|Amortization of company options                                              |  |                                           | 588,653     |   |                                           |   | -           |                                          |  |   | -                                                                                |   |  |   | 588,653     |  
|Amoritization of unearned services                                           |  |                                           | 1,575,000   |   |                                           |   | 43,750      |                                          |  |   | -                                                                                |   |  |   | 1,618,750   |  
|Employee compensation by grant of PA LLC units                               |  |                                           | 1,987,552   |   |                                           |   | 2,440,041   |                                          |  |   | 276,986                                                                          |   |  |   | 4,704,579   |  
|Expenses paid and interest added to note payable - related party             |  |                                           | 2,723,313   |   |                                           |   | 3,044,739   |                                          |  |   | 3,607,793                                                                        |   |  |   | 9,375,845   |  
|Expenses paid by issuance of common stock                                    |  |                                           | 1,214,230   |   |                                           |   | -           |                                          |  |   | -                                                                                |   |  |   | 1,214,230   |  
|Depreciation                                                                 |  |                                           | 1,137,733   |   |                                           |   | 268,691     |                                          |  |   | 55,108                                                                           |   |  |   | 1,462,240   |  
|Loss on disposition of equipment                                             |  |                                           | 126,830     |   |                                           |   | -           |                                          |  |   | -                                                                                |   |  |   | 126,830     |  
|Increase in prepaid expenses                                                 |  |                                           | (19,056     | ) |                                           |   | (103,933    | )                                        |  |   | (5,284                                                                           | ) |  |   | (129,333    | )
|(Increase) decrease in deposits                                              |  |                                           | (200        | ) |                                           |   | 2,700       |                                          |  |   | (7,700                                                                           | ) |  |   | (5,200      | )
|Increase (decrease) in accounts payable                                      |  |                                           | (506,957    | ) |                                           |   | 712,384     |                                          |  |   | 241,355                                                                          |   |  |   | 589,981     |  
|Increase (decrease) in accrued expenses                                      |  |                                           | (169,150    | ) |                                           |   | 1,376,516   |                                          |  |   | (488,929                                                                         | ) |  |   | 1,627,028   |  
|                                                                             |  |                                           |             |  
|                                                                             |  |                                           |             |  
|Net cash used in operating activities                                        |  | $                                         | (27,602,288 | ) |                                           | $ | (11,849,362 | )                                        |  | $ | (4,667,049                                                                       | ) |  | $ | (44,477,985 | )
|                                                                             |  |                                           |             |  
|Cash flows from investing activities:                                        |  |                                           |             |   |                                           |   |             |                                          |  |   |                                                                                  |   |  |   |             |  
|Proceeds from sale of asset                                                  |  |                                           | 36,000      |   |                                           |   | -           |                                          |  |   | -                                                                                |   |  |   | 36,000      |  
|Acquisition of property and equipment                                        |  |                                           | (2,471,233  | ) |                                           |   | (812,660    | )                                        |  |   | (485,283                                                                         | ) |  |   | (3,861,945  | )
|                                                                             |  |                                           |             |  
|                                                                             |  |                                           |             |  
|Net cash used in investing activities                                        |  | $                                         | (2,435,233  | ) |                                           | $ | (812,660    | )                                        |  | $ | (485,283                                                                         | ) |  | $ | (3,825,945  | )
|                                                                             |  |                                           |             |  
|Cash flows from financing activities:                                        |  |                                           |             |   |                                           |   |             |                                          |  |   |                                                                                  |   |  |   |             |  
|Member contributions                                                         |  |                                           | -           |   |                                           |   | -           |                                          |  |   | -                                                                                |   |  |   | 488,532     |  
|Reverse merger                                                               |  |                                           | -           |   |                                           |   | 99          |                                          |  |   | -                                                                                |   |  |   | 99          |  
|Common stock and warrants issued for cash                                    |  |                                           | 11,500,000  |   |                                           |   | 10,000,000  |                                          |  |   | -                                                                                |   |  |   | 21,500,000  |  
|Borrowings under notes payable - related party                               |  |                                           | 10,000,000  |   |                                           |   | 12,894,601  |                                          |  |   | 5,300,000                                                                        |   |  |   | 28,194,601  |  
|Issuance of common stock and warrants for cash                               |  |                                           | 800,000     |   |                                           |   | -           |                                          |  |   | -                                                                                |   |  |   | 800,000     |  
|                                                                             |  |                                           |             |  
|                                                                             |  |                                           |             |  
|Net cash provided by financing activities                                    |  | $                                         | 22,300,000  |   |                                           | $ | 22,894,700  |                                          |  | $ | 5,300,000                                                                        |   |  | $ | 50,983,232  |  
|                                                                             |  |                                           |             |  
|                                                                             |  |                                           |             |  
|Net (decrease) increase in cash                                              |  |                                           | (7,737,521  | ) |                                           |   | 10,232,678  |                                          |  |   | 147,668                                                                          |   |  |   | 2,679,302   |  
|                                                                             |  |                                           |             |  
|Cash and cash equivalents - beginning of period                              |  |                                           | 10,416,823  |   |                                           |   | 184,145     |                                          |  |   | 36,477                                                                           |   |  |   | -           |  
|                                                                             |  |                                           |             |  
|Cash and cash equivalents - end of period                                    |  | $                                         | 2,679,302   |   |                                           | $ | 10,416,823  |                                          |  | $ | 184,145                                                                          |   |  | $ | 2,679,302   |  
|                                                                             |  |                                           |             |  
|                                                                             |  |                                           |             |  
|Non-cash investing and financing activities:                                 |  |                                           |             |   |                                           |   |             |                                          |  |   |                                                                                  |   |  |   |             |  
|Stock and warrants issued for other liability                                |  | $                                         | 7,500,000   |   |                                           | $ | -           |                                          |  | $ | -                                                                                |   |  | $ | 7,500,000   |  
|Common stock issued for unearned services                                    |  | $                                         | -           |   |                                           | $ | 3,150,000   |                                          |  | $ | -                                                                                |   |  | $ | 3,150,000   |  
|Issuance of shares for other current assets                                  |  | $                                         | 1,200,000   |   |                                           | $ | -           |                                          |  | $ | -                                                                                |   |  | $ | 1,200,000   |  
|Long term liability incurred for restricted cash                             |  | $                                         | 2,000,000   |   |                                           | $ | -           |                                          |  | $ | -                                                                                |   |  | $ | 2,000,000   |  

See accompanying
notes to the consolidated financial statements.



17



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to
Consolidated Financial Statements

December 31, 2009 and 2008

Note 1 Organization

PetroAlgae
Inc. (the Company) began its operations through its controlled subsidiary, PetroAlgae LLC (PA LLC), on December 19, 2008, as the outcome of the reverse acquisition described below. PA LLC was formed by XL TechGroup,
Inc., (XLTG, a related party) its sponsor and parent until December 19, 2008, on September 22, 2006 as a Delaware limited liability company to develop technologies to commercially grow, harvest and process micro-crops. PA
LLCs primary business model is to license this technology to large customers who will commercially produce this biomass, which in turn is processed into two co-products: (1) renewable fuel feedstock, and (2) protein for
supplementation of animal feed and potentially human food ingredients.

Reverse Acquisition

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 Dover Glen, Inc. converted into 10 shares of common stock of the Dover Glen, Inc. 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 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, which were recorded at par value of $99.

Note 2 Going Concern

The Company is
currently in the development stage at December 31, 2009 as it is continuing the development of its product and has not yet recognized any revenues. 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.

