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EX-23.2 - New Generation Biofuels Holdings, Incv178644_ex23-2.htm
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EX-31.1 - New Generation Biofuels Holdings, Incv178644_ex31-1.htm
EX-23.1 - New Generation Biofuels Holdings, Incv178644_ex23-1.htm
EX-32.1 - New Generation Biofuels Holdings, Incv178644_ex32-1.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

 
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission File No.  1-34022

NEW GENERATION BIOFUELS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Florida
26-0067474
(State of Incorporation)
(I.R.S. Employer Identification No.)

5850 Waterloo Road, Suite 140
Columbia, Maryland 21045
(Address of Principal Executive Offices, Including Zip Code)

(410) 480-8084
(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

(Title of Each Class)
(Name of Exchange on Which Registered)
Common Stock, par value $0.001 per share
NASDAQ Capital Market

Securities Registered Pursuant to Section 12(g) of the Act:
None

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o  Yes   o  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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

o  Large accelerated filer     o  Accelerated filer
 
o  Non-accelerated filer     x   Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o  Yes   x  No

The aggregate market value of the Registrant’s Common Stock, par value $0.001 per share, held by nonaffiliates of the Registrant as of June 30, 2009 was $24,755,104.

As of March 5, 2010, the number of shares of the Registrant’s Common Stock, par value $0.001 per share, outstanding was 34,702,436.

DOCUMENTS INCORPORATED BY REFERENCE:

 

 
TABLE OF CONTENTS

   
Page
PART I
  1
Item 1.
Business
 
Item 1A.
Risk Factors
13
Item 1B.
Unresolved Staff Comments
  21
Item 2.
Properties
  21
Item 3.
Legal Proceedings
  22
Item 4.
Reserved
  22
     
PART II
  23
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  23
Item 6.
Selected Financial Data
  24
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  24
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
      30
Item 8.
Financial Statements and Supplementary Data
  30
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  31
Item 9A(T).
Controls and Procedures
  31
Item 9B.
Other Information
  32
     
PART III
  33
Item 10.
Directors, Executive Officers and Corporate Governance
  33
Item 11.
Executive Compensation
  33
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  33
Item 13.
Certain Relationships and Related Transactions, and Director Independence
  33
Item 14.
Principal Accounting Fees and Services
  33
   
 
  
 PART IV
 
Item 15.
Exhibits and Financial Statement Schedules
  33
 
Signatures
  35
 
Index to Exhibits
  36
 
Certifications
 
 


PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve numerous assumptions, risks and uncertainties, many of which are beyond our control. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” beginning on page 13 and elsewhere in this report. Important factors that may cause actual results to differ from projections include without limitation:
 
 
·
our lack of operating history;
 
 
·
our dependence on additional financing to continue as a going concern;
 
 
·
our inability to generate revenues or profits from sales of our biofuel and to establish commercial scale production facilities;
 
 
·
the disproportionally higher cost of production relative to units sold;
 
 
·
our ability to fully realize the value of our technology license agreement, which is our principal asset;
 
 
·
our inability to enter into acceptable sublicensing agreements with respect to our technology or the inability of any sublicensee to successfully manufacture, market or sell biofuel utilizing our licensed technology;
 
 
·
market acceptance of our biofuel;
 
 
·
our inability to compete effectively in the renewable fuels market;
 
 
·
governmental regulation and oversight, including our ability to qualify our biofuel for certain tax credits and renewable portfolio standards;
 
 
·
our ability to protect our technology through intellectual property rights;
 
 
·
unexpected costs and operating deficits; and
 
 
·
adverse results of any material legal proceedings.

All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and management objectives are  forward-looking statements. When used in this report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements are based on information available at the time the statement was made. We undertake no obligation to update any forward-looking statements or other information contained in this report as a result of future events, new developments or otherwise. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements are reasonable, these plans, intentions or expectations may not be achieved.
 
As used in this report, the terms “company,” “we,” “us” and “our” refer to New Generation Biofuels Holdings, Inc.

ITEM 1. BUSINESS

Our Business


We produce our biofuels using a proprietary blending technology that we believe is simpler, cleaner, less expensive, and less energy intensive than the complex chemical reaction process used to produce traditional biodiesel. We believe that this technology enables us to produce biofuels that cost less to produce, use less energy and generate significantly lower emissions than our competitors. Our technology also gives us the flexibility to produce our biofuel from multiple feedstocks, which allows us to use non-edible raw materials in our production process, when desirable. We believe that these factors will enable us to customize our product to specific customer requirements and react more quickly to trends in the biofuels market.
 
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We have incurred annual operating losses since inception and expect to incur substantial operating losses in the future in connection with the development of our core products. As of December 31, 2009, we had an accumulated deficit of $50.4 million.  The operation and development of our business will require substantial additional capital by the second quarter of 2010  to fund our operations, payments due under the exclusive license, the acquisition or development of manufacturing plants, research and development and other initiatives including potentially the financing of future acquisitions.

Our near-term business strategy involves the following:

 
·
Direct Sales.  We are seeking to develop a revenue stream from direct sales of our biofuel produced at our Baltimore production facility. Based on existing contracts with our customers, we are seeking to expand our facility over the next several months.  Our longer term strategy would include construction of additional plants.

 
·
Technology Licensing.  As a second potential revenue stream, our business plan contemplates collecting royalties through sublicensing our proprietary technology where it is more efficient for manufacturers to produce our biofuel at their own plants rather than requiring production at our facilities. We are in the process of exploring various technology licensing relationships.

 
·
Government Tax Credits.  We are also pursuing our eligibility and qualification for tax credits and other government incentives to strengthen the competitive position of our biofuel and to otherwise attempt to take advantage of the U.S. government’s encouragement of “green” technologies.

 
·
Strategic Partners.  We are seeking arrangements with strategic partners who would both provide funding and support our efforts to develop our production capacity and attract customers.

 
·
Research and Development.  To the extent permitted by our limited resources, we are continuing to develop our technology and extend it to fuels with additional applications.

Recent Developments during the Fourth Quarter of 2009 and Early 2010

Significant recent developments include the following:

 
·
Completed 41 production runs at our Baltimore production facility through December 2009.

 
·
Produced 209,000 gallons of our biofuel in 2009.

 
·
Blended our biofuel with #6 Diesel fuel to diversify our product applications and expand our potential markets.

 
·
On March 2010, we received the permit to construct approval from the State of Maryland to expand our Baltimore facility to 25 million gallons.
 
 
·
On March 12, 2010, we executed a non-binding Memorandum of Understanding, or MOU, with Regent Trend Investment Ltd (soon to be re-named Milestone Biofuels Limited, or Milestone), a potential strategic partner from China, under which Milestone would invest $20 million in our equity securities and we would collaborate with Milestone to form a joint venture to develop and operate biofuel production plants in the continental United States with a total aggregate plant capacity of 250 million gallons per year. Milestone would fund all of the capital requirements for the joint venture and we would provide the technology and operate the plants.  We would earn a minimum royalty on all sales from the joint venture and would share in a percentage of profits above the minimum royalty. The MOU remains subject to a due diligence period of up to 75 days and negotiation, execution and delivery of definitive agreements acceptable to both parties and approved by their respective boards of directors. The investment also may be subject to shareholder approval under the NASDAQ listing rules. There is no assurance that definitive agreements will be signed or that the transaction will close.

 
·
In February 2010, we entered into an agreement with Ferdinando Petrucci, the inventor of our proprietary technology, to issue 1,100,000 shares of common stock and $120,000 in cash in lieu of the $1 million license payment payable in two equal installments in February and March 2010 to help conserve cash and strengthen our liquidity.
 
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·
In February 2010, we closed a private placement of 1,890,858 shares of common stock and warrants to purchase 1,890,858 shares of common stock for total gross proceeds of approximately $1.3 million.

 
·
In January 2010, Baltimore City Schools named us in their annual heating fuel request for proposal. This request for proposal by the Baltimore City Schools is in conjunction with a proposed 1 year contract with the City of Baltimore. We previously completed a successful test program with the City of Baltimore and reached an agreement to proceed with a longer contract to include the Baltimore City Schools.

 
·
In December 2009, we closed a registered direct offering of 1,926,250 shares of common stock and warrants to purchase 577,875 shares of common stock for total gross proceeds of approximately $1.5 million.

 
·
In November 2009, we entered into a sales contract, following the purchase order entered into in July 2009, to supply Fenix Energy with 750,000 gallons of our biofuel per month for 12 months under specified conditions. In March 2010, as provided in the sales contract, we requested a letter of credit equivalent to one month’s sales. We have not yet received the letter of credit which Fenix would need to post to satisfy one of the conditions to shipment. We also would have to complete modifications to our Baltimore production facility to be able to make shipments under this arrangement.

 
·
In November 2009, we received a letter from NASDAQ that confirms that we are back in compliance with their shareholders’ equity requirements for continued listing. However, in December 2009, we received a letter from NASDAQ that states that we are not in compliance with the NASDAQ minimum bid price requirement for continued listing and have until June 2010 to regain compliance.

 
·
In October 2009, we signed a letter of intent with Ace Biofuels under which Ace Biofuels intends to license product formulations, manufacturing technology and know-how from us with the intent of constructing a biofuel manufacturing facility and marketing our biofuel in Puerto Rico, subject to completion of definitive agreements.
  
Our Growth Strategy

 
·
Continue pursuing sales to large customers through validation of biofuel performance. We are continuing to work with potential customers regarding sales of our biofuel.  The sales cycle is lengthy, but we continue to emphasize the fuel characteristics and emissions data regarding our biofuel.    To meet the potential demands of customers and prospective customers, we will need to develop additional production capacity.
 
 
·
Pursue technology sublicensing opportunities.  We plan to pursue a second revenue steam by collecting royalties through sublicensing our proprietary technology.  In March 2009, we entered into an addendum to our license agreement to provide for a cross-license with PTJ Bioenergy Holdings (“PTJ”) for all improvements by us to our proprietary technology.  The royalty payable by PTJ to us for the cross-licensed technology will equal 5% of PTJ’s revenues outside of our territory, which under the license agreement includes North America, Central America and the Caribbean.  Additionally, we have entered into non-binding letters of intent (“LOIs”) with businesses in Puerto Rico and Canada, which contemplate a payment of a fee per gallon of fuel produced and sold.
 
 
·
Power plants that are constrained by emissions restrictions and eligible for renewable energy credits.  We are marketing our biofuel as a low capital expenditure solution that would enable customers to meet requirements to use renewable energy sources and increase the productivity and extend the useful life of coal and oil power plants.
 
 
·
Commercial and industrial process and space heating customers.  These customers primarily consist of state-owned facilities and privately-owned corporate manufacturing facilities. Many states have already passed mandates to utilize renewable energy which will continue to increase annually. Privately owned corporate manufacturers are also beginning to concentrate on their responsibilities as a global corporate citizen and are proactively seeking to lower their greenhouse gas emissions. We are marketing our biofuel as a fuel alternative to both of these consumers, including through existing distributors.
 
 
·
Expand product lines to develop new applications.  Since many of the advantages of our biofuel come from their versatility and ability to be customized for different applications, we intend to continue our research and development efforts to develop additional applications for commercial use. We also plan to customize our products to customer specifications and continue to expand our product line to serve new market segments, such as blending our biofuel with #6 Oil and co-firing in Coal burning generators.
 
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·
Pursue favorable tax and regulatory policies  for our biofuels. On the federal level, we have partnered with other renewable fuel providers to support the renewal of the 50 cent per gallon “alternative fuel” tax credit” that expired on December 31, 2009.  An extension of this credit is included in legislation that has passed the U.S. Senate, and is awaiting consideration by the U.S. House of Representatives.  We have also been working with federal policymakers in an effort to qualify our fuel for the $1 per gallon tax credit for “renewable diesel.” In addition, on both the federal and state level, we are working to qualify our biofuels as a fuel that receives credit for renewable energy portfolio standards that require the use of renewable energy sources and/or to qualify for Federal and state biofuel mandates and incentives.
 
The Biofuels Industry and Market Trends
 
Biofuels and Feedstocks
 
Biofuels can be defined generally as solid, liquid or gas fuels produced from renewable, recently living biological resources, such as plant biomass. In contrast, fossil fuels are derived from non-renewable biological material formed from the decayed remains of prehistoric plants and animals. Biofuels are perceived to have a number of potential benefits including the ability to reduce greenhouse gas emissions and environmental pollution, promote energy independence through the growth of domestic energy sources, increase rural development and establish a sustainable, renewable future energy supply.
 
“First generation biofuels,” such as ethanol or biodiesel, use conventional technologies to produce fuel from crops high in sugar, such as sugar cane or sugar beets, or high in starch, such as corn or maize, or from crops containing high amounts of vegetable oil, such as soybeans or palm oil, or from animal fats. For example, ethanol production involves fermenting sugars or starches to produce ethyl alcohol, while biodiesel is produced through a chemical reaction called transesterification to generate a methyl ester fuel, while yielding glycerin as a by-product. The growth of first generation biofuels has been criticized because of perceptions that their feedstocks may divert food from human use and contribute to price increases and food shortages, particularly in lesser-developed countries.
 
“Second generation” or “advanced” biofuels use newer technologies to produce fuel from food crops, non-food plants and waste vegetable oil sources. We call our biofuel “New Generation Biofuel” because it can be produced using our less complex, proprietary blending technology to derive fuels from both food crops like soybeans and non-food sources such as recycled vegetable oil.
 
Market Size and Growth
 
The Energy Information Administration (“EIA”) has projected that the use of alternative fuels, such as ethanol, biodiesel and coal-to-liquid, will increase substantially as a result of the higher prices projected for traditional fuels and the support for alternative fuels provided in recently enacted federal and state legislation. According to a recent report, direct economic output from the advanced biofuels industry, including capital investment, research and development, technology royalties, processing operations, feedstock production and biofuels distribution, is estimated to rise to $5.5 billion in 2012, $17.4 billion in 2016 and $37 billion by 2022.

