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EX-10.8 - New Generation Biofuels Holdings, Incv203376_ex10-8.htm
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EX-31.2 - New Generation Biofuels Holdings, Incv203376_ex31-2.htm
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EX-32.1 - New Generation Biofuels Holdings, Incv203376_ex32-1.htm
EX-10.5 - New Generation Biofuels Holdings, Incv203376_ex10-5.htm
EX-31.1 - New Generation Biofuels Holdings, Incv203376_ex31-1.htm
EX-32.2 - New Generation Biofuels Holdings, Incv203376_ex32-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

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

For the transition period from ___________ to _____________

Commission File No. 1-34022

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

Florida
26-0067474
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

5850 Waterloo Road, Suite 140
Columbia, MD  21045
(Address of principal executive offices)

(410) 480-8084
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant 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-K (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ¨ No ¨

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

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

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

At November 15, 2010, the registrant had 72,763,620 shares of common stock, $0.001 par value, issued and outstanding.

 
 

 

INDEX
 
PART I. FINANCIAL INFORMATION
 
   
 
Cautionary Note Regarding Forward-Looking Statements
3
 
 
 
Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009
4
     
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (Unaudited)
5
     
 
Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2010 (Unaudited)
6
     
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (Unaudited)
7
     
 
Notes to Consolidated Financial Statements
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
     
Item 3.
Qualitative and Quantitative Disclosures About Market Risk
43
     
Item 4.
Controls and Procedures
43
     
PART II. OTHER INFORMATION
 
   
Item 1A.
Risk Factors
44
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
45
     
Item 6.
Exhibits
45
     
Signatures
 46

 
2

 

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 anticipated results. 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 disproportionately higher cost of production relative to units sold;
 
·
our ability to fully realize the value of our intellectual property, which are our principal assets;
 
·
our inability to enter into acceptable licensing agreements with respect to our technology or the inability of any licensee to successfully manufacture, market or sell biofuel utilizing our 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;
 
·
adverse results of any material legal proceedings; and
 
·
other specific risks set forth under the heading “Risk Factors” beginning on page 45 of this report.

All statements that are not clearly historical in nature regarding our strategy, future operations, financial position, prospects, 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 generally 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 new information, future events 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.

 
3

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEW GENERATION BIOFUELS HOLDINGS, INC.
Consolidated Balance Sheets

 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
 
$
216,762
   
$
567,647
 
Restricted cash
   
14,704
     
-
 
Accounts receivable
   
-
     
63,900
 
Other receivables
   
41,406
     
41,406
 
Inventories
   
11,708
     
11,708
 
Prepaid expenses and other current assets
   
1,654,972
     
237,635
 
Total current assets
   
1,939,552
     
922,296
 
                 
Property, plant and equipment - net
   
1,124,212
     
1,120,911
 
License agreement - net
   
5,104,840
     
5,650,988
 
Other assets - net
   
413,103
     
346,073
 
TOTAL ASSETS
 
$
8,581,707
   
$
8,040,268
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
 
$
1,647,292
   
$
1,472,519
 
Loan payable
   
-
     
50,000
 
Convertible notes payable
(net of unamortized discount of $- and $-)
   
200,000
     
-
 
License agreement payable, current portion
(net of unamortized discount of $314,746 and $375,467)
   
685,254
     
624,533
 
Accrued dividends on preferred stock
   
973,895
     
1,078,003
 
Common stock warrant liability and antidilution obligation
   
31,900
     
110,874
 
Total current liabilities
   
3,538,341
     
3,335,929
 
                 
License agreement payable
               
(net of unamortized discount of $400,152 and $622,274)
   
2,599,848
     
3,377,726
 
Deferred rent
   
170,365
     
324,409
 
Total liabilities
   
6,308,554
     
7,038,064
 
                 
Commitments and contingencies
   
-
     
-
 
                 
Stockholders' equity:
               
Preferred stock; $0.001 par value; 9,450,000 shares authorized; no shares issued and outstanding at September 30, 2010 and December 31, 2009
   
-
     
-
 
                 
Series A Cumulative Convertible Preferred Stock: $0.001 par value; $100 stated value, 300,000 shares authorized, - and 18,400 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively; aggregate liquidation preference of $-
   
-
     
710,970
 
                 
Series B Cumulative Convertible Preferred Stock: $0.001 par value; $100 stated value, 250,000 shares authorized, 45,785 and 45,785 shares issued and outstanding as of September 30, 2010 and December 31, 2009 respectively; aggregate liquidation preference of $5,552,424
   
3,094,872
     
3,094,872
 
                 
Common stock, $0.001 par value, 100,000,000 shares authorized; 60,353,205 and 31,711,578 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively
   
60,353
     
31,712
 
                 
Additional paid-in-capital
   
57,003,899
     
47,593,489
 
                 
Accumulated deficit
   
(57,885,971
)
   
(50,428,839
)
Total stockholders' equity
   
2,273,153
     
1,002,204
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
8,581,707
   
$
8,040,268
 
The accompanying notes are an integral part of these consolidated financial statements.