We have never been profitable and we have
incurred significant losses and cash flow deficits. For the fiscal years ended December 31, 2009, 2008, and 2007, we reported net losses of $30.3 million, $20.0 million, and $8.3 million, respectively, and negative cash flow from operating
activities of $27.6 million, $11.8 million, and $4.7 million, respectively. As of December 31, 2009, we have an aggregate accumulated deficit of $60.0 million. We anticipate that operations will continue to report losses and



18



---

negative cash flow during 2010. As a result of these net losses and cash flow deficits and other factors, there is a substantial doubt about our ability to continue as a going concern.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments would
likely include substantial impairment of the carrying amount of our assets of $8.6 million (with the exception of cash and restricted cash of $4.7 million) and potential contingent liabilities that may arise if we are unable to fulfill various
operational commitments. In addition, the value of our securities, including common stock and warrants, would be greatly impaired. Our ability to continue as a going concern is dependent upon generating sufficient cash flow from operations and
obtaining additional capital and financing. The Company is currently seeking additional funding from its principal shareholder and unrelated third parties. If our ability to generate cash flow from operations is delayed or reduced and we are unable
to raise additional funding, we may be unable to continue in business.

Note 3 Correction of Errors

The Company recently identified certain errors in its previously issued annual financial statements for the years ended December 31, 2009, 2008 and
2007. These errors, which have been corrected in this financial statement, include the following items:



| |  |  | In 2008 and 2007, the Board of Directors of PA LLC, granted 106 employees restricted ownership units in PA LLC. These ownership units generally vest
over a period of four years. At each grant date, the restricted ownership unit awards were accounted for based upon an incorrect fair value calculation. Revised grant values determined using corrected Company fair value estimates resulted in
additional compensation expense of approximately $2.0 million, $2.4 million and $277,000 in 2009, 2008 and 2007, respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The nature and amount of the Companys expenditures have changed and increased from inception (September 22, 2006) through December 31, 2009.
Consequently, it has been determined that a new category, Selling, General and Administrative (SG&A) expense, should be presented through this period. This category includes senior management and overhead costs, business development
expenditures, system infrastructure costs, accounting and legal costs and intellectual property management costs. Other costs, which are related to experimentation and development of the Companys technology, are presented as Research and
Development expense. The effect of this reclassification was to decrease Research and Development expense by $6.1 million, $1.7 million and $1.3 million and to increase SG&A expense by the same amount in 2009, 2008 and 2007, respectively, with
no net increase to expenses.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2008, an option to purchase ownership units in PA LLC was issued to XL Tech Group, LLC, a related party (XL), in connection with
continued borrowings under a Company debt facility outstanding with XL. This option, which remains outstanding, had a fair value of approximately $1.5 million and was not recorded at issuance. This transaction has now been accounted for as a
discount from the carrying amount of the related debt and the amortization of the discount added $562,000 and $516,000 to interest expense in 2009 and 2008, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2009, the Company issued common stock and warrants, with a fair value of $3.0 million, to an unrelated party that provided it with equity funding
and certain business development services. Cash proceeds from this equity issuance were received partially at December 31, 2009 ($0.8 million) and partially in January 2010 ($1.2 million). The $1.0 million balance of the fair value of the
securities issued was expensed as a business development cost within selling, general and administrative expense in 2009. The Company originally recorded the $3.0 million fair value of the securities issued as a 2009 research and development
expense. In addition, the Company received $2.0 million of additional cash in connection with this transaction, which is subject to repayment to the unrelated party at that partys option. This amount has been deposited in escrow and reported
in restricted cash and other liabilities at December 31, 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

| |  |  | In 2009, the Company entered into a series of agreements with a third party for the design, engineering, and construction of a facility for the growth,
harvesting and processing of micro-crops. This facility was to be used to demonstrate our technology to potential customers. Company shares were issued in partial payment, in advance, for these services. The Company expensed $1.0 million related to
this transaction and reported the full amount at the inception of the transaction rather than as services were performed. The shares earned and retained by the third party have been adjusted to reflect their estimated fair value at issuance of
approximately $145,000 and have now been charged to research and development expense. The shares returned by the third party after year-end, which had an estimated value of $342,000, have now been added to other current assets. The net effect of
these adjustments reduced 2009 research and development expense by $855,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

The effect of the correction of these errors on the financial statements is as follows:

Selected Condensed Financial Data

Balance sheet as of December 31, 2009



|                                                             |  |                      |             |   |                      |   |            |              |  |   |             |  
|------------------------------------------------------------ |  | -------------------- | ----------- | - | -------------------- | - | ---------- | ------------ |  | - | ----------- | -
|                                                             |  | Previously
 Reported |             |   | Increase
 (Decrease) |   |            | As 
Restated | 
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Current assets                                               |  | $                    | 4,808,635   |   |                      | $ | 1,541,726  |              |  | $ | 6,350,361   |  
|                                                             |  |                      |            
|Other assets                                                 |  |                      | 2,242,075   |   |                      |   | -          |              |  |   | 2,242,075   |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Total assets                                                 |  | $                    | 7,050,710   |   |                      | $ | 1,541,726  |              |  | $ | 8,592,436   |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Current liabilities                                          |  | $                    | 14,598,359  |   |                      | $ | (2,800,000 | )            |  | $ | 11,798,359  |  
|                                                             |  |                      |            
|Long-term liabilities                                        |  |                      | 36,248,013  |   |                      |   | 866,083    |              |  |   | 37,114,096  |  
|                                                             |  |                      |            
|Total liabilities                                            |  |                      | 50,846,372  |   |                      |   | (1,933,917 | )            |  |   | 48,912,455  |  
|                                                             |  |                      |            
|Par stock and paid in capital                                |  |                      | 20,708,476  |   |                      |   | 3,513,541  |              |  |   | 24,222,017  |  
|                                                             |  |                      |            
|Development stage deficit                                    |  |                      | (58,860,269 | ) |                      |   | (1,152,561 | )            |  |   | (60,012,830 | )
|                                                             |  |                      |            
|Noncontrolling interest                                      |  |                      | (5,643,869  | ) |                      |   | 1,114,663  |              |  |   | (4,529,206  | )
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Total liabilities and deficit                                |  | $                    | 7,050,710   |   |                      |   | 1,541,726  |              |  | $ | 8,592,436   |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Statement of operations for the year ended December 31, 2009 |  |                      |             |   |                      |   |            |              |  |   |             |  
|                                                             |  | Previously
 Reported |             |   | Increase
 (Decrease) |   |            | As 
Restated | 
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Revenue                                                      |  | $                    | -           |   |                      | $ | -          |              |  | $ | -           |  
|                                                             |  |                      |            
|Selling, general and administrative expense (1)              |  |                      | 9,293,798   |   |                      |   | 8,107,003  |              |  |   | 17,400,801  |  
|                                                             |  |                      |            
|Research and development expense                             |  |                      | 24,070,534  |   |                      |   | (8,985,474 | )            |  |   | 15,085,060  |  
|                                                             |  |                      |            
|Total expenses                                               |  |                      | 37,138,707  |   |                      |   | (316,471   | )            |  |   | 36,822,236  |  
|                                                             |  |                      |            
|Noncontrolling interest                                      |  |                      | (5,643,869  | ) |                      |   | (910,489   | )            |  |   | (6,554,358  | )
|                                                             |  |                      |            
|Net loss                                                     |  | $                    | (31,494,838 | ) |                      | $ | (1,226,960 | )            |  | $ | (30,267,878 | )
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Basic and diluted loss per share                             |  | $                    | (0.30       | ) |                      | $ | (0.01      | )            |  | $ | (0.29       | )
|                                                             |  |                      |             |  