Government initiatives are expected to contribute to this growth.  For example, the Energy Independence and Security Act of 2007 increased the minimum production of renewable fuels target to 36 billion gallons in 2022.  Currently, the US produces only 12 billion gallons of biofuels. According to a 2008 study performed in connection with the legislation, the economic impact of increasing renewable fuels production to 36 billion gallons between 2008 and 2022 would include:

 
·
adding more than $1.7 trillion to the U.S. gross domestic product;
 
 
·
generating an additional $436 billion of household income;
 
 
·
supporting the creation of as many as 1.1 million new jobs; and
 
 
·
generating $209 billion in new federal tax receipts.
 
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The American Clean Energy and Security Act of 2009 (“ACESA”) passed the U.S. House of Representatives in June 2009. The bill, among other things, (i) establishes a federal renewable energy standard; (ii) permits energy efficiency measures to satisfy part of the renewable energy standard; and (iii) establishes a cap-and-trade program to reduce greenhouse gas emissions from various sectors of the economy, including electric and natural gas utilities. Similar legislation is currently stalled in the U.S. Senate but if a bipartisan compromise could be reached, it could result in the passage of enforceable federal standards, such as a cap-and-trade program, governing greenhouse gas emissions.  If ACESA, or similar legislation, were enacted into law, we believe that affected companies could utilize our biofuel to meet more cost effectively the new requirements and in less time.  We cannot predict whether this or similar legislation will be enacted or exactly how such legislation may impact our business.

Trends in the Biofuels Market
 
We believe that our biofuels can benefit from the favorable market trends that are converging to drive growth across the renewable fuels industry, including:
 
Global energy supply and demand.   Despite the recent drops in oil prices due to the global economic recession, we believe that, over the long term, we are still in a sustained period of high demand for energy, especially for conventional sources like petroleum-based fuels.  We believe that this demand will continue to pressure oil supplies worldwide and has led to a heightened interest in developing domestic, alternative, renewable energy sources.
 
Short-term energy security risks.   Increased trade may carry a risk of heightened short-term energy insecurity for all consuming countries, as geographic supply diversity is reduced and reliance grows on vulnerable supply routes, such as the Middle East.  We believe that in developing domestic renewable energy sources, the United States will be less vulnerable to overseas markets and the vulnerability associated with those supply routes.
 
Environmental and sustainability concerns.   Concerns have risen over the growth in greenhouse gas emissions and potential negative impact on the global environment and climate change.  Unlike fossil fuels, renewable biofuels are considered to have a lower carbon footprint because the carbon dioxide released by burning the fuel is balanced by the carbon dioxide absorbed by new plant growth.
 
 Government incentives and mandates for renewable fuels. In the pursuit of climate change initiatives and energy independence, federal and state governments are increasingly emphasizing the use of renewable fuels.  The revised renewable fuel standard calls for an increase in mandatory biofuel used as Environmental Protection Agency approved biofuels.  As of January 2010, 29 states plus the District of Columbia have enacted renewable portfolio standards (RPS) that require electric power producers to use renewable sources to generate electricity.  We believe that these government policies will generate market opportunities for our biofuel.
 
Food versus fuel debate.   We believe that the “food v. fuel debate” which has resulted in growing concerns over diversion of food supplies to fuel production is pressuring first generation biofuel producers to explore alternative, non-edible feedstocks to produce their fuels . The United Nations noted in a 2007 report on sustainable bioenergy that “as second generation technologies. . . become commercially available, this will lessen the possible negative effects on land and resource competition on food availability.”   We believe that there will be a transition period for second and future generations of biofuels before non-edible feedstocks are widely available in sufficient commercial quantities.  There may also be a transition period before these technologies become more commercially viable.  We also believe that the ability to use various different kinds of feedstocks (both edible and non-edible) and waste products will provide an advantage to certain biofuels during this transition period and beyond.
   
 
We believe a significant market opportunity exists for our biofuel in three target market segments that consume approximately 15 billion gallons of fuel per year:
 
 
·
Power Generation.   The power generation sector consumed approximately 2.2 billion gallons per year of distillate and residual fuel oils, according to the estimates available from the Energy  Information Administration.  This sector includes “peaking” power plants eligible for government renewable energy credits and constrained by emissions limitations.
 
 
·
Commercial and Industrial. This sector consumes approximately 6.4 billion gallons of distillate and residual fuel oil per year that could switch to our biofuels, according to the estimates available from the Energy Information Administration. This segment includes large institutional customers like state government buildings, hospitals and sewage treatment facilities that are taking a leadership role in reducing greenhouse gases.
 
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·
Marine.   According to the estimates available from the Energy Information Administration, diesel fuel consumption in the marine market is approximately 6.3 billion gallons per year and includes commercial and private boats, such as pleasure craft, fishing boats, tugboats, and ocean-going vessels, including vessels operated by oil companies. This sector is exploring renewable fuels due to tighter emissions standards and restrictions on cruise liners idling in port.

Our Products
 
Product Formulas
 
We presently offer two biofuel product families with different formulations, made from different feedstocks and having different performance characteristics to meet the diverse needs of our customers:

 
1)
Classic. Our “Classic” biofuel formula is made using plant oil, water and a proprietary additive package. Classic represents our lowest cost product offering for various diesel fuel applications.
 
 
2)
Ultra HF. Our “Ultra HF” biofuel formula is made using plant oil and a premium selection of additives. Ultra HF, while being more expensive than Classic, offers most of the same favorable characteristics while having the advantage of a higher flash point.
 
We believe that our ability to offer a selection of biofuels with different performance characteristics gives us greater ability to meet customer demand than is the case with many other biofuel manufacturers. This customization enables us to offer potential customers biofuels responsive to their specific requirements.
 
Key Advantages of our Biofuels
 
Customer usage and test burn results have shown that our biofuel is ready to use in industrial applications without mixing or blending with other fuels, equipment modification or substantial loss of performance. We believe that our biofuels can serve as a complete fuel replacement wherever distillate or residual fuel oils are used today. This feature gives us the flexibility to deliver biofuels directly to the end user customers or to license the technology to customers for manufacturing our biofuels for themselves, without relying on distributors or other intermediaries. However, we also have the flexibility to blend our biofuels with other fuels, such as diesel, depending on the needs of the customer.
 
Another key characteristic of our biofuels is its lower pour point. The pour point of a fluid is the temperature at which dissolved solids are no longer completely soluble and the fluid begins to solidify. The pour point of a fluid is the lowest temperature at which it will pour or flow under prescribed conditions. It is a rough indication of the lowest temperature at which the fluid is readily pumpable. The pour point for some of our biofuels (B100 soybean based, for example) is less than 0 degrees Fahrenheit while that of conventional biodiesel is 32 degrees Fahrenheit.
 
Our biofuels also have certain environmental advantages. They are renewable “carbon neutral” fuels with minimal net carbon dioxide emissions. We have demonstrated reductions in nitrogen oxide emissions of 40% or more in utility scale combustion turbine applications and industrial boilers when compared to diesel and biodiesel. Furthermore, as a crop based fuel, our biofuels have virtually no sulfur emissions.
 
 
We produce our biofuels using a blending process that is much simpler than the complex chemical reaction process used to produce traditional biodiesel. Our technology combines water with commonly available additives to produce a mixture. The mixture is then combined with a plant oil or animal fat feedstock and a surfactant to produce our biofuel. By contrast, conventional biodiesel is produced utilizing a chemical reaction known as transesterification. In this process, plant oil reacts with an esterifying agent, usually an alcohol such as methanol or ethanol, to form two principal products: a methyl ester, which is the biodiesel product, and glycerin, a low value by-product that requires disposal. The chemical reaction can be undertaken with or without a catalyst, but typically requires the input of additional energy to drive the reaction. Our biofuel blending production process requires a lower input of additional energy to produce the biofuel and does not result in a glycerin by-product.
 
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Traditional Biodiesel Production Process
 

Source: National Biodiesel Board
 
New Generation Biofuel Production Process
 

Our simpler production process enables biofuels to be produced in smaller manufacturing plants than is typical for biodiesel. The smaller facility and less equipment translate into lower capital expenditures per million gallons for the production facility, a potentially significant cost advantage.  This cost advantage in turn should give us more flexibility to locate production facilities closer to major customers.  Our production process also requires less energy input than more complex chemical reactions, making our production process more energy efficient.  Our biofuel production process produces no significant by-products, wastes, emissions or discharges, unlike many biodiesel fuels, which again reduces the cost of production and increases efficiency. Compared to conventional biodiesel production methods, we believe that this proprietary blending technology is cleaner and less expensive because it is substantially less complex, less capital and energy intensive and produces fewer disposable by-products.
 

We have established a research and development group, headed by our Chief Technology Officer, Dr. Andrea Festuccia, which is based in Rome, Italy.  Utilizing input from test burns and existing customers, Dr. Festuccia has worked to optimize our product and improve its performance to meet certain customer specifications.  The improvements and modifications in the last year have included successfully blending our biofuel with #2 and #6 Diesel fuel, increasing the energy content, increasing the flash point and expanding the number of feedstocks we can use to produce our biofuel. We spent $475,013 on research and development in 2009 and $1,086,723 in 2008. The decrease in research and development expenses in 2009 is primarily the result of the beginning of commercial production of our fuel and conducting fewer test burns which were used extensively during our development stage to evaluate additional customized fuel formulations using our proprietary blending technology.
 
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Raw Materials and Principal Suppliers

Due to the flexibility of our biofuel technology, we are able to utilize multiple feedstocks without materially changing our production process or substantially increasing operating costs, although use of different feedstocks will change certain characteristics of the fuels.  We expect that this flexibility will enable us to opportunistically source our raw materials to adjust to supply and demand imbalances and price volatility in the vegetable oil and other commodities markets.
 
 We have commenced the process of procuring raw materials for production of our biofuel but have not made any significant commitments or procurements at this point. We have determined that while we can produce our biofuels from such different feedstocks as soybeans, canola, palm, sunflower, cottonseed, mustard seed, jatropha, recycled vegetable oil and animal fats, our principal raw materials in the near term will be plant oils and animal fats. We expect to source our raw materials through a variety of sources, including:

 
·
Domestic and global plant oils producers;
 
 
·
Animal fats producers and processors;
 
 
·
Commodity brokers;
 
 
·
Recycled oil collectors; and
 
 
·
Spot market suppliers.

Production Facilities
 
In February 2009, we completed construction of a 5 million gallon per year capacity production facility in Baltimore, Maryland and in April 2009, we began shipping our first commercial product that was made in this facility. The facility can be expanded in the future to produce up to 50 million gallons of second-generation biofuel a year.  To complement this production facility, we have leased approximately 6 million gallons of storage tank capacity and related terminal facilities.  Atlantic Terminalling is providing on-site logistics services, including the receipt of feedstocks, shipping of finished product and truck loading and unloading facilities.  We are in the process of negotiating to settle various issues under our lease and terminaling services agreement by reducing rent payments, relinquishing unneeded equipment and modifying other commercial terms in return for making certain payments.
 
We are continuing to explore additional ways of acquiring manufacturing facilities without having to fund the entire cost ourselves, including other joint ventures with third parties such as utilities, independent power producers, sublicensees or other strategic partners or through project-based financing. To acquire manufacturing plants we would need to identify suitable facilities that can be cost-effectively modified for our needs, negotiate acceptable purchase or lease agreements and finance any such acquisitions and capital improvements.  Unless we acquire existing plants, we may need to obtain government permits and other regulatory approvals (including environmental, zoning and construction permits), which could cause delays and/or add significant cost.
 
Sublicensing
 
Business Strategy.  Our exclusive license allows us to sublicense our proprietary technology in North America, Central America and the Caribbean, and our business plan contemplates, as a second potential revenue stream, the collection of royalties through sublicensing our proprietary technology. We expect to pursue sublicenses where it is more efficient for manufacturers to produce our biofuel at their own plants, rather than requiring production at our proposed facilities. In 2009, we took steps to execute this strategy by signing non-binding letters of intent (“LOIs”) with businesses in Puerto Rico and Canada that are evaluating sublicensing our technology to construct biofuel manufacturing facilities and marketing and selling our biofuel under the “New Generation” brand name.  These LOIs contemplated payment to us of a fee per gallon of fuel produced and sold.  We are continuing to explore sublicensing opportunities both domestically and internationally.
 
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Global Energy Sublicense. In April 2006 we entered into a sublicense agreement with Global Energy Holdings, Inc. (formerly Xethanol Corporation), formerly our largest shareholder and a renewable fuels company engaged in the production and sale of ethanol and its by-products.  Neither side purchased or sold any product and Global Energy did not utilize the license to make biofuel, and accordingly we have not received any royalties from Global Energy.  In November 2009, Global Energy filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Court for the District of Delaware to protect its assets and restructure its business.   About six months prior to its bankruptcy filing, in March 2009, Global Energy sold its remaining 5,301,300 shares of our common stock to 2020 Energy, currently our largest shareholder.   In connection with that sale of our shares, Global Energy agreed to assign its rights under the sublicense agreement to 2020 Energy.  We do not believe that assignment has yet been completed.

Competition

The markets for our biofuels are highly competitive.  We compete with petroleum-based fuels, with other biofuels like biodiesel or ethanol, and with other forms of alternative energy like wind and solar.

Currently, the cost of producing most alternative fuels forces many manufacturers to operate at a significant competitive disadvantage compared to petroleum-based fuels. Producers of alternative fuels generally depend upon government support, including tax credits and various incentives, upon the willingness of customers to pay a premium for renewable non-petroleum fuels and upon government mandates to use specified minimum amounts of renewable fuels, which amounts increase each year.  Our ability to compete with petroleum-based fuels depends significantly on our ability to qualify for the various tax credits and other government incentives.

Also relevant to our ability to compete with petroleum-based fuels is the cost of adapting equipment to use alternative fuels.  Since the vast majority of fuels currently consumed are petroleum-based, most consumers have equipment designed for consumption of those fuels, and alternative fuel suppliers often experience a second cost disadvantage – the expense of adapting the equipment to accommodate alternative fuels.  We believe the ability of our biofuels to serve as a direct fuel replacement for distillate or residual fuel oils that requires no significant plant modifications improves our ability to compete.

Within the alternative fuels market, the manufacture, marketing and sale of biofuels and other alternative fuels is highly competitive and highly fragmented.   Such competition could be intense and could drive up the costs of feedstocks, plant construction, attracting and retaining qualified engineers, chemists and other key employees, as well as other operating expenses. Additionally, new companies are constantly entering the market.