 
4

 
 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)

 
   
For the Three
Months Ended
September 30,
2010
   
For the Three
Months Ended
September 30,
2009
   
For the Nine
Months Ended
September 30,
2010
   
For the Nine
Months Ended
September 30,
2009
 
                         
Revenues:
                       
Product
  $ -     $ 34,412     $ 6,351     $ 77,048  
Total revenue
    -       34,412       6,351       77,048  
Operating expenses:                                 
Cost of product revenue (including depreciation and amortization for the three and nine months ended September 30, 2010 and 2009 of $205,011, $178,670, $624,075, and $511,282, respectively)
    301,699       584,745       1,408,925       1,391,240  
Research and development expense
    87,770       73,126       240,930       363,160  
General and administrative expense
    1,920,911       2,279,523       6,354,618       6,775,806  
Total operating expenses
    2,310,380       2,937,394       8,004,473       8,530,206  
                                 
Loss from operations
    (2,310,380 )     (2,902,982 )     (7,998,122 )     (8,453,158 )
                                 
Interest income
    75       1,294       461       2,951  
Interest expense
    (276,973 )     (119,029 )     (659,253 )     (338,692 )
Gain on debt extinguishment
    50,000       -       204,000       241,500  
Gain on settlement of trade payables and lease termination
    1,319,483       -       1,319,483       -  
Gain (loss) on net change in fair value of derivative liabilities
    65,521       1,343,577       60,525       (1,797,071 )
                                 
Net loss
    (1,152,274 )     (1,677,140 )     (7,072,906 )     (10,344,470 )
                                 
Dividends to preferred stockholders
    (109,748 )     (167,919 )     (384,226 )     (4,549,741 )
                                 
Net loss attributable to common stockholders
  $ (1,262,022 )   $ (1,845,059 )   $ (7,457,132 )   $ (14,894,211 )
                                 
Basic and diluted net loss per share
  $ (0.03 )   $ (0.06 )   $ (0.20 )   $ (0.61 )
                                 
Weighted average number of shares outstanding
    42,962,197       28,465,378       37,672,085       24,345,980  

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

 
5

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Consolidated Statement of Changes in Stockholders’ Equity
Nine Months ended September 30, 2010
(Unaudited)

   
Common Stock
   
Preferred Stock
Series A
   
Preferred Stock
Series B
   
Additional
Paid-In- Capital
   
Accumulated
Deficit
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
                   
                                                                         
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
 
                                                                         
Issuance of stock options and restricted stock to employees
   
1,169,454
     
1,170
     
-
     
-
     
-
     
-
     
1,770,091
     
-
     
1,771,261
 
Issuance of stock options to non-employees
   
-
     
-
     
-
     
-
     
-
     
-
     
3,318
     
-
     
3,318
 
Issuance of common stock for prepaid consulting services
   
7,200,000
     
7,200
     
-
     
-
     
-
     
-
     
1,778,800
     
-
     
1,786,000
 
Issuance of common stock for note settlement and extension
   
5,950,000
     
5,950
     
-
     
-
     
-
     
-
     
524,883
     
-
     
530,833
 
Issuance of warrants in connection with convertible notes payable
   
-
     
-
     
-
     
-
     
-
     
-
     
149,949
     
-
     
149,949
 
Issuance of warrants to non-employees for deferred financing costs
   
-
     
-
     
-
     
-
     
-
     
-
     
38,165
     
-
     
38,165
 
Issuance of warrants to non-employees for note extensions
   
-
     
-
     
-
     
-
     
-
     
-
     
77,117
     
-
     
77,117
 
Issuance of common stock for payment of accounts payable and accrued expenses
   
585,000
     
585
     
-
     
-
     
-
     
-
     
157,791
     
-
     
158,376
 
Issuance of common stock pursuant to separation agreement
   
164,062
     
164
     
-
     
-
     
-
     
-
     
104,836
     
-
     
105,000
 
Issuance of common stock for settlement of license agreement payable
   
1,100,000
     
1,100
     
-
     
-
     
-
     
-
     
724,900
     
-
     
726,000
 
Proceeds from the issuance of common stock and warrants, net of offering costs
   
11,808,700
     
11,808
     
-
     
-
     
-
     
-
     
2,863,471
     
-
     
2,875,279
 
Conversion of preferred stock into common stock
   
582,089
     
582
     
(18,400)
     