(1) - previously General and administrative expense



21



---

Selected Condensed Financial Data

Balance sheet as of December 31, 2008



|                                                             |  |                      |             |   |                      |   |            |              |  |   |             |  
|------------------------------------------------------------ |  | -------------------- | ----------- | - | -------------------- | - | ---------- | ------------ |  | - | ----------- | -
|                                                             |  | Previously
 Reported |             |   | Increase
 (Decrease) |   |            | As 
Restated | 
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Current assets                                               |  | $                    | 10,527,100  |   |                      | $ | -          |              |  | $ | 10,527,100  |  
|                                                             |  |                      |            
|Non-current assets                                           |  |                      | 1,071,205   |   |                      |   | -          |              |  |   | 1,071,205   |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Total assets                                                 |  | $                    | 11,598,305  |   |                      | $ | -          |              |  | $ | 11,598,305  |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Current liabilities                                          |  | $                    | 3,179,405   |   |                      | $ | -          |              |  | $ | 3,179,405   |  
|                                                             |  |                      |            
|Long-term liabilities                                        |  |                      | 25,319,761  |   |                      |   | (1,695,917 | )            |  |   | 23,623,844  |  
|                                                             |  |                      |            
|Total liabilities                                            |  |                      | 28,499,166  |   |                      |   | (1,695,917 | )            |  |   | 26,803,249  |  
|                                                             |  |                      |            
|Par stock and paid in capital                                |  |                      | 10,464,570  |   |                      |   | 4,037,838  |              |  |   | 14,502,408  |  
|                                                             |  |                      |            
|Development stage deficit                                    |  |                      | (27,365,431 | ) |                      |   | (2,379,521 | )            |  |   | (29,744,952 | )
|                                                             |  |                      |            
|Noncontrolling interest                                      |  |                      | -           |   |                      |   | 37,600     |              |  |   | 37,600      |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Total liabilies and deficit                                  |  | $                    | 11,598,305  |   |                      |   | -          |              |  | $ | 11,598,305  |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Statement of operations for the year ended December 31, 2008 |  |                      |             |   |                      |   |            |              |  |   |             |  
|                                                             |  | Previously
 Reported |             |   | Increase
 (Decrease) |   |            | As 
Restated | 
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Revenue                                                      |  | $                    | -           |   |                      | $ | -          |              |  | $ | -           |  
|                                                             |  |                      |            
|Selling, general and adminstrative expense (1)               |  |                      | 5,051,293   |   |                      |   | 3,200,383  |              |  |   | 8,251,676   |  
|                                                             |  |                      |            
|Research and development expense                             |  |                      | 10,867,277  |   |                      |   | (1,001,433 | )            |  |   | 9,865,844   |  
|                                                             |  |                      |            
|Total expenses                                               |  |                      | 17,166,609  |   |                      |   | 2,983,641  |              |  |   | 20,150,250  |  
|                                                             |  |                      |            
|Noncontrolling interest                                      |  |                      | (40,211     | ) |                      |   | (122,189   | )            |  |   | (162,400    | )
|                                                             |  |                      |            
|Net loss                                                     |  | $                    | (17,126,398 | ) |                      | $ | 2,861,452  |              |  | $ | (19,987,850 | )
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Basic and diluted loss per share                             |  | $                    | (0.17       | ) |                      | $ | 0.03       |              |  | $ | (0.20       | )
|                                                             |  |                      |             |  

(1) - previously General and administrative expense



22



---

Selected Condensed Financial Data

Balance sheet as of December 31, 2007



|                                                             |  |                      |             |   |                      |   |            |              |  |   |            |  
|------------------------------------------------------------ |  | -------------------- | ----------- | - | -------------------- | - | ---------- | ------------ |  | - | ---------- | -
|                                                             |  | Previously
 Reported |             |   | Increase
 (Decrease) |   |            | As 
Restated | 
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Current assets                                               |  | $                    | 190,489     |   |                      | $ | -          |              |  | $ | 190,489    |  
|                                                             |  |                      |            
|Non-current assets                                           |  |                      | 529,936     |   |                      |   | -          |              |  |   | 529,936    |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Total assets                                                 |  | $                    | 720,425     |   |                      | $ | -          |              |  | $ | 720,425    |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Current liabilities                                          |  | $                    | 804,216     |   |                      | $ | -          |              |  | $ | 804,216    |  
|                                                             |  |                      |            
|Long-term liabilities                                        |  |                      | 9,666,710   |   |                      |   | (758,917   | )            |  |   | 8,907,793  |  
|                                                             |  |                      |            
|Total liabilities                                            |  |                      | 10,470,926  |   |                      |   | (758,917   | )            |  |   | 9,712,009  |  
|                                                             |  |                      |            
|Par stock and paid in capital                                |  |                      | 488,532     |   |                      |   | 276,986    |              |  |   | 765,518    |  
|                                                             |  |                      |            
|Development stage deficit                                    |  |                      | (10,239,033 | ) |                      |   | 481,931    |              |  |   | (9,757,102 | )
|                                                             |  |                      |            
|Noncontrolling interest                                      |  |                      | -           |   |                      |   | -          |              |  |   | -          |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Total liabilities and deficit                                |  | $                    | 720,425     |   |                      |   | -          |              |  | $ | 720,425    |  
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Statement of operations for the year ended December 31, 2007 |  |                      |             |   |                      |   |            |              |  |   |            |  
|                                                             |  |                      |            
|                                                             |  | Previously
 Reported |             |   | Increase
 (Decrease) |   |            | As 
Restated | 
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Revenue                                                      |  | $                    | -           |   |                      | $ | -          |              |  | $ | -          |  
|                                                             |  |                      |            
|Selling, general and administrative expense (1)              |  |                      | 1,604,098   |   |                      |   | 1,380,318  |              |  |   | 2,984,416  |  
|                                                             |  |                      |            
|Research and development expense                             |  |                      | 6,813,459   |   |                      |   | (1,950,077 | )            |  |   | 4,863,382  |  
|                                                             |  |                      |            
|Total expenses                                               |  |                      | 8,861,029   |   |                      |   | (514,651   | )            |  |   | 8,346,378  |  
|                                                             |  |                      |            
|Noncontrolling interest                                      |  |                      | (32,720     | ) |                      |   | 32,720     |              |  |   | -          |  
|                                                             |  |                      |            
|Net loss                                                     |  | $                    | (8,828,309  | ) |                      | $ | (481,931   | )            |  | $ | (8,346,378 | )
|                                                             |  |                      |             |  
|                                                             |  |                      |            
|Basic and diluted loss per share                             |  | $                    | (0.09       | ) |                      | $ | (0.00      | )            |  | $ | (0.08      | )
|                                                             |  |                      |             |  

(1) - previously General and administrative expense



23



---

Note 4 Basis of Presentation

Principles of Consolidation

The
consolidated financial statements presented herein include the accounts of the Company and its consolidated subsidiary PA, LLC. Noncontrolling interests are accounted for based upon the value or cost attributed to their investment adjusted for the
share of income or loss that relates to their percentage ownership of the entire Company. All intercompany transactions and balances have been eliminated in consolidation.