We believe our ability to compete successfully in the biofuel production industry will depend on several factors, including the following:

 
·
advantages of our production process, including cost and efficiency factors;
 
 
·
fuel performance characteristics, including the ability of our biofuels to be used as a complete fuel replacement for distillate or residual fuel oils and our ability to customize our products to meet a customer’s requirements;
 
 
·
feedstock flexibility, particularly the ability to avoid using edible feedstocks in our production process;
 
 
·
overall demand for biofuels as a result of governmental incentives and legislation; and
 
 
·
continued technological innovation.

Tax Credits and Other Government Support

Since our fuel and other alternative and renewable fuels generally cost more to produce per unit of energy than petroleum-based fuels or coal, we and other producers of alternative fuels will be dependent upon government support to make our fuels cost competitive. This support generally takes the form of tax credits, payments or other incentives or mandates.
  
50 cent per gallon “alternative fuel” tax credit. The 50 cent per gallon credit applicable to our fuel, when mixed with diesel, kerosene or other taxable fuel and sold at the retail level, expired on December 31, 2009, along with biodiesel and other alternative fuel tax credits. Congress is expected to pass in the coming months a tax extenders bill which will extend (effective retroactive to January 1, 2010) through the end of 2010 or beyond many expired tax provisions, but we cannot assure you if or when the tax credit applicable to our fuel will be extended.
 
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$1 per gallon tax credit for biodiesel and “renewable diesel.” We are not currently eligible for the $1 per gallon federal tax credit currently afforded biodiesel and “renewable diesel.” We have been engaged in an effort to convince Congress to amend the tax code definitions to make our biofuel eligible for the same tax credit provided to biodiesel.  In late 2008, the biodiesel tax credit definitions were amended such that we may qualify for the $1 per gallon tax credit with appropriate guidance from the U.S. Department of the Treasury.  Until such guidance is issued, however, we will not be eligible for the $1 per gallon credit available to biodiesel.  In addition, the biodiesel tax credit (and renewable diesel) expired on December 31, 2009.

Intellectual Property

We acquired the rights to our proprietary technology through an exclusive license agreement with the inventor of the technology, Ferdinando Petrucci, in March 2006. Under the license agreement, we have been granted a perpetual, exclusive license to make, use and exploit certain chemical additives for use in making biofuel and related know-how. Our exclusive license extends to North America, Central America and the Caribbean, and we have a right of first offer for any other territories worldwide (other than Italy and Paraguay, which are reserved to the inventor). As of March 15, 2010, our license agreement has remaining payments of $1.0 million per year during each of the next four years, with the next payment of $1.0 million due in February 2011.

In April 2006, we filed a U.S. provisional patent application on behalf of the inventor and directed to the technology covered by our license. In April 2007, we filed a patent application under the Patent Cooperation Treaty which claimed the benefit of the U.S. provisional application and in September 2008 we filed national applications in the United States and certain foreign countries.   Until patent protection is granted, we must rely on trade secret protection, which requires reasonable steps to preserve secrecy. Therefore, we require that our personnel, contractors and sublicensees not disclose the trade secrets and confidential information pertaining to the technology. In addition, trade secret protection does not provide any barrier to a third party “reverse engineering” fuel made with the technology, to the extent that the technology is readily ascertainable by proper means. Neither the patent, if it issues, nor trade secret protection will preclude third parties from asserting that the technology, or the products we or our sub-licensees commercialize using the technology, infringes upon their proprietary rights. 
 
Government Regulations
 
Environmental Regulations . Our business is subject to environmental risks and hazards and we are subject to environmental regulation implemented and/or imposed by a variety of international conventions as well as federal, state, provincial, and municipal laws and regulations. Environmental laws restrict and prohibit spills, discharges and emissions of various substances produced in association with biofuel manufacturing operations. Environmental laws also require that manufacturing plants are operated, maintained and decommissioned in such a way that satisfies applicable regulatory authorities. Environmental permitting of biofuel manufacturing facilities varies with the characteristics of individual plants and by state. Our biofuel is manufactured using a process that is believed to yield little, if any wastes, emissions or discharges.

Compliance with environmental laws can require significant expenditures and a violation may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner we expect may result in stricter standards and enforcement, larger fines and liability, as well as potentially increased capital expenditures and operating costs. Compliance with environmental laws may cause us to limit our production, significantly increase the costs of our operations and activities, or otherwise adversely affect our financial condition, results of operations, and/or prospects.

Clean Air Act. We intend to market our biofuel as a new class of biofuel for power generation, commercial and industrial heating and marine use.  In order to be legally marketable as a fuel for on-road motor applications, our biofuel must be registered with the Environmental Protection Agency (EPA) and comply with the EPA’s rigorous emissions, durability, and health effects regulations promulgated to implement Section 211 of the Clean Air Act. Under these regulations, a company registering a fuel must conduct extensive testing on a variety of in-use motor vehicle engines.
 
Section 211 of the Clean Air Act generally does not apply to using our biofuel in a stationary source, such as utility power generation applications or institutional/commercial heating fuel, or in certain marine applications. There may, however, be federal or state requirements applicable to emissions from individual furnaces, boilers, and similar equipment. As a practical matter, market acceptance of our biofuel may be limited until we can demonstrate that (i) our biofuel is comparable to conventional fuels from an energy content and emissions perspective as well as handling and storage perspectives, and (ii) that our biofuel is compatible with existing heating systems or power generation systems and other combustion systems. To date, we have only demonstrated the foregoing in commercially available systems on a very limited basis.  In addition, certain initial testing indicated that our biofuel may require further development so that its viscosity is more stable under certain temperature conditions.
 
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We also are evaluating the regulatory requirements for using our fuel in motor vehicle applications in our territory outside the United States.
 
Company History
 
We are a Florida corporation that was initially organized as Wireless Holdings, Inc. in June 2003.  Our Delaware subsidiary, New Generation Biofuels, Inc, formerly H2Diesel, Inc., was formed in February 2006 to acquire the exclusive license to commercialize the proprietary technology used to produce our biofuel.  Through a reverse merger transaction in October 2006, H2Diesel became a subsidiary of public company Wireless Holdings, Inc., which we eventually renamed New Generation Biofuels Holdings, Inc. in March 2008.  Since September 2008, our common stock has been listed on the NASDAQ Capital Market (“NASDAQ”) under the ticker symbol “NGBF.”
 
Employees
 
We have twelve employees, all of whom are full time employees. We expect to increase the number of employees as we implement our business objectives and expand our management team. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We believe that our relations with our employees are good.
 
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Name
 
Age
 
Position
         
Lee S. Rosen
 
56
 
Chairman of the Board
         
Cary J. Claiborne
 
49
 
President, Chief Executive Officer, Chief Financial Officer and Director
         
David H. Goebel
 
50
 
Chief Operating Officer
         
Andrea Festuccia
 
38
 
Chief Technology Officer
         
Phillip J. Wallis
 
46
 
Chief Marketing Officer
         
Connie Lausten, P.E.
 
42
 
Vice President, Regulatory and Legislative Affairs
         
Philip R. Cherry, Jr.
 
47
 
Vice President, Engineering and Operations

The following is a description of the business experience of each of our executive officers:
 
Lee S. Rosen, Chairman of the Board
 
Mr. Rosen is the founder of H2Diesel, Inc., our wholly owned subsidiary (now known as New Generation Biofuels, Inc.) and has served as the Chairman of our Board since October 2006. Mr. Rosen has been involved in the financial and securities brokerage industry since 1980 and has worked as a broker dealer with a number of firms.

Cary J. Claiborne, President, Chief Executive Officer, Chief Financial Officer and a Director
 
Mr. Claiborne became our President, Chief Executive Officer and a Director in March 2009 and continues to serve as our Chief Financial Officer.  Prior to joining New Generation Biofuels in December 2007, Mr. Claiborne served as the Chief Financial Officer of Osiris Therapeutics, a publicly traded Biotech company from 2004 to 2007. From 2001 to 2004, Mr. Claiborne was the Vice President, Financial Planning and Analysis at Constellation Energy. Mr. Claiborne earned an MBA in Finance from Villanova University and a BA in business administration from Rutgers University.
 
David H. Goebel, Jr., Chief Operating Officer

Mr. Goebel has served as our Chief Operating Officer since July 2009.  Mr. Goebel previously served as our Vice President of Global Sourcing and Supply Chain since September 2007 and previously worked at MeadWestvaco, a packaging solutions and products company, as the acting Vice President of Supply Chain/Director of Customer Service. He was responsible for redesigning the corporate order-to-cash processes, strategizing organizational and process changes in capacity planning, demand forecasting, inventory management/ operations, logistics/distribution, and customer service. Additionally, for nearly 20 years, Mr. Goebel worked at ExxonMobil and its predecessor, Mobil Corporation, in many different leadership capacities including manufacturing, engineering, supply chain, operations, marketing, and sales. Mr. Goebel holds a bachelor of science degree in microbiology from University of Minnesota along with graduate studies at both the University of Texas at Dallas and Northeastern University.
 
Andrea Festuccia, PhD, Chief Technology Officer

Dr. Festuccia has served as Chief Technology Officer since April 2006. Currently, Dr. Festuccia is Partner, Technical Director and member of the Board of Directors of IGEAM S.r.l. (since February 2009), a private Italian company with about 100 employees engaged in consulting environmental and safety problems where he has worked since June 1999. Prior to his current position with IGEAM S.r.l., Dr. Festuccia was the Director of the B.U. “Environment and Territory” at IGEAM S.r.l. Dr. Festuccia was Adjunct Professor of General and Inorganic Chemistry with the University of “La Tuscia” of Viterbo from 1999 to 2000. Dr. Festuccia was a former Technical Director and member of the Board of Directors of 3TI Progetti Italia (from July 2004 to January 2009). Dr. Festuccia is currently an external consultant with the University “La Sapienza” of Rome, a position that he has held since 2001. He also worked as an external expert for the Minister of Foreign Affairs of Italy-Farnesina from 2002-2004 and as Technical Director of Ecosystems S.r.l. from 2002 to present. He is the Chairman of the Board of Directors of OPT SENSOR, a private Italian company dealing with R&D for electronic equipments to measure chemical/physical parameters, a spin-off company of University “La Sapienza” of Rome. He is also the CEO of BART-Biotechnology and Recovery Technologies, a small private Italian company engaged in biotechnology. In October 1996, he received a degree in chemical engineering and subsequently, in 2007, his doctor of philosophy degree in chemical engineering from the University of Rome - “La Sapienza”.
 
 
Mr. Wallis joined us in January 2008. Mr. Wallis served as Manager, Regional Sales and Solutions for Asia Pacific and Africa at the Chevron Corporation from September 2001 to December 2006 and as Process Documentation Team Lead, Chevron Supply Trading from December 2006 to January 2008.

 
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Connie Lausten, P.E., Vice President, Regulatory and Legislative Affairs

Ms. Lausten joined the management team as Vice President of Legislative and Regulatory Affairs in May 2007. From 2003 to 2007, Ms. Lausten served as Manager of Federal Affairs for National Grid USA, one of the world’s largest utilities. Ms. Lausten also has served at the Federal Energy Regulatory Commission and in the United States House of Representatives on the Government Reform Committee, Subcommittee for Energy Policy, Natural Resources and Regulatory Affairs. Ms. Lausten is a Licensed Professional Engineer and received a Master of Science and a Bachelor of Science degree in Mechanical Engineering from the University of Minnesota.

Philip R. Cherry, Jr. Vice President, Engineering and Operations

Mr. Cherry has served as Vice President of Engineering and Operations since June 2008. Mr. Cherry was previously employed by the ethanol producer VeraSun from 2007 through May 2008 as Director of Operations where he was responsible for the commissioning, initial operation and annual maintenance shutdowns of a fleet of ethanol facilities. Prior to joining VeraSun, Mr. Cherry worked for U.S. BioEnergy providing contract management to ethanol facility owners. Mr. Cherry was also with The O-H Group from 2003 through 2006, providing project management and technical consulting services to renewable fuel producers. Additionally, for nine years Mr. Cherry worked for Mobil Oil Corporation in a variety of process and scientific roles. Mr. Cherry holds a Bachelor of Science degree in Chemistry from Chapman University. He is a member of the American Chemical Society, ASTM International, and the California Biomass Collaborative.
 
Other Information
 
News and information about New Generation Biofuels is available on our website, www.newgenerationbiofuels.com. In addition to news and other information about our company, we have provided access through this site to our filings with the Securities and Exchange Commission as soon as reasonably practicable after we file or furnish them electronically.

We have also provided access on our website to our Code of Business Conduct and Ethics, the charters of our Audit, Compensation and Nominating Committees and other corporate governance documents. Copies of these documents are available to any shareholder upon written request made to our corporate secretary at our corporate headquarters at 5850 Waterloo Road, Suite 140, Columbia, Maryland 21045, Attn: Corporate Secretary. In addition, we intend to disclose on our website any changes to or waivers for executive officers from our Code of Business Conduct and Ethics.

ITEM 1A. RISK FACTORS
 
Our business faces many risks. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline. Some of the risks described below may apply to more than just the subsection in which we grouped them for the purpose of this presentation. You should consider all of the following risks, together with all of the other information in this Annual Report on Form 10-K, before deciding to invest in our securities.
 
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Risks Related to Our Business

Our existing financial resources will only provide financing through mid-May 2010, and we will need to raise additional capital to continue our business, which could be particularly challenging in the near term under current financial market conditions.

The report of our independent registered public accounting firm for the year ended December 31, 2009 contains an explanatory paragraph which states that we have incurred negative cash flows from operations since inception and are dependent upon future financing and, based on our operating plan and existing working capital deficit, this raises substantial doubt about our ability to continue as a going concern. Based on our current estimates, we anticipate that our existing financial resources will be adequate to permit us to continue to conduct our business through mid May 2010, and we will need to control costs and raise additional capital to continue our business beyond May 2010. Accordingly, we will need to complete a financing in the second quarter of 2010. As of December 31, 2009, we have incurred a net loss of $14.4 million and negative cash flows from operating activities of $7.1 million. As of December 31, 2009, we had approximately $0.6 million of available cash and approximately $1.5 million of accounts payable and accrued expenses. In February 2010, we closed a private placement of common stock for total gross proceeds of approximately $1.3 million.  In addition, under the license agreement with the inventor of our proprietary technology, we are required to pay $1.0 million per year over the next four years, with the next $1 million due in February 2011. We are in the process of negotiating to settle various issues under our site lease and terminaling services agreement for our Baltimore production facility by reducing rent payments, relinquishing unneeded equipment and modifying other commercial terms of the agreements in return for making certain payments. If we are unable to raise additional capital, we will not be able to continue our business. We cannot ensure that additional funding will be available or, if available, that it can be obtained on terms and conditions we will deem acceptable. Any additional funding derived from the sale of equity securities is likely to result in significant dilution to our existing shareholders and may require shareholder approval, which cannot be assured.