(710,970)
     
-
     
-
     
1,198,722
     
-
     
488,334
 
Antidilution obligation associated with issuance of common stock
   
-
     
-
     
-
     
-
     
-
     
-
     
 (40,000)
     
-
     
(40,000)
 
Issuance of common stock for settlement of antidilution obligation associated with issuance of common stock
   
82,322
     
82
     
-
     
-
     
-
     
-
     
58,367
     
-
     
58,449
 
Preferred stock dividends
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(384,226
)
   
(384,226
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(7,072,906
)
   
(7,072,906
)
                                                                         
Balance at September 30, 2010
   
60,353,205
   
$
60,353
     
-
   
$
-
     
45,785
   
$
3,094,872
   
$
57,003,899
   
$
(57,885,971
)
 
$
2,273,153
 

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

 
6

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Unaudited)

   
For the
Nine Months
Ended September 30,
2010
   
For the
Nine Months
Ended September 30,
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(7,072,906
)
 
$
(10,344,470
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Bad debt expense
   
5,609
     
-
 
Amortization of prepaid consulting fee
   
395,089
     
400,625
 
Amortization of deferred financing costs
   
108,165
     
-
 
Depreciation and amortization expense
   
87,099
     
68,747
 
Loss on disposal of property and equipment
   
-
     
70,423
 
Amortization of license agreement
   
546,148
     
462,354
 
Amortization of discount on license agreement payable
   
282,843
     
338,692
 
Amortization of discount on convertible notes payable
   
149,949
     
-
 
Compensation expense associated with stock options and restricted stock to employees
   
1,876,261
     
2,048,989
 
Stock options issued to non-employees for services
   
3,318
     
25,951
 
Gain (loss) on change in fair value of warrant liability and antidilution obligation
   
(60,525)
     
1,797,071
 
Gain on debt extinguishment
   
(204,000)
     
(241,500)
 
Gain on settlement of trade payables and lease termination
   
(1,319,483)
     
-
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
58,291
     
4,706
 
Inventory
   
-
     
(11,708)
 
Prepaid expenses and other current assets
   
(26,426)
     
22,619
 
Other assets
   
(91,466
)
   
(15,180)
 
Accounts payable and accrued expenses
   
1,595,307
     
132,969
 
Deferred rent
   
(90,886)
     
-
 
Net cash used in operating activities
   
(3,680,496
)
   
(5,239,712
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Net increase in restricted cash
   
(14,704)
     
-
 
Related party receivables
   
-
     
(77,820)
 
Purchase of property and equipment
   
(65,964
)
   
(657,438)
 
Payment for patents
   
-
     
-
 
Net cash used in investing activities
   
(80,668
)
   
(735,258
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payments for license agreement payable
   
(120,000)
     
-
 
Proceeds from the issuance of convertible notes payable
   
700,000
     
-
 
Payment of deferred financing costs
   
(45,000)
     
-
 
Proceeds from issuance of common stock, net
   
2,875,279
     
5,799,452
 
Net cash provided by financing activities
   
3,410,279
     
5,799,452
 
Decrease in cash and cash equivalents
   
(350,885
)
   
(175,518)
 
Cash and cash equivalents - beginning of period
   
567,647
     
1,476,246
 
Cash and cash equivalents - end of period
 
$
216,762
   
$
1,300,728
 
                 
Supplemental Disclosure of Non-Cash Operating and Financing Activities
               
Accrued dividends on preferred stock
 
$
384,226
   
$
544,580
 
Issuance of restricted stock to non-employees for prepaid consulting services
 
$
-
   
$
117,500
 
Issuance of common stock to non-employees for prepaid consulting services
 
$
1,786,000
   
$
-
 
Issuance of warrants to non-employees for prepaid consulting services
 
$
-
   
$
483,439
 
Common stock warrant liability
 
$
-
   
$
2,214,371
 
Reclassification of warrant liability in connection with waiver of antidilution provision
 
$
-
   
$
4,053,043
 
Reclassification of warrant liability in connection with antidilution triggering event
 
$
-
   
$
158,451
 
Cumulative effect of reclassification of warrants (ASC Topic 815)
 
$
-
   
$
260,115
 
Common stock issued for payment of license agreement payable
 
$
726,000
   
$
758,500
 
Issuance of common stock for payment of accounts payable and accrued expenses
 
$
158,376
   
$
25,000
 
Warrants issued for payment of accounts payable and accrued expenses
 
$
-
   
$
99,732
 
Accrued preferred stock dividends converted into shares of common stock
 
$
488,334
   
$
241,563
 
Deemed dividend related to beneficial conversion feature on Series B Preferred Stock
 