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

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. To the extent cash
is received in advance of the Companys performance or the availability of rights under a license agreement, such amounts are reported as deferred revenue.

Cash and Cash Equivalents and Cash Concentration

The Company considers all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents. The
Company at December 31, 2009, has approximately $4.7 million on deposit at a single financial institution.

Restricted Cash

Restricted cash consists of cash received by the Company related to a license for intellectual property, which will be held in escrow
until certain actions are taken by the licensee.

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, 2008 and 2007. The respective carrying values of certain on-balance-sheet financial instruments approximate their fair values. These financial instruments include cash, accounts payable, and accrued expenses. Fair values are assumed to
approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate the amounts expected to be received or paid.

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



24



---

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 would measure 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 of the impaired
assets. There were no impairments in 2009, 2008 or 2007.

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.

As required by ASC 740-10-05, Accounting for Uncertainty in Income Taxes the Company recognizes the financial statement effects of a tax position when it
is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold
requires a substantial degree of judgment by management based on the individual facts and circumstances. Actual results could differ from these estimates.

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 is 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.

Stock-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 stock-based transactions be recorded in the financial statements. The Statement establishes fair value as
the measurement objective in accounting for stock-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for stock-based payment transactions with employees. The Statement also establishes fair
value



25



---

as the measurement objective for transactions in which an entity acquires goods or services from non-employees in stock-based payment transactions.

Recently Issued 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.

Business Combinations and Non-controlling
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, Non-controlling Interests in Consolidated Financial Statements). The new accounting standard establishes accounting and reporting standards for the non-controlling interest (or minority interests) in a
subsidiary and for the deconsolidation of a subsidiary by requiring all non-controlling 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 non-controlling interests by requiring they be treated as equity transactions. The Companys adoption of this new accounting standard resulted in a change in the description and classification
of amounts formerly reported as minority interest.



26



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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.

The Companys
common stock is traded on the Over The Counter Bulletin Board or OTCBB. The Company shares became public through a reverse acquisition and a very small percentage of the issued and outstanding shares are available for active trading since a large
majority of shares are held by affiliates. Due to the very limited number of shares held by non-affiliates and the resulting low trading volume in our common stock, our public shares are susceptible to unusual swings in price based on very few
trades. Consequently, we determined that the OTCBB trading price of the common stock was no longer a reasonable indicator of the fair value of shares when not issued for cash. Instead, the fair value of our common stock was estimated using a Level 3
fair value measurement. Specifically, fair value of our equity has been estimated by applying discounted cash flow valuation techniques to the Companys estimate of future cash flows from its business as of the valuation date.



27



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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.

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.



28



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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 which is effective for calendar year reporting entities beginning after January 1, 2010. 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 effect of this new guidance on the Companys revenues, which in turn
depends upon the final structure of the Companys contracts with customers, is still being analyzed.







Note
5  Property and Equipment

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



|                                               |  |                    |            |   |           |   |           |      |  |   |              |   |  |           
|---------------------------------------------- |  | ------------------ | ---------- | - | --------- | - | --------- | ---- |  | - | ------------ | - |  | ----------
|                                               |  | As of December 31, |            |   | Estimated
|                                               |  | 2009               |            |   | 2008      |   |           | 2007 |  |   | useful lives
|                                               |  |                    |           
|Leasehold improvements                         |  | $                  | 613,863    |   |           | $ | 365,160   |      |  | $ | 64,090       |   |  | 5-10 years
|Furniture and fixtures                         |  |                    | 81,716     |   |           |   | 22,567    |      |  |   | 13,417       |   |  | 3-7 years 
|Automobiles                                    |  |                    | 62,641     |   |           |   | 32,344    |      |  |   | 12,252       |   |  | 2-5 years 
|Computer and office equipment                  |  |                    | 230,068    |   |           |   | 127,019   |      |  |   | 25,778       |   |  | 1-7 years 
|Engineering equipment                          |  |                    | 2,276,908  |   |           |   | 607,050   |      |  |   | 357,175      |   |  | 2-7 years 
|Software and networking                        |  |                    | 388,029    |   |           |   | 236,572   |      |  |   | 105,340      |   |  | 1-5 years 
|Total cost basis                               |  | $                  | 3,653,225  |   |           | $ | 1,390,712 |      |  | $ | 578,052      |   |  |           
|                                               |  |                    |            |  
|Less accumulated depreciation and amortization |  |                    | (1,416,350 | ) |           |   | (324,507  | )    |  |   | (55,816      | ) |  |           
|                                               |  |                    |            |   |           |   |           |      |  |   |              |   |  |           
|                                               |  | $                  | 2,236,875  |   |           | $ | 1,066,205 |      |  | $ | 522,236      |   |  |           
|                                               |  |                    |            |   |           |   |           |      |  |   |              |   |  |           

Depreciation expense was $1,137,733, $268,691, $55,108 and $1,462,240 for the years ended December 31, 2009,
2008 and 2007 and the period from inception to December 31, 2009, respectively. Leasehold improvements are amortized over the shorter of the assets useful life or the remaining lease term.



29



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Note 6 Accrued Expenses

Accrued expenses are comprised of the following components:



|                              |  |      |           |      |   |           |  |   |        
|----------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | -------
|                              |  | 2009 |           | 2008 |   | 2007     
|Accrued payroll and bonus     |  | $    | 606,454   |      | $ | 1,042,299 |  | $ | 83,649 
|Accrued vacation compensation |  | $    | 651,839   |      | $ | 344,051   |  | $ | 31,718 
|Other accruals                |  | $    | 358,898   |      | $ | 399,991   |  | $ | 294,457
|                              | 
|                              |  |      |          
|Total accrued expenses        |  | $    | 1,617,191 |      | $ | 1,786,341 |  | $ | 409,824
|                              |  |      |          

Note 7 Notes Payable  Related Party

On July 24, 2009, the Company entered into agreements with its principal lender to restructure all of the Companys loans. The
Company, PA LLC, PetroTech Holdings, and LV Administrative Services, Inc., as administrative and collateral agent for PetroTech Holdings, fully executed an Omnibus Amendment, Joinder and Reaffirmation Agreement, which amended (i) the demand
notes issued by PA LLC to PetroTech Holdings 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 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 XLTG and assigned to PetroTech Holdings 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. 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 the dates below.

Notes payable consist of the following at December 31, 2009, 2008 and 2007:



|                                                                                                                     |  |      |            |   |      |   |            |      |  |   |          
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------
|                                                                                                                     |  | 2009 |            |   | 2008 |   |            | 2007
|Note 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 June 30, 2012                                                                                   |  |      |            |   |      |   |            |      |  |   |          
|                                                                                                                     |  |      |           
|Note Payable to PetroTech Holdings Corp.                                                                             |  |      | 7,222,089  |   |      |   | 7,222,089  |      |  |   |          
|     Collateral  all assets of the Company                                                                         |  |      |            |   |      |   |            |      |  |   |          
|     Interest accrues monthly, at 12% per annum                                                                     |  |      |            |   |      |   |            |      |  |   |          
|     Note is due on June 30, 2012                                                                                   |  |      |            |   |      |   |            |      |  |   |          
|                                                                                                                     |  |      |           
|Convertible Note Payable to PetroTech Holdings Corp.                                                                 |  |      | 10,000,000 |   |      |   |            |      |  |   |          
|     Collateral  all assets of the Company                                                                         |  |      |            |   |      |   |            |      |  |   |          
|     Interest accrues monthly, at 12% per annum                                                                     |  |      |            |   |      |   |            |      |  |   |          
|     Note is due on June 30, 2012 if not converted to common shares as described
below                              |  |      |            |   |      |   |            |      |  |   |          
|                                                                                                                     |  |      |           
|Up to $25,000,000 Note Payable to PetroTech Holdings Corp.                                                           |  |      | 17,849,495 |   |      |   | 16,921,243 |      |  |   | 8,907,793
|     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) |  |      |            |   |      |   |            |      |  |   |          
|     Note is due on June 30, 2012                                                                                   |  |      |            |   |      |   |            |      |  |   |          
|     Permits additional draws to fund interest. Maximum balance of this note is limited to $25
million              |  |      |            |   |      |   |            |      |  |   |          
|                                                                                                                     |  |      |            |   |      |   |            |      |  |   |          
|Subtotal                                                                                                             |  |      | 35,489,096 |   |      |   | 24,560,844 |      |  |   | 8,907,793
|Original Issue Discount                                                                                              |  |      | (375,000   | ) |      |   | (937,000   | )    |  |   |          
|                                                                                                                     |  |      |            |   |      |   |            |      |  |   |          
|                                                                                                                     |  |      |           
|Total                                                                                                                |  | $    | 35,114,096 |   |      | $ | 23,623,844 |      |  | $ | 8,907,793



30



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The Convertible Note Payable allows the holder to convert all or any portion of the issued and outstanding
principal amount and/or accrued interest and fees then due into shares of common stock at a fixed conversion price of $5.43 per share.

Each
note payable and the related master security agreement and equity pledge and guaranty agreement contain provisions that specify events of default which could lead to acceleration of the maturity of the debt. These provisions prohibit the encumbrance
or sale of the assets of the Company and require maintenance and insurance of the assets of the Company. An event of default would also arise if the Company became insolvent, filed bankruptcy, allowed a change in control or had unresolved judgments
against the Companys assets. As of the balance sheet dates above, none of these events had occurred.

A portion of the notes payable at
December 31, 2007, were held by XLTG. During 2007 and 2008 the Company received funding from XLTG in the form of a note with the interest rate at prime + 2%, with the interest drawing into the note after each month. Activity under this note
included cash advances of $5,255,000 and $5,300,000 in 2008 and 2007, respectively, and non cash advances totaling $2,758,450 and $3,607,793 in 2008 and 2007, respectively. Non cash advances included PIK interest of $928,252 and $961,749 in 2008 and
2007, respectively. In January 2008, an option to acquire 2,029,337 membership interests in PetroAlgae, LLC for 30 years at a price of less than one cent each was issued to XLTG as additional consideration for funding under the note. The issuance of
this option has been accounted for as an original issue discount on the related debt in the initial amount of approximately $1.45 million and is being amortized over the remaining term of the debt. The amortization of this discount of $562,000 and
$516,000 in 2009 and 2008, respectively, has been included in interest expense.

In August 2008, the note and related option to acquire
PetroAlgae, LLC membership interests that was held by XLTG was acquired by PetroTech Holdings.



31



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The balance of this note at December 31, 2009 and 2008, was $17,849,495 and $16,921,243. A portion of
the note was assigned to Valens US, the controlling interest in PetroTech Holdings and an affiliate of the Company.

Interest expense related
to these notes, including the amortization of original issue discount, was $3,198,642, $1,764,039, $433,472 and $5,406,153 during the years ended December 31, 2009, 2008 and 2007 and the period from inception to December 31, 2009,
respectively. No interest was capitalized during these periods.

Note 8 Leases

The Company has non-cancellable operating leases for office space and certain land used in its business that expire through 2010. The Company has four
extension periods remaining on its land lease, which provide for an increase in annual rent of approximately 20% during the extension period. In addition, XLTG 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, 2008, 2007 and since inception was $749,890,
$436,592, $73,725 and $1,271,675, respectively.

Note 9 Stockholders (Deficit) Equity

Authorized Capital. The Companys equity consists of 300,000,000 shares of $.001 par value common stock, of which approximately 106,229,000 shares
have been issued and are outstanding at December 31, 2009. In addition, the Company may issue up to 25,000,000 shares of preferred stock. No preferred stock is outstanding.

Issuance of Common Stock

At Inception,
the Company issued 100,000,000 shares of common stock (as adjusted to reflect the capital accounts of the legal acquirer in the reverse acquisition that took place in December 2008) in exchange for cash of $488,532.

To date, the Company has used a Level 3 valuation method to determine share fair value as well as the value of PA LLCs ownership interests.
Specifically, the Company employed valuation experts to conduct valuations based primarily upon a discounted cash flow analysis using inputs that were not externally observable, in this case its managements estimate of future cash flows from
its business, to determine fair value. The Company uses this methodology because the trading price of its common stock on the Over The Counter Bulletin Board service or OTCBB is considered a less meaningful indication of fair value because a very
small percentage (less than 1%) of the issued and outstanding shares are available for active trading since a large majority of shares are held by affiliates or are restricted securities. Due to the very limited number of shares held by
non-affiliates and the resulting low trading volume, the Companys public shares are susceptible to unusual swings in price based on very few trades. Consequently, the Company concluded that the OTCBB trading price of the common stock is not
considered a reasonable indicator of the fair value of its shares.

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 with a related party.

Issuance of Common Stock for
Services

During December 2008, the Company issued 1,000,000 shares of common stock for consulting services to be performed by a related
party through December 2010. The shares were valued at $3.15 per share



32



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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, the Company entered into a
Stock Purchase Agreement with Engineering Automation and Design Inc., a Nebraska corporation (EAD), pursuant to which the we issued 151,057 shares of common stock as partial consideration, in advance, for certain services relating to the
design, engineering, and construction of facilities for the growth, harvesting and processing of micro-crops for demonstration of our technology to potential customers. In February 2010, EAD returned 106,126 shares of common stock to the Company,
which were canceled. The shares earned and retained by EAD under the related agreements were accounted for at their estimated fair value at issuance of approximately $144,678 (44,931 shares at $3.22 fair value per share) and charged to research and
development expense. The shares returned after year-end, which had an estimated value of $341,725, have been included in other current assets at December 31, 2009.

During December 2009, the Company issued approximately 9,500 shares of common stock valued at an estimated fair value of $5.50 per share for legal
services.

Issuance of Common Stock and Warrants (units)

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 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 and 875,000 options exercisable at $15.00 per
share through December 31, 2009. These additional rights expired unexercised and the fair value at issuance of these rights was determined to be negligible.

The 562,500 units sold to the affiliate and 375,000 of the units 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. The cash proceeds received of $7,500,000 were allocated between the fair values of the common stock and
warrants (averaging $5.75 per common share and $2.25 per warrant) and the total was recorded as a liability due to the uncertain number of shares that will be required to be issued due to the share price guarantee. The fair value of the warrants was
estimated 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 estimated volatility of 75%. Because the guaranty provisions were not required to be fulfilled by the
Company, the common stock and warrants 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. The value of the units issued was allocated between the fair values of the common stock and warrants of $2,021,429 ($5.66 per share) and $835,714 ($2.34 per warrant), respectively. The fair value of the warrants was estimated using the
Black-Scholes valuation model, based on the estimated fair value



33



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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 estimated volatility of 75%. 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 expired unexercised on June 30, 2010. The Company estimated the fair value of the 500,000 additional warrants using the
Black-Scholes option pricing model and the same assumptions stated above, resulting in an estimated fair value of the options of $161,000. The excess of the fair value of all securities issued to Green Sciences Energy, LLC of $3,018,144 over the $2
million of cash received in 2009 ($.8 million) and 2010 ($1.2 million) has been recognized as a business development cost included in SG&A expense in 2009. The Company simultaneously entered into a license of its technology with these entities,
as explained in Note 10.