We are an early stage company with a limited operating history, which makes us a speculative investment.
 
We are an early stage company that is commercializing our exclusive licensing rights to proprietary technology to manufacture biofuel that we acquired in early 2006. Since then, we have been engaged in organizational activities, including developing our business plan, hiring key management, optimizing product performance, developing our production facility, raising capital, conducting test burns with potential customers, entering into initial sales contracts, delivering initial fuel orders to customers and exploring sublicensing opportunities. We recorded our first sales in the fourth quarter of 2008.  We currently have twelve employees. During the year ended December 31, 2009, we commenced our principal business operations and have exited the development stage. Prior to that from our inception, we were a development stage entity. Accordingly, we have limited relevant operating history upon which you can evaluate our performance and prospects. You should consider our prospects in light of the inherent risks, expenses and difficulties encountered by companies in the early stage of development, particularly companies in new and evolving markets such as the renewable fuels industry. Such risks include technology risks, capital requirements, lack of market acceptance of our products, failure to establish business relationships, competitive disadvantages against larger and more established companies and regulatory matters.

We have a history of losses, deficits and negative operating cash flows and will likely continue to incur losses for the foreseeable future which may impede our ability to achieve our business objectives.

We expect to incur operating losses and continued negative cash flows for the foreseeable future as we invest in sales and marketing, research and development and production facilities to achieve our business objectives. We may not achieve or sustain profitability on a quarterly or annual basis in the future. To be profitable, we will have to significantly increase our revenues and reduce our costs. Future revenues and profits, if any, will depend upon various factors such as those discussed here, many of which are beyond our control. If we are unable to increase our revenues, reduce costs or achieve profitability, we may have to reduce or terminate our operations.

Sufficient customer acceptance for our biofuel may never develop or may take longer to develop than we anticipate, and as a result, our revenues and profits, if any, may be insufficient to fund our operations.

Sufficient markets may never develop for our biofuel, may develop more slowly than we anticipate or may develop with economics that are not favorable for us. The development of sufficient markets for our biofuel at favorable pricing may be affected by cost competitiveness of our biofuel, customer reluctance to try a new product and emergence of more competitive products. Because we only recently began manufacturing our biofuel, potential customers may be skeptical about product stability, supply availability, quality control and our financial viability, which may prevent them from purchasing our biofuel or entering into long-term supply agreements with us. We cannot estimate or predict whether a market for our biofuel will develop, whether sufficient demand for our biofuel will materialize at favorable prices, or whether satisfactory profit margins will be achieved. If such pricing levels are not achieved or sustained, or if our technologies and business approach to our markets do not achieve or sustain broad acceptance, our business, operating results and financial condition will be materially and adversely impacted.
 
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Our ability to produce and distribute our biofuel on a commercially sustainable basis is unproven, and until we can prove our technology, we likely will not be able to generate or sustain sufficient revenues to continue operating our business.
 
While producing biofuel from vegetable oils or animal fats is not a new technology, the technologies we are pursuing for our biofuel production have never been utilized on a commercially sustainable basis. Our biofuel, while intended as a new class of biofuel for power generation, commercial and industrial heating and marine use, may never achieve technical or commercial viability. All of the tests and sales that we have conducted to date with respect to our technology have been performed in a limited scale environment, and the same or similar results may not be obtainable at competitive costs on a large-scale commercial basis.

We have conducted multiple test burns of our biofuel products with potential customers. However, others may need to replicate these tests before our biofuel becomes commercially acceptable. We have never utilized our technology under the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that may arise. Our technology may require further research, development, regulatory approvals, environmental permits, design and testing prior to commercialization. Accordingly, our technology and our biofuel may not perform successfully on a commercial basis and may never generate any profits.
 
We likely will not be able to generate significant revenues until we can successfully validate our product performance with customers and operate our manufacturing facility on a commercial scale.
 
To date, we have generated a small amount of revenues on sales of limited quantities of our biofuel. Revenue generation could be impacted by any of the following:
 
 
·
delays in demonstrating the technological advantages or commercial viability of our proposed products;
 
 
·
problems with our commercial scale production plant, including delays in upgrading the plant, technical staffing, permitting or other operational issues;
 
 
·
inability to interest early adopter customers in our products; and
 
 
·
inability to obtain cost effective supplies of vegetable oil and feedstocks.

Any planned manufacturing plants may not achieve projected capacity or efficiency, and we may not be able to sell our biofuel generated at these plants at prices that will cover our costs. Potential customers may require lengthy or complex trials or long sampling periods before committing to significant orders for our products.

The current credit and financial market conditions may exacerbate certain risks affecting our business.

Due to the continued disruption in the financial markets arising from the global recession in 2008 and the slow pace of economic recovery, many of our potential customers are unable to access capital necessary to accommodate the use of our biofuel. Many are operating under austerity budgets that limit their ability to invest in infrastructure necessary to use alternative fuels and that make it significantly more difficult to take risks with new fuel sources. As a result, we may experience increased difficulties in convincing customers to adopt our biofuel as a viable alternative at this time.
 
We may not be able to generate revenues from sublicensing our technology.
 
Our exclusive perpetual license allows us to sublicense our proprietary technology in North America, Central America and the Caribbean, and our business plan includes, as a second potential revenue stream, the collection of royalties through sublicensing our proprietary technology. To date, we do not have any revenues from sublicenses and have only entered into one sublicense, with Global Energy Holdings Group, Inc. (formerly Xethanol Corporation, “Global Energy”). It is extremely unlikely that Global Energy will be able to perform its obligations under the sublicense. Since Global Energy sold its remaining 5,301,300 shares of our common stock that it owned in March 2009 and filed for bankruptcy in November 2009, we are re-evaluating our agreements with Global Energy and may engage in discussions to modify or terminate them. We likely will need to continue proving the viability of our technology before we can obtain any additional sublicense agreements, and we cannot assure you that we will be able to do so. Companies to which we grant sublicenses may not be able to produce, market and sell enough biofuel to pay us royalty fees or they may default on the payment of royalties. We may not be able to achieve profitable operations from collecting royalties from the sublicensing of our proprietary technology. 
 
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The strategic relationships upon which we may rely are subject to change.
 
Our ability to successfully test our technology, to develop and operate manufacturing plants and to identify and enter into commercial arrangements with customers or sublicensees will depend on developing and maintaining close working relationships with industry participants. These relationships will need to change and evolve over time, as we enter different phases of development. Our strategic relationships most often are not yet reflected in definitive agreements, or the agreements we have do not cover all aspects of the relationship. Our success in this area also will depend on our ability to select and evaluate new strategic relationships and to consummate transactions. Our inability to identify suitable companies or enter into and maintain strategic relationships may impair our ability to grow. The terms of relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake in order to maintain these relationships. Moreover, reliance upon strategic partners to manufacture and sell our biofuel subjects us to additional risks, including a limited ability to control the quality of such fuel and the failure of such partners to perform in accordance with the terms of agreements that they may enter into with us. Arrangements we enter into with such partners may compete with any biofuel that we may manufacture at our own plants and therefore may limit our organic growth.
 
Our biofuel and other alternative sources are at significant disadvantage to petroleum fuels.
 
Our biofuel and other alternative fuels like biodiesel compete with petroleum-based fuels. Currently, the cost of producing most alternative fuels forces manufacturers to operate at a significant competitive disadvantage compared to petroleum-based fuels. Producers of alternative fuels generally depend upon government support, including tax credits and various incentives and mandates to purchase alternative fuels, and upon the willingness of customers to pay a premium for cleaner burning, renewable non-petroleum fuels.

We may be unable to compete successfully in the highly competitive alternative fuels market.

Within the alternative fuels market, the manufacture, marketing and sale of biofuels (such as biodiesel) and other alternative fuels is highly competitive. Such competition could be intense and could drive up the costs of feedstock, plant construction, attracting and retaining qualified engineers, chemists and other key employees, as well as other operating expenses. Additionally, new companies are constantly entering the market. This growth and fragmentation could negatively impact us or our sublicensees’ ability to obtain additional capital from investors. Larger companies which have been engaged in this business for substantially longer periods of time may have access to greater financial and other resources. These companies may have greater success in recruiting and retaining qualified employees and in fuel manufacturing and marketing, which may give them a competitive advantage.

We may never develop the scale economies necessary to optimize our cost structure and enable us to produce and sell our biofuels for a profit.

Our current business model depends, in part, on developing sufficiently large sales volumes and production capacity to be able to realize economies of scale and minimize raw materials, sourcing, logistics and transportation costs. If we are unable to generate sufficient economies of scale in our operations, we may be unable to obtain volume discounts on raw materials and transportation or cut marginal production costs to the level necessary to profitably price our biofuel.
 
The tax credits for which we were eligible expired at the end of 2009.  Failure to renew these or similar tax credits could make our biofuel less competitive.

The 50 cent per gallon credit applicable to our fuel, when mixed with diesel, kerosene or other taxable fuel and sold at the retail level, expired on December 31, 2009, along with biodiesel and other alternative fuel tax credits. We depend in part on the availability of tax credits to incentivize customers to purchase our fuels. Congress is expected to pass in the coming months a tax extenders bill which will extend (effective retroactive to January 1, 2010) through the end of 2010 or beyond many expired tax provisions, but we cannot assure you if or when the tax credit applicable to our fuel will be extended.
 
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If our biofuels do not qualify for government mandated or incentivized renewable energy credits or renewable portfolio standards or biofuel mandates, our potential customers may be less likely to pay a premium for our biofuels, which could negatively impact our ability to generate revenues.

More than thirty states have enacted renewable energy credits (“RECs”) or renewable portfolio standards (“RPS”), and several other states have created biofuel mandates, tax credits and other incentives for the use of renewable fuels. Our business model depends in part, on our biofuels qualifying for RECs, RPS requirements or biofuel mandates and that our customers will pay a premium for our biofuels in order to receive tax credits or comply with the government mandates. If we do not receive this premium because our biofuel does not qualify our customers for the credits or incentives, we may be unable to generate sufficient revenues or profits which could have a negative effect on our business, results of operations and financial condition.

 We may never fully realize the value of our technology license agreement, which presently is our principal asset.

We may not be successful in realizing the expected benefits from our master license agreement, which represented over 70% of our total assets as of December 31, 2009.  We recorded our initial fuel sale in October 2008 and accordingly began to amortize the license agreement. Further, we initially intended to use the licensed technology to generate our expected revenues without any significant modification, but we have conducted significant additional research and development to modify the basic fuel technology to meet market demands for particular fuel attributes. To date, we have incurred approximately $2.4 million in research and development separate from our license payments, and we are continuing to incur additional research and development costs to optimize our fuels to test different feedstocks and to tailor the fuel energy output, emissions and other specifications to the specific needs of potential customers.

Our business depends on proprietary technology that we may not be able to protect and may infringe on the intellectual property rights of others.

Our success will depend, in large part, on our technology’s commercial viability and on the strength of our intellectual property rights. Much of the technology presently consists only of trade secret rights, which are difficult to protect. If others gain access to the trade secrets relating to our technology, including through analysis or “reverse engineering,” they may able to develop substantially equivalent technology. Although we filed patent applications to protect our technology, there can be no assurance that we ultimately will receive patent protection or that any protection that is obtained will be broad enough to be effective in protecting our technology against claims or actions by competitors. Further, any patents that are obtained may not withstand challenges as to validity and enforceability. Third parties may assert that the technology, or the products we or our sub-licensees commercialize using the technology, infringes upon their proprietary rights. We have yet to complete an infringement analysis and, even if such an analysis were available at the current time, we could not be certain that no infringement exists, particularly as our products have not yet been fully developed. We may need to acquire additional licenses from third parties in order to avoid infringement claims, and any required licenses may not be available to us on acceptable terms, or at all. To the extent infringement claims are made, we could incur substantial costs in the resulting litigation, and the existence of this type of litigation could impede the development of our business.
 
Our technology may become ineffective or obsolete.
 
To be competitive in the biofuel industry, we may be required to continually enhance and update our technology. The costs of doing so may be substantial, and if we are unable to maintain the efficacy of our technology, our ability to compete may be impaired. The impact of technical shortcomings could have a material adverse effect on our business, financial condition, results of operations and prospects.

If we cannot make the required payments under our license agreement for our proprietary technology, the inventor may be able to terminate the agreement, which could preclude us from selling our biofuel.
 
We still have substantial obligations under the license agreement with the inventor of our proprietary technology. Specifically, we are required to pay Mr. Petrucci an additional $1.0 million in cash per year for the next four years, for a total of $4.0 million in remaining payments. To the extent we default on any of these payments or breach any other material provisions of our license, the inventor could terminate the agreement, which is our principal asset. The license agreement also provides that the inventor may terminate the agreement if an insolvency or bankruptcy petition is filed against us and is not dismissed within 90 days.
 
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We depend on key personnel to execute our business plan. If we cannot attract and retain key personnel, we may not be able to successfully implement our business plan.

As of December 31, 2009, we had 12 full-time employees. In 2009 and early 2010, three of our executives resigned from the Company, including David Gillespie, our former President, Chief Executive Officer and a Director. Our success depends to a significant degree upon the continuing contributions of our key management. We have a relatively small team, and the loss of a key individual or inability to attract suitably qualified replacements or additional staff could adversely affect our business. No assurance can be given that our key personnel will continue their association or employment with us or that replacement personnel with comparable skills will be found. If we are unable to attract and retain key personnel and additional employees, our business may be adversely affected.

2020 Energy, LLC owns approximately 21.0% or our outstanding common stock, and Ferdinardo Petrucci, the inventor of our proprietary technology owns approximately 11.6% of our common stock. The managing and sole member of 2020 Energy has partnered with Mr. Petrucci to form PTJ Bioenergy Holdings, Ltd, an entity that is the licensor (by assignment from Mr. Petrucci) of our technology.  2020 Energy and Mr. Petrucci may delay, defer or prevent us from taking actions that would be beneficial to our other shareholders.
 
As of March 5, 2010, 2020 Energy, LLC and Mr. Petrucci combined owned approximately 32.6% of our outstanding common stock. This amount includes an additional 1,100,000 shares that were issued to Mr. Petrucci in February 2010 in lieu of a license payment.  Accordingly, they may be able to exercise significant influence over the outcome of substantially all matters required to be submitted to our shareholders for approval, including the election of our board of directors and any proposed merger or consolidation of our company. Their ownership interest in our company may discourage potential investors from investing in our securities due to concerns with the overhang on our common stock and third parties from seeking to acquire control of our company, which may adversely affect the market price of our common stock.

Risks Related to Our Industry

The current economic and political environment may provide increased uncertainty and unpredictability that may have an adverse effect on our industry.

Our industry relies heavily on governmental incentives, usually tax-based, and government mandates to encourage broad market acceptance and use of alternative fuels. The slow pace of changes in renewable energy polices by the Obama Administration and Congress has minimized a positive impact on the market’s willingness to embrace alternative fuels. The timing and the effectiveness of these policies are unknown and may not provide the requisite support to ensure success of the alternative fuels industry. In addition, the global economic recession, the tight capital markets and the slow economic recovery have depressed fuel prices and energy demand, limited the ability of customers to spend funds on new, experimental fuels and limited the funds available to invest in early-stage companies.

Prices and markets for biofuel are unpredictable and tend to fluctuate significantly.
 
The price of biofuels, as well as the price of conventional petroleum-based fuels and other alternative fuels, is based on global demand, supply and other factors, all of which are beyond our control. Global prices for biodiesel fuel have fluctuated widely in recent years, and we expect that prices will continue to fluctuate. Price fluctuations will have a significant impact upon our revenue, results of operations and on our general financial condition. Price fluctuations for biodiesel and other conventional and alternative fuels may also impact the capital markets, and our ability to raise capital. In particular, as prices of petroleum-based fuels decline, the interest in investing in alternative sources of energy, like our biofuel, may decline as well. Future decreases in the price of biodiesel and competing fuels may have a material adverse effect on our financial condition and future results of operations.
 
Our financial results are substantially dependent on commodity prices and supplies, which are subject to significant volatility and uncertainty.

Our results of operations, financial position and business outlook are substantially dependent on commodity prices, especially prices for vegetable oil, animal fat feedstock and materials used in producing our biofuel. The prices for these items are quite volatile and could cause our results to fluctuate substantially. We may experience periods of declining prices for our products and increasing costs for our raw materials, which would result in operating losses. Many biofuel companies attempt to hedge a portion of the effects of fluctuations in prices by entering into forward contracts to supply vegetable oil or purchase feedstock or other items or by engaging in transactions involving exchange-traded futures contracts. These activities involve substantial costs and substantial risks and may be ineffective in mitigating changing commodity prices. We have not entered into any hedging, forward contracts, or similar arrangements and could be at a competitive disadvantage with companies that have entered into successful hedging arrangements.
 
18

 
The biofuel industry is subject to significant environmental regulation and may be adversely affected by regulatory and environmental risks.
 
Biofuels businesses are subject to environmental risks and hazards and environmental regulation imposed by a variety of international conventions as well as federal, state, provincial, and local laws and regulations. Environmental laws restrict and prohibit spills, discharges and emissions of various substances produced in association with biofuel manufacturing operations. Environmental laws also require that manufacturing plants are operated, maintained and closed in such a way that satisfies applicable regulatory authorities. Compliance with environmental laws can require significant expenditures and a violation may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner we expect may result in stricter standards and enforcement, larger fines and liability, as well as potentially increased capital expenditures and operating costs. Compliance with environmental laws may limit production, significantly increase the costs of operations, or otherwise adversely affect results of operations and prospects.
 
To market our fuel for on-road motor vehicle applications in the United States, our biofuel must be registered with the U.S. Environmental Protection Agency, or EPA, and comply with the EPA’s rigorous emissions, engine durability and health effects regulations. We have not yet applied for such registration. We are evaluating the regulatory requirements for using our fuel in motor vehicle applications in our territory outside the United States.
 
Section 211 of the Clean Air Act generally does not apply to using our biofuel in a stationary source, such as utility power generation applications or institutional or commercial heating fuel, or in certain marine applications. There may, however, be federal or state requirements applicable to emissions from individual furnaces, boilers, and similar equipment. As a practical matter, market acceptance of our biofuel may be limited until we can demonstrate that (i) our biofuel is comparable to conventional fuels from an energy content and emissions perspective, as well as handling and storage perspectives, and (ii) that our biofuel is compatible with existing heating systems or power generation systems and other combustion systems. To date, we have not demonstrated any of the foregoing in such commercially available systems. In addition, certain initial testing indicated that our biofuel may require further development so that its viscosity is more stable under certain conditions.

Our business is subject to local legal, political, and economic factors.
 
To the extent we operate our business outside of North America, particularly in Central America and the Caribbean where we have an existing license, we will need to adapt our business to the local legal, political and economic conditions. Certain of these areas are less hospitable to US businesses, and US businesses operating in certain of these areas have been subject at various times to risks from terrorism, military repression, interference with private contract rights, currency fluctuations, inflation, exchange controls, laws or policies affecting environmental issues (including land use and water use), workplace safety, foreign investment, foreign trade, investment or taxation, restrictions imposed on the alternative fuel industry (such as restrictions on production) and price controls and export controls. Any changes in alternative fuel, financial incentives, investment regulations, policies or a shift in political attitudes within our operating area are beyond our control and may adversely affect our business and future financial results.
 
 Risks Related to Our Securities

Our declining stock price and need to raise additional capital likely could lead to significant dilution in future financing transactions.
 
In light of our need to raise significant amounts of additional capital, coupled with the recent decline in our stock price, we may need to issue large amounts of additional shares of common stock or securities convertible into common stock, resulting in significant dilution to our shareholders and causing a reduction in their proportionate ownership and voting power. Under NASDAQ rules, our board of directors has the ability, without seeking shareholder approval, to issue additional shares of common stock or convertible preferred stock, aggregating up to 20% of our outstanding common stock, for such consideration as the board of directors may consider sufficient, which may be at a discount to the market price. In addition, we may be required to issue securities that may contain antidilution provisions or other onerous terms that may also result in additional dilution to our shareholders.
 
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Some of our recent financing transactions included antidilution provisions that, if triggered, could dilute the ownership interests of our existing common shareholders.

Some of our outstanding securities include antidilution provisions that, when triggered, result in the issuance of additional shares that would dilute the interests of existing common stockholders. Our March 2009 private placement included certain antidilution provisions that apply if we issue additional shares of common stock or convertible securities in a financing transaction within 15 months of the closing date with a purchase price or conversion price less than $0.80 per share or if we issue additional warrants in a financing transaction within the next 15 months with an exercise price less than $0.90 per share, subject to certain caps required by NASDAQ listing rules. On June 29, 2009 and September 23, 2009, we obtained waivers from the holders of the warrants issued in the March 2009 offering, which permitted us to enter into future financing transactions without the potential triggering of the antidilution provisions in their warrants.  Our February 2010 private placement also included certain antidilution provisions that apply if we issue additional equity securities in a financing transaction with a purchase price less than $0.69 per share or issue convertible securities with a purchase price less than $0.69 at any time within 6 months after the registration statement is declared effective, subject to certain caps required by NASDAQ listing rules.

These antidilution provisions could be disproportionately dilutive and adversely affect the prevailing market prices of our common stock. The existence of conversion features also may result in short selling of our common stock that may further depress the market price.
 
If we do not meet NASDAQ requirements for continued listing, our common stock may be delisted which could negatively impact our stock’s liquidity.

Under NASDAQ listing rules, our common stock could be delisted from NASDAQ if we do not meet certain standards regarding our financial condition and operating results (including, among other factors, maintaining adequate shareholders’ equity, minimum $1.00 bid price and market capitalization), the distribution of our publicly held securities and compliance with NASDAQ listing agreements and SEC rules and regulations. In December 2009, we received a notice from NASDAQ that we were not in compliance with the minimum bid requirement for 30 consecutive business days and had until June 2010 to regain compliance. NASDAQ also requires a minimum shareholders’ equity of $2.5 million or, alternatively, a market value of listed securities of at least $35 million. In August 2009, we received a communication from NASDAQ when we reported in our Quarterly Report on Form 10-Q that our shareholders’ equity equaled $648,756 at June 30, 2009. At September 30, 2009, our shareholders’ equity barely exceeded the minimum requirement of $2.5 million, and we received confirmation from NASDAQ that we were back in compliance with such requirement.

In the future, however, due to factors such as losses from operations and the volatility of our stock price, we may not be able to meet the listing maintenance requirements of the NASDAQ Capital Market. If we are unable to satisfy the NASDAQ criteria for maintaining listing, our common stock may be subject to delisting. Trading, if any, of our securities would thereafter be conducted on the OTC Bulletin Board or in the so-called “pink sheets”. As a consequence of any such delisting, our shareholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices of, our common stock.

Our common stock is thinly traded and subject to volatility.
 
Although our common stock is currently traded on the NASDAQ and previously was traded on the Amex, it has traded in relatively small volumes. If our common stock continues to be thinly traded, it may enhance volatility in the share price and make it difficult for investors to buy or sell shares in the public market without materially affecting the quoted share price. Further, investors seeking to buy or sell a certain quantity of our shares in the public market may be unable to do so within one or more trading days. If limited trading in our stock continues, it may be difficult for holders to sell their shares in the public market at any given time at prevailing prices, which may limit the liquidity of our common stock.
 
The market price of our common stock is likely to be volatile based upon developments in our business or the industry.
 
The market price of our common stock is likely to be volatile as a result of many factors including, but not limited to:
 
 
·
our announcement of developments, whether positive or negative, with respect to our business, including the viability of our biofuel, new or changes in strategic relationships, and our ability or failure to meet business milestones;
 
20

 
 
·
developments concerning intellectual property rights and regulatory approvals;
 
 
·
the announcement of new products or product enhancements by our competitors;
 
 
·
changes in the market for alternative fuels and in commodities used to produce them;
 
 
·
fluctuations in the availability of capital to companies in the early stages;
 
 
·
changes in the social, political and economic climate in the regions in which we operate; and
 
 
·
the impact of sales and trading activity with respect to our common stock in the market.

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

A significant number of our shares are eligible for sale, and their sale could depress the market price of our common stock.
 
Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock. Approximately 4 million shares of our common stock issued in our March 2009 private placements became eligible for sale in the open market under Rule 144 in September and November 2009, respectively. In general, a person who has held restricted shares for the requisite holding period, upon compliance with Rule 144 procedures, may sell shares into the market. In addition, we are currently in the process of registering for resale by non-affiliate selling shareholders 3,781,716 shares of our common stock issued in our February 2010 private placement, including shares issuable upon exercise of options to purchase that are not currently outstanding. We cannot predict the effect, if any, that the availability of these shares for sale, or the sale of these shares, will have on the market price for our common stock. If the number of shares offered for sale is greater than the number of shares sought to be purchased, then the price of our common stock would decline. The market price of our securities could be adversely affected by future sales of these securities.

Our common stock may be considered “a penny stock” and may be difficult to sell.
 
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. While penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or in the Pink Sheets, they also may trade on securities exchanges. To the extent the market price of our publicly traded common stock is less than $5.00 per share, it may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
Not applicable.

ITEM 2. PROPERTIES
 
We own no real property and currently lease our office and production spaces. As of August 28, 2009, we terminated the lease on our office space in Lake Mary, Florida and relocated our corporate headquarters from Lake Mary, Florida to Columbia, Maryland, closer to the Company’s biofuel production plant.  The new corporate headquarters is located at 5850 Waterloo Road, Suite 140, Columbia, Maryland 21045.  The Company has remained a Florida corporation and currently maintains two smaller administrative offices in Florida.
  
           On September 12, 2008, we entered into a site lease agreement to locate our first commercial scale biofuel manufacturing plant at a port location in Baltimore, Maryland and a terminaling services agreement to provide certain terminaling services at the site. The lease agreement covers the physical premises where the production facility is located as well as approximately six million gallons of storage tank capacity and related terminaling facilities. The initial term of the lease agreement is five years with an option to renew for three additional five year periods. The total base rental commitment, for the initial five year rental period, is approximately $4,605,000. Under the terminaling services agreement, we are provided terminaling services that include the receipt, the unloading and the transfer of raw materials and the subsequent transfer and load out of finished product from and to railcars, barges and trucks. The term of the terminaling services agreement runs concurrently with the lease agreement. The total minimum throughput charges, for the initial five year service agreement period, are approximately $953,000.  We are in the process of negotiating to settle various issues under our lease and terminaling services agreement by reducing rent payments, relinquishing unneeded equipment and modifying other commercial terms in return for making certain payments.
 
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We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our business, financial condition or results of operations.

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

Our common stock began trading on the NASDAQ on September 23, 2008 under the symbol “NGBF.”  Between April 15, 2008 and September 22, 2008 our common stock traded on the Amex under the symbol “GNB” and prior to trading on Amex, our common stock was traded on the OTC Bulletin Board under the symbol “HTWO.OB.”  The following table below sets forth the high and low sales prices per share for the periods our common stock was traded on NASDAQ and Amex and the high and low bid prices per share for the periods our common stock was quoted on the OTC Bulletin Board.

   
High
   
Low
 
2010
           
First Quarter  (through March 15, 2010)
 
$
0.92
   
$
0.62
 
                 
2009
               
First Quarter
 
$
1.12
   
$
0.43
 
Second Quarter
   
1.80
     
0.81
 
Third Quarter
   
1.60
     
0.84
 
Fourth Quarter
   
1.25
     
0.61
 
                 
2008
               
First Quarter
 
$
6.00
   
$
3.00
 
Second Quarter
   
7.08
     
4.25
 
Third Quarter
   
5.15
     
3.45
 
Fourth Quarter
   
4.50
     
0.71
 

Shareholders
 
The approximate number of holders of record of our common stock as of December 31, 2009 was 142, including those brokerage firms and/or clearing houses holding shares of common stock for their clientele (with each such brokerage house and/or clearing house being considered as one holder). As of December 31, 2009, we had 31,711,578 shares of common stock outstanding. In February 2010, we completed a private placement of 1,890,858 shares of common stock and warrants to purchase an additional 1,890,858 shares. As of March 15, 2010, we had 34,702,436 shares of common stock outstanding.
 