Noncontrolling Interest

During 2006, the Company issued 5% of the Class A voting units (1,000,000 units) of PA LLC as partial consideration for a license to certain
technology from AzTE. AzTE has been granted anti-dilution rights and is entitled to 5% of the fully diluted capitalization of PA LLC. Pursuant to the anti-dilution clause, the Company would be required to issue AzTE an additional 156,017 units as of
December 31, 2009.

Grant of PA LLC Profits Interests to Employees

PA LLC has an equity compensation plan which allows it to grant employees and consultants awards of profits interests in restricted Class B ownership
units (the Interests) and is limited to 14% of the total outstanding units.

The Company granted 674,500 and 2,816,471 Interests
during 2007 and 2008, respectively, to the majority of its employees as of the date that they began employment with the Company. As of December 31, 2009, the granted Interests, net of Interests forfeited, totaled approximately 2.9 million or 12.6%
of total outstanding units. These Interests give the recipient the right to participate in the income of PA LLC and any distribution that may arise from a liquidity event to the extent that such realized amounts exceed the ownership unit fair value
at the date of grant. The Company determined the fair value of these grants using a probability-weighted present value calculation, as further described below.

The fair value of the Interests granted was calculated by modeling the cash impact of possible future Company liquidity event scenarios in relation to
the economics of the agreements. The key steps in this process for each grant were as follows:



| |  | The likelihood and expected value of an IPO, a sale to a strategic buyer, and a financial sale or LBO were estimated based on information that was available to
management at the date of the grants,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The probability of achieving each scenario was estimated based the Companys outlook at grant date based upon milestones accomplished at that point and future
hurdles,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The probability-weighted future values were converted to future liquidity per share by dividing projected proceeds by the units outstanding before each grant,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



34



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| |  | The estimated fair value per unit at grant date (determined by employing discounted cash flow analyses to the business projections) was deducted from the
estimated future value per unit to derive the gross potential Interest associated with each grant,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The gross cash flow estimated for each Interest was then discounted to present value based upon the weighted average time required to accomplish estimated liquidity
events using a 60% discount rate, which is consistent with discount rates applied in the valuation of development stage technology companies.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The grants of Interests contain restrictions that allow the Company to repurchase the units for nominal consideration until a service period or other
condition is met. This restriction is removed over a service period (generally four years) with regard to approximately 2.15 million Interests. During 2009, 2008 and 2007, compensation expense related to these Interests was $2.0 million, $2.4
million and $0.3 million, respectively. The related compensation expense is recognized as a S,G&A or research and development expense, depending upon the recipients role in the Company. Unrecognized compensation cost related to these
Interests which are still restricted totaled $3.0 million as of December 31, 2009 and is expected to be expensed over the next three years. An aggregate of approximately 655,000 of these Interests remained restricted at December 31, 2009. An
aggregate of 257,860, 156,300 and 127,800 of these Interests were forfeited and repurchased during 2009, 2008 and 2007, respectively.

Five
senior officers were granted an aggregate 1.34 million Interests that are subject to repurchase for nominal consideration until a significant liquidity event is accomplished. Because that condition has not yet been met, these grants are
considered contingent and are not currently amortized. This amount will be recognized as compensation expense during the period when the liquidity event is fully accomplished. The amount and nature of the liquidity event was changed in July 2009
from a requirement to obtain $150 million of distributions and/or debt repayments to the Companys controlling shareholder to a requirement to obtain $25 million of new liquidity for the Company. This change resulted in a $4.6 million increase
in the unrecognized compensation expense to $6.0 million as of December 31, 2009. All of these Interests remain restricted and outstanding as of December 31, 2009.

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.

These options generally become exercisable on a ratable basis over four years
beginning at each recipients date of hire. Two senior officers received grants that become exercisable either ratably over four years or upon the accomplishment of two of four business objectives, whichever occurs sooner. The Company estimates
that the business objective criteria will be met in two years and is amortizing the cost of these grants over a two year period. The Company determined the fair value of these options using the Black-Scholes model using assumptions described in
detail below. Compensation cost is being recognized as a S,G&A or research and development expense, depending upon the recipients role in the Company, over the required service period of each grant.



35



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The fair value of the employee option grants were determined by incorporating the following assumptions into
the Black-Scholes option pricing model:



|                        |  |           |  |          
|----------------------- |  | --------- |  | ---------
|Grant dates             |  | June 2009 |  | July 2009
|Share fair value        |  | $4.22     |  | $4.40    
|Exercise price          |  | $8.50     |  | $8.00    
|Risk-free interest rate |  | 3.01%     |  | 2.8%     
|Expected term           |  | 6 1⁄4 years |  | 6 1⁄4 years
|Expected volatility     |  | 75.2%     |  | 75.2%    
|Dividend yield          |  | 0%        |  | 0%       

The
Black-Scholes calculations resulted in the determination of the following compensation cost:



|                          |  |            |  |          
|------------------------- |  | ---------- |  | ---------
|                          |  | June 2009  |  | July 2009
|Fair value per option     |  | $2.36      |  | $2.54    
|Number of options granted |  | 1,072,500  |  | 45,000   
|Fair Value                |  | $2,531,100 |  | $114,300 

To date, the Company has
used a Level 3 valuation method to determine share fair value. Specifically, the Company employed valuation experts to conduct valuations based primarily upon a discounted cash flow analysis using inputs which were not externally observable, in this
case our managements estimate of future cash flows from our business, to determine fair value. The Company uses this methodology because the trading price of its common stock on the Over The Counter Bulletin Board service or OTCBB is
considered a less meaningful indication of the fair value because a very small percentage (less than 1%) of the issued and outstanding shares are available for active trading since a large majority of shares are held by affiliates or are restricted
securities. Due to the very limited number of shares held by non-affiliates and the resulting low trading volume, the Companys public shares are susceptible to unusual swings in price based on very few trades. Consequently, the Company
concluded that the OTCBB trading price of the Company common stock is not considered a reasonable indicator of the fair value of its shares.

The Company estimates volatility in accordance with SEC SAB No. 107, Share-based Payment based on an analysis of expected volatility of
share trading prices for a peer group of companies. Over a period of time similar to that of the expected option life, the volatility in share price of these alternative energy and clean-tech companies averaged 75%.

The risk-free interest rate is based on the yield of U.S. Treasury securities with a remaining maturity equal to the expected term of the option as of
the date of issuance. Because the Company does not have history on which to judge the period over which the options will be outstanding, the expected life of the options has been determined utilizing the simplified method allowed for plain
vanilla options as described by SAB No. 107. The Companys expected dividend yield was assumed to be zero as we have not paid, and do not anticipate paying, cash dividends on common stock.

Because the Company has very little history from which to estimate forfeiture of options or grants, it accounts for such forfeitures prospectively, that
is, in the period in which they actually occur.