Dividends
 
We have never declared or paid dividends on our common stock. We do not intend to declare dividends in the foreseeable future because we anticipate that we will reinvest any future earnings into the development and growth of our business. Any decision as to the future payment of dividends will depend on our results of operations and financial position and such other factors as our Board of Directors in its discretion deems relevant.
 
Registration Rights
 
Under the terms of some private placements, we have entered into registration rights agreements with the purchasers of our convertible preferred stock, common stock and warrants. Under the registration rights agreements, we were required to file “resale” registration statements with the SEC covering the shares of our common stock issued directly, upon conversion of the preferred stock issued or upon exercise of the warrants issued in the private placements. Pursuant to our February 2010 private placement, we filed a registration statement on  Form S-3 on February 11, 2010 to register 3,781,716 shares of common stock for resale by the selling shareholders.  This registration statement has not yet been declared effective by the SEC. In November 2008, we registered 4,770,990 shares of our common stock for resale by the selling stockholders on two registration statements on Form S-3 (Registration No. 333-151318 and No. 333-151320). We are obligated to maintain the effectiveness of these “resale” registration statements from the effective date until all securities registered under the registration statements have been sold or are otherwise able to be sold pursuant to Rule 144 under the Securities Act, without regard to volume limitations, provided we comply with our reporting obligations. We may also include on future registration statements additional shares issuable upon exercise of our outstanding warrants and options. We agreed to use our best efforts to have the “resale” registration statement declared effective by the SEC as soon as possible after the initial filing, but by no later than 180 days after the closing of the private placements.
 
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Equity Compensation Plans

Please refer to Item 12 of this Annual Report for information regarding securities authorized under our equity compensation plans.
   
ITEM 6.
SELECTED FINANCIAL DATA
 
Not applicable.
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a renewable biofuels provider that is marketing a new class of “second generation” biofuels for use in diesel fuel applications, including power generation, commercial and industrial heating and marine transportation that began generating revenues in 2008.

We produce our biofuels using a proprietary blending technology that we believe is simpler, cleaner, less expensive, and less energy intensive than the complex chemical reaction process used to produce traditional biodiesel. We believe that this technology enables us to produce biofuels that cost less to produce, use less energy and generate significantly lower emissions than our competitors. Our technology also gives us the flexibility to produce our biofuel from multiple feedstocks, which allows us to use non-edible raw materials in our production process, when desirable. We believe that these factors will enable us to customize our product to specific customer requirements and react more quickly to trends in the biofuels market.

The operation and development of our business will require substantial additional capital to fund our operations, payments due under our exclusive technology license, the development or expansion of our production plants, research and development, and other initiatives.
 
Going Concern Matters
 
Our ability to continue as a going concern is dependent upon, among other things, future offerings of capital or alternative financing arrangements and the expansion of our operations.  Uncertainty as to the outcome of these factors raises substantial doubt about our ability to continue as a going concern.  We are currently evaluating various courses of action to address the issues we are facing. There can be no assurance that any of these efforts will be successful.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, long-lived assets, accrued liabilities, income taxes, common stock warrant liabilities and antidultion obligations, and share-based compensation. These estimates are based on historical experience, information received from third parties, and on various other assumptions that are believed to be 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 these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements.

 
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Revenue Recognition

We follow the provisions as set forth by authoritative accounting guidance.

We generally recognize revenue when we have satisfied all contractual obligations and we are reasonably assured of collecting the resulting receivable.

We recognize revenue related to the sale of our inventory as we ship or deliver products, provided all other revenue recognition criteria have been met. We recognize revenue from products sold through distributors or other third-party arrangements upon shipment of the products, if the distributor has a right of return, provided that (a) the price is substantially fixed and determinable at the time of sale; (b) the distributor’s obligation to pay us is not contingent upon resale of the products; (c) title and risk of loss passes to the distributor at time of shipment; (d) the distributor has economic substance apart from that provided by us; (e) we have no significant obligation to the distributor to bring about resale of the products; and (f) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such criteria have been met.

Share-based Compensation

We calculate the fair value of all share-based payments to employees and non-employee directors, including grants of stock options, non-restricted and restricted shares, and amortize these fair values to share-based compensation in the income statement over the respective vesting periods of the underlying awards.

Share-based compensation related to stock options includes the amortization of the fair value of options at the date of grant determined using Black-Scholes option pricing model. We amortize the fair value of options to expense over the vesting periods of the underlying options.

We estimate the fair value of stock option awards on the date of grant using assumptions about volatility, expected life of the awards, risk-free interest rate, and dividend yield rate. The expected volatility in this model is based on the historical volatility of our common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time awards are granted, based on maturities which approximate the expected life of the options. The expected life of the options granted is estimated using the “simplified” method for “plain vanilla” options. The expected dividend rate takes into account the absence of any historical payments and management’s intention to retain all earnings for future operations and expansion.

We estimate the fair value of non-restricted and restricted stock awards based upon the closing market price of our common stock at the date of grant. We charge the fair value of non-restricted awards to share-based compensation upon grant. We amortize the fair value of restricted awards to share-based compensation expense over the vesting period of the underlying awards.

Derivative Accounting

We adopted new guidance as issued on January 1, 2009 which significantly impacted the accounting for certain of our freestanding derivative instruments by requiring us to account for these instruments as liabilities because they were no longer afforded equity treatment due to their exercise price reset features.  We account for these arrangement in accordance with ASC Topic  815-10-50,  “Accounting for Derivative Instruments and  Hedging  Activities,” “Accounting for Derivative Financial Instruments Indexed  to, and  Potentially Settled in, a Company’s Own Stock,” as well as related  interpretations of these standards. In accordance with GAAP, derivative instruments and hybrid instruments are recognized as either assets or liabilities in the statement of financial position and are measured at fair value with gains or losses recognized in earnings or other comprehensive income depending on the nature of the derivative or hybrid instruments.  Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and recognized at fair value with changes in fair value recognized as either a gain or loss in earnings if they can be reliably measured.  When the fair value of embedded derivative features cannot be reliably measured, we measure and report the entire hybrid instrument at fair value with changes in fair value recognized as either a gain or loss in earnings.  We determine the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument and precluding the use of "blockage" discounts or premiums in determining the fair value of a large block of financial instruments. Fair value under these conditions does not necessarily represent fair value determined using valuation standards that give consideration to blockage discounts and other factors that may be considered by market participants in establishing fair value.

 
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Long-Lived Assets

We review long-lived assets, including leasehold improvements, property and equipment, and acquired intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. This requires us to estimate future cash flows related to these assets. Actual results could differ from those estimates, which may affect the carrying amount of assets and the related amortization expense.

Income Taxes

We account for income taxes pursuant to authoritative accounting guidance, which prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax return.  We do not recognize an uncertain tax position as a deferred tax asset if it has less than a 50% likelihood of being sustained.

We have analyzed our filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As a result of our analysis, we have recorded no additional tax liability.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax assets would increase our income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Our deferred tax assets at December 31, 2009 were fully offset by a valuation allowance.

Results of Operations
 
Comparison of the Year ended December 31, 2009 and the Year ended December 31, 2008

Net Loss
 
We incurred a net loss of $14.4 million for the year ended December 31, 2009, as compared to $13.5 million for the year ended December 31, 2008.
 
The increase in net loss of $0.9 million resulted primarily from:

 
·
a $2.0 million increase in cost of revenues.
 
 
·
a $0.1 million increase in general and administrative expenses.
 
 
·
a $1.7 million increase in non-cash loss on fair market value adjustment.

partially offset by:

 
·
a $0.2 million increase in revenues.
 
 
·
a $0.6 million decrease in research and development expenses.
 
 
·
a $0.4 million decrease in legal settlements.
 
 
·
a $1.6 million decrease in license impairments.
 
 
·
a $0.2 million increase in gain on debt extinguishment.

Revenue
 
Total revenues for the year ended December 31, 2009 were $178,938, an increase of $0.15 million compared to total revenues of $22,943 for the year ended December 31, 2008. The increase in net revenues was due to the initiation of biofuel production and sales from our production plant in Baltimore, Maryland.
 
Our product revenue was driven by a number of factors including: in the commercial and industrial market we offered our product at a substantial discount to the price of petroleum diesel fuel in order to attract “early adopter” customers and gain product validation and performance data through their use of our product. These discounts were partially offset by eliminating the need to perform test burns to sign up commercial and industrial customers, thereby lowering our research and development costs.  We also gained the ability to utilize these early customers as a marketing tool, by bringing potential customers to existing sites for real-time demonstrations of our biofuel performance in their boiler applications. We have since signed several customers as a result and no longer offer “early adopter” discounts. We have continued to have success in signing up customers since discontinuing the “early adopter” discount, but may from time to time offer volume-related or other promotional pricing discounts as warranted.
 
 
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Cost of Product Revenue
 
Cost of product revenue was $2.3 million for the year ended December 31, 2009, an increase of $2.0 million, compared to $0.3 million for the year ended December 31, 2008. Cost of product revenue is comprised of raw material feedstocks used in production of $0.9 million in 2009 compared to $0.1 million in 2008, direct facility costs of $0.8 in 2009 compared to no costs in 2008, and amortization of the license agreement of $0.6 million in 2009 compared to $0.2 million in 2008.

During  2009 cost of product revenue was driven by a disproportionally higher cost of production relative to units sold. We were just beginning to ramp-up production in our Baltimore facility and were running in small batch processing which does not allow us to purchase our feedstocks in large enough quantities to leverage volume discounts and transportation costs. We also amortize our license agreement on a straight line basis and pay fixed monthly lease costs on the facility. These non-volume driven items were approximately $1.5 million of the $2.3 million total cost of product revenue. As we are ramping up our production, the amortization and direct facility costs will have a disproportionate impact on our cost of product revenue in relation to units sold.  As we begin fulfilling our recently awarded contracts and our production volume increases, we believe that our per unit cost of production will decrease as we process much larger production runs, though there can be no assurance that these cost reductions will materialize.
 
Research and Development Expenses

Research and development expenses were approximately $0.5 million for the year ended December 31, 2009 compared to $1.1 million for the year ended December 31, 2008.  The decrease in research and development expenses in 2009 is primarily the result of the beginning of production of our fuel and conducting less test burns which were used to evaluate additional customized fuel formulations using our proprietary blending technology.

General and Administrative Expenses
 
General and administrative expenses were $9.8 million for the year ended December 31, 2009, compared to $9.7 million in the prior year. The increase of $0.1 million in 2009 over the prior year was primarily attributable to the following:

Increases in expenses related to:

 
·
$0.3 million in salary and severance pay based on hiring 2 additional employees and payment of severance to an executive.
 
 
·
$0.3 million for lease termination expenses associated with the Lake Mary office lease termination.
 
 
·
$0.2 million related to the Baltimore plant lease and terminaling services lease.
 
 
·
$0.3 million for board fees. Compensation program was implemented in August 2008.
 
 
·
$0.3 million for non cash compensation expense related to the fair market value of warrants issued for services.
 
 
·
$0.7 million for non cash compensation expense related to restricted stock awards.
 
 
·
$0.1 million for general liability and D&O insurance.
 
 
·
$0.2 million for investor relations and consulting services.

Decreases in expenses related to:
 
 
·
$1.0 million related to non cash compensation expense related to stock options.
 
 
·
$0.9 decrease in legal expenses.
 
 
·
$0.2 million for penalty shares expense incurred in prior year for late filing of registration statement.
 
 
·
$0.1 million for recruiting fees as 2 executives positions in prior year.
 
 
·
$0.1 million for bonuses.

Interest Expense

Interest expense was $0.5 million for the year ended December 31, 2009 compared to $0.5 million in the prior year. The expenses are unchanged as interest expense consists entirely of interest incurred related to the License Agreement payable.
 
27

 
(Loss) Gain on Fair Value Adjustment

The loss on net change in fair value of derivative liabilities of $1.7 million for the year ended December 31, 2009, was the result of the change in fair value of the detachable warrants issued to investors in connection with several financings during the year ended December 31, 2009.  The warrants issued in conjunction with several financings during the year ended December 31, 2009 are considered derivative liabilities and must be valued at the end of each period.  The carrying value of the common stock warrant liability is calculated using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility, and the remaining contractual term of the award. The risk-free rate of interest is based on the U.S. Treasury rates appropriate for the expected term of the award. Expected dividend yield is projected at 0%, as the Company has not paid any dividends on its common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future. Expected volatility is based on the Company’s historical volatility and the historical volatilities of the common stock of comparable publicly traded companies.

Comparison of the Year ended December 31, 2008 and the Year ended December 31, 2007

Research and Development Expenses
 
Research and development expenses were approximately $1.1 million for the year ended December 31, 2008, compared to $0.8 million for the year ended December 31, 2007. The increase in research and development expenses in 2008 reflects primarily costs from conducting tests to evaluate additional customized fuel formulations using our proprietary blending technology and costs to focus on further optimizing emissions as well as combustion tuning to enhance reliable cold engine starts.
 
General and Administrative Expenses
 
General and administrative expenses were $9.7 million for the year ended December 31, 2008, compared to $7.5 million in the prior year. The increase of $2.2 million in 2008 over the prior year was primarily attributable to increased expenses of $1.0 million associated with personnel and related costs, increases related to legal and audit fees of $0.5 million, and an increase of $0.2 million for rental costs.
 
Interest Expense
 
Interest expense was $0.5 million for the year ended December 31, 2008, compared to $0.8 million in the prior year. The decrease of $0.3 million in 2008 over the prior year was attributable to a reduction in license agreement payable. Interest expense consists of interest incurred related to the License Agreement payable.
 
 Other Expense
 
Other Expense was zero for the year ended December 31, 2008, compared to $0.3 million in the prior year. The decrease was attributable to the recognition of a charge, in the prior year, associated with a forfeited deposit of $250,000 as a result of the termination by Global Energy of our stock purchase and termination agreement.
 