36



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A summary of stock option activity is as follows:



|                             |  |                |   |  |                              |       |   |                          |   |     
|---------------------------- |  | -------------- | - |  | ---------------------------- | ----- | - | ------------------------ | - | ----
|                             |  | Numberofshares |   |  | Weightedaverageexerciseprice |       |   | Weightedaveragefairvalue
|Balance at December 31, 2008 |  |               |   |  |                              |      |   |                          |   |    
|Granted June 17, 2009        |  | 1,072,500      |   |  | $                            | 8.50  |   |                          | $ | 2.36
|Granted July 16, 2009        |  | 45,000         |   |  | $                            | 8.00  |   |                          | $ | 2.54
|Exercised/Forfeited          |  | (200,000       | ) |  | $                            | (8.50 | ) |                          | $ | 2.36
|                             |  |                |   |  |                              |       |   |                          |   |     
|                             |  |                |  
|Balance at December 31, 2009 |  | 917,500        |   |  | $                            | 8.48  |   |                          | $ | 2.37

During 2009, a total of 7,000 of the
options granted during the year became exercisable by year-end and the fair value of such options at December 31, 2009, was $16,520. Unrecognized compensation cost related to unvested options totaled approximately $2.1 million as of December
31, 2009 and is expected to be expensed over the next four years. No options were exercised during 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 $0.00. The intrinsic value of each option share is the difference between the
estimated fair market value of the common stock and the exercise price of such option share. The Company estimates that at the end of the year, the fair value of its common stock is less than the exercise price of all outstanding options.

Inputs to both the PA LLC profits interest fair value calculation and the Companys stock option Black-Scholes model are subjective and
generally require significant judgment to determine. If, in the future, the Company determines that another method for calculating the fair value of its stock-based compensation is more reasonable, or if another method for calculating these input
assumptions is prescribed by authoritative guidance, the fair value calculated for its stock-based compensation could change significantly. Regarding stock options, higher volatility and longer expected terms generally result in an increase to
stock-based compensation expense determined at the date of grant.

Note 10 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 9), $1,550,000 in cash, and a contingent obligation to make certain payments if licensed products derived from this intellectual property are sold. The Company
determined that the intellectual property will not be used in its products and accordingly expensed the non-refundable portion of the payments to research and development expense.

In December 2009, entered into a master license agreement with Congoo, LLC which was later assigned to Green Science Energy, LLC, its controlled
affiliate. Under this agreement, the Company granted the licensee the right to market and sell sub-licenses and licensed product within Egypt and Morocco for 13 months. The agreements provided for a $2.0 million payment to us which has been escrowed
and recorded as restricted cash. The licensee has the right to exercise an option to cease marketing the Companys intellectual property and will be refunded the $2.0 million if it does so and delivers a sufficient list of prospective customers
to the Company by January 2011.



37



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Note 11 Retirement Plan

Employees of PA LLC may participate in a 401k retirement plan sponsored by the Company. PA LLC will match the contribution made by participating
employees up to 4% of their eligible salaries. Matching contributions were $220,263, $97,228 and $3,881 during 2009, 2008 and 2007, respectively.



Note 12 Income Taxes

The Company
has not recorded any income tax expense or benefit for the years ended December 31, 2009 and 2008 primarily due to our history of operating losses. Because the Company was a limited liability company and passed through its losses to its owners
before the reverse acquisition (December 19, 2008), no federal or state tax benefit or provision was reported by the Company for periods before that date.

The reconciliation of income tax benefit at the statutory federal income tax rate of 35% to net income tax benefit for the years ended December 31,
2009 and 2008 is as follows:



|                                                    |  |              |             |   |      |   |            |  
|--------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ---------- | -
|                                                    |  | December 31, |            
|                                                    |  | 2009         |             |   | 2008 |  
|U.S. federal benefit at statutory rate              |  | $            | (12,887,783 | ) |      | $ | (7,052,588 | )
|State income taxes, net of federal benefit          |  |              | (1,243,056  | ) |      |   | (29,453    | )
|Losses incurred as LLC (before reverse acquisition) |  |              |            |   |      |   | 6,760,481  |  
|                                                    |  |             
|Nondeductible equity compensation                   |  |              | 695,627     |   |      |   |           |  
|Other items                                         |  |              | 22,372      |   |      |   | (12,277    | )
|Increase in valuation allowance                     |  |              | 13,412,840  |   |      |   | 333,837    |  
|                                                    |  |              |             |   |      |   |            |  
|                                                    |  | $            |            |   |      | $ |           |  
|                                                    |  |              |             |   |      |   |            |  

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets
are as follows:



|                                                                     |  |              |             |   |      |   |             |  
|-------------------------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                                     |  | December 31, |            
|                                                                     |  | 2009         |             |   | 2008 |  
|Deferred tax assets                                                  |  |              |             |   |      |   |             |  
|Net operating loss and research and development credit carryforwards |  | $            | 14,300,976  |   |      | $ | 352,168     |  
|Intangibles and fixed assets                                         |  |              | 9,676,196   |   |      |   | 10,385,445  |  
|Accruals and other items                                             |  |              | 444,064     |   |      |   | 497,856     |  
|Stock-based compensation                                             |  |              | 227,073     |   |      |   |            |  
|Total deferred tax assets                                            |  |              | 24,648,309  |   |      |   | 11,235,469  |  
|Less: Valuation allowance                                            |  |              | (24,648,309 | ) |      |   | (11,235,469 | )
|                                                                     |  |              |             |   |      |   |             |  
|                                                                     |  |             
|Net deferred tax assets                                              |  | $            |            |   |      | $ |            |  
|                                                                     |  |              |             |   |      |   |             |  



38



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At December 31, 2009 and 2008 we had net operating loss carryforwards of approximately 37.0 million and
0.9 million, respectively, available to reduce future taxable income, if any, for federal and state income tax purposes. The net operating loss carryforwards expire between 2023 and 2024, and valuation allowances equal to the full amounts have been
provided.

Utilization of the net operating loss carryforwards may be subject to an annual limitation if the Company experiences a tax code
defined change in ownership in excess of percentage change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of the net operating loss before utilization.

The Company reviews its deferred tax assets on a regular basis to evaluate their recoverability based upon expected future reversals of
deferred tax liabilities, projections of future taxable income, and tax planning strategies that it might employ to utilize such assets, including net operating net operating loss carryforwards. Based on the positive and negative evidence of
recoverability, the Company establishes a valuation allowance against the net deferred assets unless it is more likely than not that it will recover such assets through the above means. In the future, the Companys evaluation of the
need for the valuation allowance will be significantly influenced by its ability to achieve profitability and its ability to predict and achieve future projections of taxable income.

As required by ASC 740-10-05, Accounting for Uncertainty in Income Taxes the Company recognizes the financial statement effects of a tax position
when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. The evaluation of whether a tax position meets the more-likely-than-not recognition
threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. Actual results could differ from these estimates. The Company adopted ASC 740-10-05 on January 1,2007. Since adoption, the Company has
not recognized any liability for unrecognized tax benefits or incurred any interest or penalties under this pronouncement.

The Company files
U.S. and state income tax returns with varying statutes of limitations. Both 2008 and 2009 tax years remain open to examination.

Note
13 Related Party Transactions

During 2008, 2007 and the period from inception to December 31, 2009, the Company paid XLTG an
aggregate of $2,166,524, $1,699,047 and $4,154,714, respectively, as reimbursement for administrative, executive management, business development and other services which have been included in SG&A expense for those periods.

As of December 31, 2008 and 2007, approximately $62,000 and $200,000, respectively, was due to XLTG for administrative services performed for the Company
and is included in accrued expenses in the accompanying consolidated balance sheets.

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



39



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The Company leases land where its bioreactor demonstration site is located from a related party on an annual
basis for approximately $47,000. The Company has four extension periods on this lease, subject to a one-time increase in annual rent of approximately 20% that would be effective in July 2011.

During December 2008, the Company issued 1,000,000 shares of common stock for consulting services to be performed by a company owned by a board member
through December 2010. These consulting services consist of general business and financial consulting and assistance in negotiating sales, financing and other agreements. The fair value of the shares issued was $3,150,000 which was initially
recorded as unearned compensation, a reduction of paid in capital. The balance of unearned compensation is displayed separately as additional information on our statement of changes in stockholders deficit. During 2009 and 2008, $1,575,000 and
$43,750, respectively, was amortized as SG&A expense.

During 2009, the Company paid approximately $373,000 for consulting services
performed by related parties and affiliates of the Company. No amounts were payable to these parties at December 31, 2009.

Note
14 Subsequent Events

Equity Issuances

From February through May 2010, the Company sold an aggregate of 787,500 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 or $6.3 million as follows:

687,500 units sold to
affiliates for $5.5 million

100,000 units to sold third parties for $0.8 million

The 687,500 units sold to affiliates 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 full $5.5 million in proceeds will be recorded as a liability due to the uncertain number of shares that will be required to be issued due to the share price guarantee in accordance with ASC guidance. liability If at the
expiration of the six month share price guaranty period the guaranty provisions are not required to be fulfilled by the Company, it is expected that the common stock and warrants will no longer be required to be accounted for as liabilities and will
be reclassified to equity.

Debt Issuances

On May 27, 2010, June 23, 2010, and July 21, 2010 PetroTech Holdings Corp. funded $2,300,000, $1,100,000, and $1,000,000,
respectively, to PA LLC pursuant to the terms of a separate secured term notes. Each of these notes provide for interest at 12%, which is accrued as a PIK amount, and are due on June 30, 2012.

Return of Company Shares

On June 2, 2010, the
Company entered into an agreement with AzTE that provides for recovery of the 1,000,000 class A voting units of PA LLC, which were issued to AzTE during 2006. The agreement also provided for return of AzTE-licensed technology, the cancellation of
all existing and future obligations and agreements between PetroAlgae and AzTE and the payment of $600,000 by the Company to AzTE. The PA LLC interests that were recovered were canceled.



40



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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). In light of the adjustments
explained and presented in this Form 10-K/A, we have determined that as of December 31, 2009, the Companys system of internal control over financial reporting was not effective.



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.

Due to the early stage of the Companys development and the limited funds available to it, the Company
has a small number of accounting personnel that process and report on certain financial transactions that present a relatively high degree of technical accounting complexity. The Company believes that the material errors that were identified and
corrected in its 2009 Form 10-K/A occurred and were not detected until recently due to the following material weaknesses in internal controls, which are being remediated as indicated below:



| |  | The Companys accounting staff was small and did not include personnel with the requisite technical expertise to evaluate complex transactions  the Company
replaced the accounting department head with a CPA that has 25 years experience handling complex transactions and public reporting requirements. Other staffing changes will be made as deemed necessary.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Communication between management and the accounting staff regarding certain complex transactions and changes in the business appears to have been inadequate  we
have established stronger lines of communication and documentation procedures to ensure that the substance of all transactions are fully understood and properly reported.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company did not have a rigorous policy or procedure for establishing the value of equity and equity-linked securities when issued to employees or others for
non-cash consideration  we have established a framework and detailed process of fair value estimation for such securities that is consistent with GAAP rules that will be followed in all future transactions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The remediation of material weaknesses and other deficiencies in internal controls is a continuing work in progress due to the issuance of new accounting
standards and changes in our business. However,



41



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remediation of known weaknesses 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 ongoing increase in our accounting resources will permit us to remediate all material weaknesses and significant deficiencies in internal control over financial reporting.

Notwithstanding the aforementioned material weakness, our management performed additional analyses, reconciliations and other procedures to
determine that, after giving effect to the adjustments made in this Form 10-K/A, 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.

This annual report does not
include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting
firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.

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.



42



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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      |  | Year |  | Salary |         |     | Bonus |   | Company
Stock Awards(2) |  | Total
Compensation
|Position                |  |      |  |        |        
|Ottmar
Dippold,         |  | 2007 |  | $      | 210,000 |     |       | $ |                        |  |                    |           |  | $ | 210,000  
|Chief Executive Officer |  | 2008 |  | $      | 233,077 |     |       | $ | 68,900                  |  | $                  | 2,421,069 |  | $ | 2,723,046
|                        |  | 2009 |  | $      | 276,385 | (1) |       | $ |                        |  |                    |           |  | $ | 276,385  
|Jim
McCreary,           |  | 2007 |  | $      | 200,000 |     |       | $ |                        |  |                    |           |  | $ | 200,000  
|Chief Operating Officer |  | 2008 |  | $      | 200,000 |     |       | $ | 53,000                  |  | $                  | 809,200   |  | $ | 1,062,200
|                        |  | 2009 |  | $      | 215,385 |     |       | $ |                        |  |                    |           |  | $ | 215,385  
|David
Szostak,          |  | 2007 |  | $      | 300,000 |     |       | $ |                        |  |                    |           |  | $ | 300,000  
|Chief Financial Officer |  | 2008 |  | $      | 271,154 |     |       | $ | 59,625                  |  | $                  | 1,206,900 |  | $ | 1,634,879
|                        |  | 2009 |  | $      | 225,000 | (1) |       | $ |                        |  |                    |           |  | $ | 225,000  
|John
Scott,             |  | 2007 |  | $      | 500,000 |     |       | $ |                        |  |                    |           |  | $ | 500,000  
|Chairman of the Board   |  | 2008 |  | $      | 451,923 |     |       | $ | 99,375                  |  | $                  | 3,576,000 |  | $ | 4,415,298
|                        |  | 2009 |  | $      | 477,404 | (1) |       | $ |                        |  |                    |           |  | $ | 477,404  

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(3) |  | Total Unit Awards(2)
|Ottmar Dippold |  | 104,718        |  | 314,152          |  | 418,870             
|Jim McCreary   |  | 115,000        |  | 35,000           |  | 140,000             
|David Szostak  |  | 270,000        |  |                 |  | 270,000             
|John
Scott     |  | 800,000        |  |                 |  | 800,000             



| | (1) | Includes certain amounts that, upon mutual agreement between the Company and the executive officers, have been withheld and will be paid upon consummation of this
offering. The aggregate amount is approximately $80,000 for the three officers referenced above.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Incentive equity awards in PA LLC are in the form of restricted Class B Membership Units. When granted, the units are subject to repurchase by the Company. Based upon
either a service period or the accomplishment of a liquidity event, the right of the Company to repurchase these units is removed.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



43



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| | (3) | Employees holding Class B Membership Units that are not subject to repurchase by the Company will be able to exchange their equity interests for PetroAlgae Inc. common
stock.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44



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PART IV



|ITEM 15.        EXHIBITS | AND 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 Amendment No. 1 to Form 10-K/A:



| |  | 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.



|     |  |                                                                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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



45



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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.

Date: August 5, 2010



PETROALGAE INC.By:

/s/ David SzostakName:

David SzostakTitle:

President (Principal
Executive Officer and Principal Financial Officer)