(Loss) Gain on Fair Value Adjustment
 
Loss on fair value adjustment was $717 for the year ended December 31, 2008, compared to a gain of $0.6 million in the prior year.  During December 2007, we recorded an $80,752 contingent liability for 2% of the shares issued in the December 2007 private placement.  During 2008, we recorded an additional $186,291 contingent liability for 4% of the shares issued, up to the maximum penalty of 6%.  For the year ended December 31, 2008 and 2007, we recorded a loss on fair value adjustment of $30,169 and a gain on fair value adjustment of $1,796, respectively, related to this liability as our stock price fluctuated during this period. Upon issuance of the shares the contingent liability was eliminated.

In connection with the Series B Private Placement completed on March 31, 2008, we recorded a contingent liability of $43,986 for 1% of the amount invested, due to the registration statement not being declared effective within 180 days of the initial required filing date. We recorded a gain on fair value adjustment of $29,452 related to this liability as our stock price declined during this period. Upon issuance of the shares the contingent liability was eliminated.

We recorded a $1,574,100 contingent liability at January 1, 2007 based on our stock price at that date. For the year ended December 31, 2007, we recorded a gain on fair value adjustment of $629,640 related to this liability as our stock price declined during this period. Upon issuance of the shares the contingent liability was eliminated.

 
28

 

Liquidity and Capital Resources
 
Liquidity
 
At December 31, 2009, we had $0.6 million in cash, compared to $1.3 million at September 30, 2009.
 
Although we completed a private placement of $1,304,692 in gross proceeds in the first quarter of 2010, we will need to reduce costs and raise additional financing to continue our operations beyond the second quarter of 2010. We expect that our available cash and interest income will be sufficient to finance currently planned activities through mid May 2010. We estimate that we will require an additional $6.0 million to fund our operations through 2010. These estimates are based on certain assumptions, which could be negatively impacted by the matters discussed under “Risk Factors.”

Several existing commitments that require significant expenditures will continue to impact our liquidity and capital resources. We have monthly lease and other outstanding payment obligations under our production facility site lease and terminaling service agreement for past production. We also have incurred costs associated with developing, upgrading and expanding the capacity of our biofuel production facility in Baltimore, Maryland. Under the license agreement with the inventor of our proprietary technology, we also are required to pay $1.0 million per year over the next four years. We will continue incurring costs to test and optimize our fuels, enhance research and development, pay our employees and sustain operations.

We are unlikely to be able to continue our operations unless we can obtain additional financing. We likely will seek such funding through public or private financings or some combination of them. Additional funding may not be available to us on acceptable terms, or at all. Even after funding our short term needs, given our ongoing need for capital, we may raise money on an opportunistic basis when the market makes such funding available on acceptable terms.
 
We have financed our operations to date primarily through the sale of our common and preferred stock and warrants in private placements with accredited investors and registered direct offerings. In March 2009, we raised $3,166,000 in gross proceeds from the sale of shares of common stock at a purchase price of $0.80 per share and warrants with an exercise price of $0.90 per share. In July 2009, we raised $3,196,600 in gross proceeds from the sale of shares of common stock at a price of $1.05 per share and warrants with an exercise price of $1.60 per share.  In December 2009, we raised $1,541,000 in gross proceeds from the sale of shares of common stock at a purchase price of $0.80 per share and warrants with an exercise price of $0.90 per share. In February 2010, we raised $1,304,700 in gross proceeds from the sale of shares of common stock at a purchase price of $0.69 per share and warrants with an exercise price of $0.90 per share.

 If we continue to raise capital through the sale of equity securities, or securities convertible into equity, dilution to our then existing shareholders would result. If we raise additional capital through the incurrence of debt, we would likely become subject to covenants restricting our business activities, and holders of debt instruments would have rights and privileges senior to those of our equity investors. In addition, servicing the interest and repayment obligations under these borrowings would divert funds that would otherwise be available to support research and development or commercialization activities.
 
Cash Flows
 
Net cash used in operating activities was $7.1 million for the year ended December 31, 2009 primarily reflecting our net loss of $14.4 million, partially offset by $3.3 million in non-cash stock-based compensation expense, $0.7 million in non-cash stock based expense for services rendered by consultants, $0.5 million in non-cash amortization expense associated with our license agreement payable, $0.6 million in non-cash amortization expense related to the license, and $1.7 million loss on change in fair value of warrant liability. Net cash used in operating activities was $6.3 million for the year ended December 31, 2008 primarily reflecting our net loss of $13.5 million, partially offset by $3.4 million in non-cash stock-based compensation expense, $0.6 million in non-cash stock based expense for services rendered by consultants, $0.5 million in non-cash amortization expense associated with our license agreement payable, $0.2 million in non-cash amortization expense related to the license, $0.2 million in non-cash penalty share expense, $0.4 million in warrant expense associated with legal settlement and $1.6 million in impairment expense related to the write-down of license value.
 
Net cash used in investing activities was $0.9 million attributable to plant additions for the year ended December 31, 2009. Net cash used in investing activities was $0.5 million for the year ended December 31, 2008. Net cash used in investing activities in 2008 was attributable to $0.4 million to build out our plant facility and purchase furniture and equipment, and $0.1 million of patent costs.

 
29

 
 
Net cash provided by financing activities was $7.1 million for the year ended December 31, 2009, and is attributable to the issuance of common stock related to public and private offerings..

Net cash provided by financing activities was $6.6 million for the year ended December 31, 2008, and consisted of $7.2 million in net proceeds from the issuance of preferred stock, and $0.4 million in proceeds from exercise of warrants, partially offset by $1.0 million in payments for our License Agreement.
 
Capital Requirements and Resources
 
Our future capital requirements will depend on many factors, including:

 
·
the level of cash flows from product sales;
 
 
·
conducting additional testing with utilities, independent power producers or others, including product application testing, to gain market acceptance of our biofuel among customers and equipment manufacturers;
 
 
·
maintaining and improving our production facility in Baltimore, Maryland under our terminal lease agreement with Pennington Partners, LLC or with others to supply our products initially for testing and eventually for the broader biofuels market;
 
 
·
the scope and results of our research and development efforts;
 
 
·
developing and executing a sales marketing plan for the commercial and industrial heating fuel and marine market segments and a technology plan that complements the marketing plan;
 
 
·
entering into feedstock supply and transportation logistics agreements to supply our production facilities;
 
 
·
developing additional strategic relationships to attract potential customers and sublicensees and to obtain the capital commitments necessary to engineer, construct and operate biofuel plants in our exclusive territory;
 
 
·
continuing to pursue favorable tax incentives for our biofuel, particularly efforts to include our biofuel in the $1 per gallon credit afforded biodiesel and to have the benefit of such a change extend beyond the current expiration date of December 31, 2009 and to pursue obtaining EPA approval;
 
 
·
recruiting additional key employees to expand the capabilities of our existing management team; and
 
 
·
the costs of maintaining, expanding and protecting our intellectual property portfolio, including litigation costs and liabilities.

Off−Balance Sheet Arrangements
 
We currently do not have any off-balance sheet arrangements.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 8. 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Our Consolidated Financial Statements may be found on pages F-1 through F-31 of this report.

 
30

 

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A(T).  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, we are required to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  This required evaluation was carried out with the participation of our principal executive officer and principal financial officer. Based upon such evaluation as of December 31, 2009, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level such that the information relating to us and our consolidated subsidiary required to be disclosed in our Exchange Act reports (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  Internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) includes those policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (c) 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.

Internal control over reporting, because of its inherent limitations, may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of the Company’s management, including the principal executive officer and the principal financial officer, the Company conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework and criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the Company’s evaluation under the COSO framework, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2009.
 
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 temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 
31

 

Changes in Internal Control over Financial Reporting

During the year ended December 31, 2009, there were no significant changes in our control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
None.

 
32

 

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information with respect to the identity, business experience and directorships of our directors and their remuneration is incorporated by reference to the information set forth in the section captioned “Election of Directors” in our Proxy Statement for the 2010 Annual Meeting of Shareholders, which is anticipated to be filed pursuant to Regulation 14A no later than one hundred twenty (120) days following the end of  fiscal year 2009 (the “Proxy Statement”). The information with respect to our Audit Committee is incorporated by reference to the information set forth in the section captioned “Committees of the Board of Directors – Audit Committee” in the Proxy Statement. The information with respect to material changes in the nominating process for the Board of Directors, if any is, incorporated by reference to the information set forth in the appropriate subsection of the section captioned “Election of Directors” in the Proxy Statement. The information with respect to compliance with Section 16(a) of the Exchange Act is incorporated by reference to the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. The information with respect to our Code of Ethics is incorporated by reference to the section captioned “Code of Business Conduct and Ethics” in the Proxy Statement.

The information with respect to the identity and business experience of our executive officers is set forth in the Section captioned “Executive Officers” in Part I of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference to the information set forth under the caption “Executive Compensation” in our Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item is incorporated by reference to the information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” in our Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

The information required by this item, if any, is incorporated by reference to the information set forth under the captions “Transactions with Related Parties” and “Independence of the Board of Directors” in our Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this item is incorporated by reference to the information set forth under the caption “Independent Registered Public Accounting Firm Fees and Services” in our Proxy Statement.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
15(a)(1) Financial Statements  
 
The consolidated financial statements of the registrant as listed in the “Index to Consolidated Financial Statements” found on pages F-1 through F-32 of this report, are filed as part of this report.

15(a)(2) Financial Statement Schedules  
 
Consolidated financial statement schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules, or because the required information is provided in the consolidated financial statements or notes thereto.

 
33

 

15(a)(3) Exhibits  
 
The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

 
34

 

SIGNATURES
 
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
New Generation Biofuels Holdings, Inc
   
 
By:
/s/ Cary J. Claiborne 
 
   
President, Chief Executive Officer & Chief Financial Officer
   
 
Date:   March 26, 2010
 
Power of Attorney

Know all men by these presents, that each person whose signature appears below constitutes and appoints Cary J. Claiborne as his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this annual report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE
 
TITLE
 
DATE
         
/s/ Cary J. Claiborne
 
President, Chief Executive Officer and Chief Financial Officer
 
March 26, 2010
Cary J. Claiborne
 
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
   
         
/s/ Lee S. Rosen
 
Chairman of the Board
 
March 26, 2010
Lee S. Rosen
       
         
/s/ John E. Mack
 
Director
 
March 26, 2010
John E. Mack
       
         
/s/ Douglas S. Perry
 
Director
 
March 26, 2010
Douglas S. Perry
       
         
/s/ James R. Sheppard, Jr.
 
Director
 
March 26, 2010
James R. Sheppard, Jr.
       

 
35

 
 
EXHIBIT INDEX

Exhibit No.
 
Exhibit Description
3.1
 
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed March 31, 2008).
     
3.2
 
Articles of Amendment to the Articles of Incorporation relating to our Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed March 31, 2008).
     
3.3
 
Amended and Restated Bylaws, dated March 5, 2008 (incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K filed March 31, 2008).
     
4.1
 
Form of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed October 26, 2006).
     
4.2
 
Form of Warrant (incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K filed March 31, 2008).
     
4.3
 
Form of Warrant(incorporated by reference to Exhibit 4.3 to the Annual Report on Form 10-K filed March 31, 2008).
     
4.4
 
Form of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed March 31, 2008).
     
4.5
 
Form of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed March 4, 2009).
     
4.6
 
Form of Warrant (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed March 4, 2009).
     
4.7
 
Form of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed July 23, 2009).
     
4.8
 
Form of Warrant (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed July 23, 2009).
     
 4.9
 
Form of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed December  11, 2009).
     
4.10
 
Form of Warrant (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed December 11, 2009).
     
4.11
 
Form of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed February 3, 2010).
     
10.1
 
Exclusive License Agreement dated as of March 20, 2006 between H2Diesel, Inc. and Ferdinando Petrucci (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed October 26, 2006, portions of which have been omitted pursuant to a request for confidential treatment.
     
10.2
 
Amendment #1, dated September 11, 2006, to the Exclusive License Agreement between H2Diesel, Inc. and Ferdinando Petrucci (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed October 26, 2006).
     
10.3
 
Amendment #2, dated December 13, 2006, to the Exclusive License Agreement dated March 20, 2006, as amended, between H2Diesel, Inc. and Ferdinando Petrucci (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed December 15, 2006).

 
36

 

10.4
 
Amendment #3, dated November 3, 2007, to the Exclusive License Agreement dated March 20, 2006, as amended, between H2Diesel, Inc. and Ferdinando Petrucci (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-QSB filed November 14, 2007).
     
10.5
 
Amendment #4, dated November 9, 2007, to the Exclusive License Agreement dated March 20, 2006, as amended, between H2Diesel, Inc. and Ferdinando Petrucci (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-QSB filed November 14, 2007).
     
10.6
 
Amendment #5, dated February 20, 2008, to the Exclusive License Agreement dated  March 20, 2006, as amended, between H2Diesel, Inc. and Ferdinando Petrucci (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed February 25, 2008).
     
10.7
 
Amendment #6, dated March 25, 2008, to the Exclusive License Agreement dated March 20, 2006, as amended, between H2Diesel, Inc. and Ferdinando Petrucci (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K filed March 31, 2008).
     
10.8
 
Amendment #7, dated January 8, 2009, to the Exclusive License Agreement, dated March 20, 2006, as amended, between New Generation Biofuels, Inc. (formerly H2Diesel, Inc.) and Ferdinando Petrucci (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed January 12, 2009).
     
10. 9
 
Addendum, dated March 30, 2009, to the Exclusive License Agreement, dated March 20, 2006, as amended, between New Generation Biofuels, Inc. (formerly H2Diesel, Inc.) and PTJ Bioenergy Holdings Ltd. (as successor by assignment to Ferdinando Petrucci) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed April 7, 2009).
     
10.10
 
Amendment #8, dated February 19, 2010, to the Exclusive License Agreement, dated March 20, 2006, as amended, between New Generation Biofuels, Inc. (formerly H2Diesel, Inc.) and Ferdinando Petrucci (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed February 23, 2010).
     
10.11*
 
Omnibus Incentive Plan adopted November 14, 2007 (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K filed March 31, 2008).
     
10.12
 
Form of Director Non-Qualified Stock Option Agreement under Omnibus Incentive Plan (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K filed March 31, 2008).
     
10.13
 
Amended Form of Non-Qualified Stock Option Agreement under Omnibus Incentive Plan (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K filed March 31, 2009).
     
10.14
 
Amended Form of Incentive Stock Option Agreement under Omnibus Incentive Plan (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K filed March 31, 2009).
     
10.15
 
Amended Form of Restricted Stock Agreement under Omnibus Incentive Plan (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K filed March 31, 2009).
     
10.16*
 
Employment Agreement dated as of October 18, 2006 between David A. Gillespie and  H2Diesel, Inc. (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed October 26, 2006).
     
10.17*
 
Employment Agreement dated as of July 23, 2009 between Lee S. Rosen and the Company (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed July 29, 2009).
     
10.18*
 
Separation Agreement, dated March 24, 2009, between the David A. Gillespie and the Company (incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K filed March 31, 2009).

 
37

 

10.19*
 
Amended and Restated Employment Agreement dated as of September 19, 2006, between Andrea Festuccia and H2Diesel, Inc. (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed October 26, 2006).
     
10.20* 
 
Amended and Restated Employment Agreement dated as of December 18, 2007 between Cary J. Claiborne and H2Diesel, Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed January 11, 2008).
     
10.22
 
Form of Registration Rights Agreement in connection with Private Placement of Common Stock in February 2010 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on February 3, 2010) .
     
10.23
 
Option Agreement dated September 15, 2006, between Lee S. Rosen and H2Diesel, Inc. (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed October 26, 2006).
     
10.24
 
Option Agreement dated September 19, 2006, between Andrea Festuccia and H2Diesel, Inc. (incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K filed October 26, 2006).
     
10.25
 
Option Agreement dated October 18, 2006, between David A. Gillespie and H2Diesel, Inc. (incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K filed October 26, 2006).
     
10.26
 
Option Agreement dated December 19, 2008 between Cary J. Claiborne and H2Diesel Holdings, Inc. (incorporated by reference to Exhibit 10.30 to the amended Annual Report on Form 10-K/A filed July 25, 2008).
     
10.27
 
Form of Independent Director Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed February 21, 2007).
     
10.28
 
Option Agreement dated April 24, 2007, between Kim Johnson and H2Diesel Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-QSB filed May 15, 2007).
     
10.29
 
Site Lease Agreement, dated September 12, 2008, by and between Pennington Partners, LLC and the Company (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed September 18, 2008).
     
 10.30
 
Terminaling Services Agreement, dated September 12, 2008, by and between Atlantic Terminalling, LLC and N the Company (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed September 18, 2008, portions of which have been omitted pursuant to a request for confidential treatment).
     
10.31
 
Lease Termination Agreement, dated August 28, 2009, by and between Central Florida Educators’ Federal Credit Union and the Company (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed September 3, 2009).
     
14.1
 
Code of Business Conduct and Ethics adopted November 13, 2007 (incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K filed March 31, 2008).
     
16.1
 
Letter of Imowitz Koenig & Co. LLP, dated October 20, 2009, addressed to the Securities and Exchange Commission (incorporated by reference to Exhibit 16.1 to the Current Report on Form 8-K filed October 21, 2009).
     
16.2
 
Letter of Imowitz Koenig & Co. LLP, dated November 1, 2009, addressed to the Securities and Exchange Commission (incorporated by reference to Exhibit 16.1 to the Current Report on Form 8-K filed November 3, 2009).
     
21.1†
 
Subsidiaries of the Company
     
23.1†
 
Consent of Reznick Group, P.C.
     
23.2†
 
Consent of Imowitz Koenig & Co., LLP

 
38

 

24.1†
 
Power of Attorney (included on signature page).
     
31.1†
 
Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002 (includes both Principal Executive Officer and Principal Financial Officer)
     
32.1†
 
Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (includes both Principal Executive Officer and Principal Financial Officer)
 
 † 
 Filed herewith.
Management contract or compensatory plan or arrangement.

 
39

 

New Generation Biofuels Holdings, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
Report of Independent Registered Public Accounting Firm
F-2
   
Report of Independent Registered Public Accounting Firm
F-3
   
Consolidated Balance Sheets as of December 31, 2009 and 2008
F-4
   
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008
F-5
   
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009 and 2008
F-6
   
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
F-7
   
Notes to Consolidated Financial Statements
F-8

 
F-1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
New Generation Biofuels Holdings, Inc.

We have audited the consolidated balance sheet of New Generation Biofuels Holdings, Inc. (a Florida Corporation) and subsidiaries (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 audit 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 consolidated 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 audit provides 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 New Generation Biofuels Holdings, Inc. and subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for the year the ended, 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 more fully described in Note 1 to the consolidated financial statements, the Company has experienced negative cash flows from operations since inception and is dependent upon future financing in order to fund its planned operating activities. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans regarding these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 1 to the consolidated financial statements, the Company adopted Emerging Issues Task Force 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (codified in FASB ASC Topic 815), effective as of January 1, 2009 and adjusted its accounting for its consolidated financial statements for the year ended December 31, 2009 presented herein.

/S/ REZNICK GROUP, P.C.

Vienna, Virginia
March 26, 2010

 
F-2

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
New Generation Biofuels Holdings, Inc.

We have audited the accompanying consolidated balance sheet of New Generation Biofuels Holdings, Inc. (the “Company”) (A Development Stage Enterprise) as of December 31, 2008 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2008.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor have we been engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall consolidated financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Generation Biofuels Holdings, Inc. (A Development Stage Enterprise) as of December 31, 2008 and the results of its operations and its cash flows for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company is in the development stage and has incurred losses and negative cash flows from operations.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
/s/ Imowitz Koenig & Co., LLP
 
 Certified Public Accountants

New York, New York
March 31, 2009

 
F-3

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Consolidated Balance Sheets

   
December 31, 2009
   
December 31, 2008
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
 
$
567,647
   
$
1,476,246
 
Accounts receivable
   
63,900
     
22,943
 
Other receivables
   
41,406
     
 
Inventories
   
11,708
     
 
Prepaid expenses and other current assets
   
237,635
     
195,369
 
Total current assets
   
922,296
     
1,694,558
 
                 
Property, plant and equipment, net
   
1,120,911
     
378,946
 
License agreement, net
   
5,650,988
     
6,267,460
 
Other assets, net
   
346,073
     
392,208
 
TOTAL ASSETS
 
$
8,040,268
   
$
8,733,172
 
                 
LIABILITIES AND STOCKHOLDER'S EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
 
$
1,472,519
   
$
1,385,311
 
Loan payable
   
50,000
     
50,000
 
License agreement payable, current portion
               
(net of unamortized discount of $375,467 and $71,270)
   
624,533
     
928,730
 
Accrued dividends on preferred stock
   
1,078,003
     
765,369
 
Common stock warrant liability and antidilution obligation
   
110,874
     
-
 
Total current liabilities
   
3,335,929
     
3,129,410
 
                 
License agreement payable
               
(net of unamortized discount of $622,274 and $1,464,132)
   
3,377,726
     
3,535,868
 
Deferred rent
   
324,409
     
 
Total liabilities
   
7,038,064
     
6,665,278
 
                 
Commitments and contingencies
   
     
 
                 
Stockholders' equity:
               
Preferred stock; $0.001 par value; 9,450,000 shares authorized; no shares issued and outstanding at December 31, 2009 and 2008
   
-
     
-
 
Series A Cumulative Convertible Preferred Stock; $0.001 par value; $100.00 stated value; 300,000 shares authorized, 18,400 and 26,400 shares issued and outstanding as of December 31, 2009 and 2008, respectively; aggregate liquidation preference of $2,264,328
   
710,970
     
1,020,087
 
Series B Cumulative Convertible Preferred Stock; $0.001 par value; $100.00 stated value; 250,000 shares authorized, 45,785 and 72,126 shares issued and outstanding as of December 31, 2009 and 2008, respectively; aggregate liquidation preference of $5,232,234
   
3,094,872
     
5,023,429
 
Common stock; $0.001 par value; 100,000,000 shares authorized; 31,711,578 and 19,299,168 shares issued and outstanding as of December 31, 2009 and 2008, respectively
   
31,712
     
19,299
 
Additional paid-in-capital
   
47,593,489
     
29,889,220
 
Accumulated deficit
   
(50,428,839
)
   
(33,884,141
)
Total stockholders' equity
   
1,002,204
     
2,067,894
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
8,040,268
   
$
8,733,172
 

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

 
F-4

 
 
NEW GENERATION BIOFUEL HOLDINGS, INC.
Consolidated Statements of Operations

   
For the Year
Ended December
31, 2009
   
For the Year
Ended December
31, 2008
 
Revenues:
           
Product
 
$
137,532
   
22,943
 
Alternative fuel tax credit
   
41,406
     
 
Total revenue
   
178,938
     
22,943
 
Operating expenses:
               
Cost of product revenue (including depreciation and amortization of $685,806 and $193,471, respectively)
   
2,311,576
     
307,541
 
Research and development
   
475,013
     
1,086,723
 
General and administrative
   
9,751,064
     
9,653,380
 
Legal settlement
   
-
     
359,595
 
License impairment charge
   
-
     
 1,600,369
 
Total operating expenses
   
12,537,653
     
13,007,608
 
                 
Loss from operations
   
(12,358,715
)
   
(12,984,665)
 
                 
Interest income
   
3,458
     
29,418
 
Interest expense 
   
(537,661
)
   
 (536,581)
 
Other income
   
     
7,208
 
Gain on debt extinguishment
   
241,500
     
 
Loss on net change in fair value of derivative liabilities
   
(1,745,383)
     
(717)
 
                 
Net loss
   
(14,396,801
)
   
(13,485,337)
 
                 
Dividends to preferred stockholders
   
(4,691,379
)
   
(3,689,317)
 
                 
Net loss attributable to common stockholders
 
$
(19,088,180
)
 
$
(17,174,654)
 
                 
Basic and diluted net loss per share
 
$
(0.73
)
 
$
(0.92)
 
                 
Weighted average number of shares outstanding
   
26,236,636
     
18,725,312
 

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

 
F-5

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity

   
Common Stock
   
Preferred Stock - Series A
   
Preferred Stock - Series B
   
Additional
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
                                                       
Balance at January 1, 2008
    18,165,793     $ 18,166       42,050     $ 1,624,798                 $ 18,955,101     $ (16,709,487 )   $ 3,888,578  
Compensation expense associated with options, stock and restricted stock
                                        3,268,363             3,268,363  
Issuance of options and warrants for services rendered
                                        558,505             558,505  
Warrant expense related to legal settlement
                                        359,595             359,595  
Issuance of common stock for services rendered
    16,250       16                               78,484             78,500  
Issuance of common stock - registration rights agreement
    61,128       61                               309,894             309,955  
Issuance of common stock - dividends on conversion of preferred stock
    33,947       34                               135,754             135,788  
Issuance of preferred stock and warrants in private offering
                            79,405       5,556,361       2,032,739             7,589,100  
Dividend associated with the beneficial conversion feature of the preferred stock
                                        2,963,995       (2,963,995 )      
Private placement costs
                                        (401,450 )           (401,450 )
Conversion of preferred stock into common stock
    570,617       571       (15,650 )     (604,711 )     (7,279 )     (532,932 )     1,171,511             34,439  
Exercise of warrants into common stock
    451,433       451                               456,729             457,180  
Dividends accrued on preferred stock
                                              (725,322 )     (725,322 )
Net loss
                                              (13,485,337 )     (13,485,337 )
Balance at December 31, 2008
    19,299,168     $ 19,299       26,400     $ 1,020,087       72,126     $ 5,023,429     $ 29,889,220     $ (33,884,141 )   $ 2,067,894  
Cumulative effect of reclassification of warrants (ASC Topic 815)
    -       -       -       -       -       -       (2,803,597 )     2,543,482       (260,115 )
Balance at January 1, 2009, as adjusted
    19,299,168     $ 19,299       26,400     $ 1,020,087       72,126     $ 5,023,429     $ 27,085,623     $ (31,340,659 )   $ 1,807,779  
                                                                         
Issuance of stock options and restricted stock to employees
    1,208,325       1,209                               3,292,109             3,293,318  
Issuance of stock options to non-employees
                                        35,684             35,684  
Issuance of warrants to non-employees for prepaid consulting services
                                        595,763             595,763  
Issuance of warrants for payment of accounts payable and accrued expenses
                                        99,732             99,732  
Issuance of common stock for payment of accounts payable and accrued expenses
    25,000       25                               24,975             25,000  
Issuance of restricted stock to non-employees for prepaid consulting services
    155,000       155                               137,745             137,900  
Issuance of common stock for settlement of license agreement payable
    925,000       925                               757,575             758,500  
Proceeds from the issuance of common stock and warrants, net of offering costs
    8,928,131       8,928                               7,054,411             7,063,339  
Accrued preferred stock dividends converted into shares of common stock
    113,330       113                               373,472             373,585  
Conversion of preferred stock into common stock
    1,057,624       1,058       (8,000 )     (309,117 )     (26,341 )     (1,928,557 )     2,236,616             -  
Warrant liability associated with issuance of common stock
                                        (2,163,943 )           (2,163,943 )
Warrant liability associated with issuance of common stock
                                        (50,428 )           (50,428 )
Antidilution obligation associated with issuance of common stock
                                        (102,500 )           (102,500 )
Reclassification of warrant liability associated with antidilution triggering event on Series B preferred stock
                                        158,451             158,451  
Reclassification of warrant liability in connection with waiver of antidilution provision
                                        4,053,043             4,053,043  
Deemed dividend associated with the beneficial conversion feature on Series B preferred stock
                                        4,005,161       (4,005,161 )      
Preferred stock dividends
                                              (686,218 )     (686,218 )
Net loss
                                              (14,396,801 )     (14,396,801 )
Balance at December 31, 2009
    31,711,578     $ 31,712       18,400     $ 710,970       45,785     $ 3,094,872     $ 47,593,489     $ (50,428,839 )   $ 1,002,204  
 
The accompanying notes are an integral part of these consolidated financial statements. 
 
F-6

 
Consolidated Statement of Cash Flows

   
For the Year Ended
December  31, 2009
   
For the Year Ended
December 31, 2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net l