$
-
   
$
4,005,161
 
Conversion of Series A preferred stock to common stock
 
$
710,970
   
$
309,117
 
Conversion of Series B preferred stock to common stock
 
$
-
   
$
1,351,989
 
Antidilution obligation associated with issuance of common stock
 
$
40,000
   
$
102,500
 
Common stock issued for settlement payment of convertible notes payable and accrued interest
 
$
530,883
   
$
-
 
Issuance of common stock settlement of antidilution obligation associated with issuance of common stock
 
$
58,449
   
$
-
 
Discount on convertible notes associated with detachable warrants
 
$
149,949
   
$
-
 
Warrants issued for settlement and extensions of convertible notes payable
 
$
77,117
   
$
-
 
Issuance of warrants to non-employees for deferred financing costs
 
$
38,165
   
$
-
 
Deferred financing costs included in accounts payable and accrued expenses
 
$
25,000
   
$
-
 

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

 
7

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

New Generation Biofuels Holdings, Inc. (the “Company”), a Florida corporation, through its wholly owned subsidiary, New Generation Biofuels, Inc., a Delaware corporation, holds an exclusive license for North America, Central America and the Caribbean (the “Master License”) to commercialize proprietary technology (the “Technology”) to manufacture alternative biofuels from vegetable oils and animal fats that the Company intends to market as a new class of renewable fuel for power generation, commercial and industrial heating and marine transportation.

During the period from inception through March 31, 2009, the Company was considered to be a development stage company. In the second and third quarters of 2009, the Company placed in service its first biofuel production plant, a 5 million gallon per year facility located in Baltimore, Maryland, and has generated revenues from planned principal operations. The Company has therefore emerged from the development stage as of December 31, 2009.

Basis of Presentation and Going Concern

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, which are necessary for a fair presentation of the results of the interim periods presented, have been included. The results of the operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the year as a whole. These unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited financial statements and footnotes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 26, 2010.

The Company has incurred a net loss of $7.1 million for the nine months ended September 30, 2010 and has an accumulated deficit of $57.9 million as of September 30, 2010. The Company is obligated to pay $4.0 million in additional payments under the Master License, of which $1.0 million is due in March 2011.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

The Company is seeking to raise additional capital through public and/or private placement offerings and targeting strategic partners in an effort to increase revenues. The ability of the Company to continue as a going concern is dependent upon the success of capital offerings or alternative financing arrangements and expansion of its operations. If the Company is unsuccessful in raising additional capital from any of these sources, it will defer, reduce, or eliminate certain planned expenditures. The Company will continue to consider other financing alternatives. There can be no assurance that the Company will be able to obtain any sources of financing on acceptable terms, or at all.

If the Company cannot obtain sufficient additional financing in the short-term, it may be forced to restructure or significantly curtail its operations, file for bankruptcy or cease operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be forced to take any such actions.

Material subsequent events have been considered for disclosure and recognition through the filing date of these consolidated financial statements.

 
8

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

Basis of Consolidation

The consolidated financial statements include the Company and its wholly owned subsidiaries New Generation Biofuels, Inc. and NGB Marketing LLC. All intercompany accounts and transactions have been eliminated in consolidation.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to the recoverability of the purchased license intangible asset, realization of deferred income taxes, accrued liabilities, common stock warrant liability and antidilution obligation, and the valuation of stock-based transactions. These estimates generally involve complex issues and require the Company to make judgments, involve analysis of historical and the prediction of future trends, and are subject to change from period to period. Actual results could differ from those estimates.

Restricted Cash

As of September 30, 2010 and December 31, 2009, the Company had restricted cash of $14,704 and $-0-, respectively, which serves as collateral for a surety bond.

Other Receivables

Other receivables are comprised of non-trade receivables in connection with the 50 cent per gallon U.S. federal alternative fuel excise tax credit. The Company records its alternative fuel tax credits as revenue in its consolidated statements of operations as the credits are fully refundable and do not need to offset income tax liabilities to be received. No fuel tax credits were earned during the three months and nine months ended September 30, 2010 and 2009.

Deferred Financing Costs

Deferred financing costs represent costs incurred in connection with the issuance of the convertible notes payable. Deferred financing costs are being amortized over the term of the financing instrument on a straight-line basis, which approximates the effective interest method. At September 30, 2010 and December 31, 2009, the Company capitalized deferred financing costs of $108,165 and $-0-, respectively. Amortization of deferred financing costs included in interest expense for the three months and nine months ended September 30, 2010 and 2009 was $33,652, $108,165, $-0- and $-0-, respectively .
 
Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally three to fifteen years) using the straight-line method. Amortization of leasehold improvements is computed over the shorter of the lease term or the estimated useful life of the related assets. Depreciation and amortization expense for the three and nine months ended September 30, 2010 and 2009 was $20,915, $62,663, $20,853 and $51,811, respectively.

 
9

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

Property, plant and equipment consists of the following at September 30, 2010 and December 31, 2009:

   
2010
   
2009
 
                 
Property and equipment
  $ 1,120,092     $ 1,109,571  
Construction in progress
    127,985       72,542  
      1,248,077       1,182,113  
Less: accumulated depreciation and amortization
    (123,865 )     (61,202 )
                 
Property, plant and equipment – net
  $ 1,124,212     $ 1,120,911  

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. Various factors including estimated future sales growth and estimated profit margins are included in this analysis. Management believes at this time that carrying values and useful lives continue to be appropriate.

Convertible Debt

Convertible debt is accounted for under specific guidelines established in GAAP. The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that have conversion features at fixed or adjustable rates that are in-the-money when issued and records the fair value of warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to paid-in-capital or liabilities as appropriate. The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing employee options, except that the contractual life of the warrant is used. Upon each issuance, the Company evaluates the variable conversion features and determines the appropriate accounting treatment as either equity or liability, in accordance with GAAP. The Company first allocates the value of the proceeds received to the convertible instrument and any other detachable instruments (such as detachable warrants) on a relative fair value basis and then determines the amount of any BCF based on effective conversion price to measure the intrinsic value, if any, of the embedded conversion option. Using the effective yield method, the allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense. For a conversion price change of a convertible debt issue, the additional intrinsic value of the debt conversion feature, calculated as the number of additional shares issuable due to a conversion price change multiplied by the previous conversion price, is recorded as additional debt discount and amortized over the remaining life of the debt.

GAAP rules specify that a contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with GAAP contingency rules. The contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with said rules, pursuant to which a contingent obligation must be accrued only if it is more likely than not to occur.

 
10

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

Revenue Recognition

The Company recognizes revenue when the following criteria have been met: i) persuasive evidence of an arrangement exists; ii) services have been rendered or product has been delivered; iii) price to the customer is fixed and determinable; and iv) collection of the underlying receivable is reasonably assured.

The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue recognition criteria have been met. The Company recognizes product revenues upon shipment to distributors, provided that (i) the price is substantially fixed and determinable at the time of sale; (ii) the distributor’s obligation to pay the Company is not contingent upon resale of the products; (iii) title and risk of loss passes to the distributor at time of shipment; (iv) the distributor has economic substance apart from that provided by the Company; (v) the Company has no significant obligation to the distributor to bring about resale of the products; and (vi) 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.

The Company recognizes alternative fuel tax credits as revenue in its consolidated statements of operations as the credits are fully refundable and do not need to offset income tax liabilities to be received. The Company classified the tax credits as revenue because (i) the tax credit enables the Company to reduce the price it charges its customers for the Company's products without an actual reduction in revenue associated with the lower prices and (ii) under current tax law, the tax credit expired on December 31, 2009 and the Company believes classifying the tax credit as a reduction in operating expenses would be potentially misleading.

Computation of Net Loss per Share

Basic loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding for all periods. Diluted earnings per share is computed by dividing net loss attributable to common shareholders by the weighted average number of shares outstanding, increased by common stock equivalents. Common stock equivalents represent incremental shares issuable upon exercise of outstanding options and warrants, the conversion of preferred stock and the vesting of restricted stock. However, potential common shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.

As of September 30, 2010 and 2009, there were 27,202,320 and 19,940,444, respectively, shares of common stock equivalents including options (convertible into 8,876,418 shares of common stock as of September 30, 2010 and 8,769,845 shares of common stock as of September 30, 2009), non-employee options (convertible into 291,000 shares of common stock as of September 30, 2010 and 1,741,000 shares of common stock as of September 30, 2009), and warrants (convertible into 18,034,902 shares of common stock as of September 30, 2010 and 9,429,599 shares of common stock as of September 30, 2009), all of which were excluded from the computation of diluted earnings per share because the inclusion of such shares would have been anti-dilutive. As of September 30, 2010 and 2009, there were -0- and 18,400 shares of Series A Convertible Preferred Stock outstanding which are convertible into -0- and 460,000, respectively, shares of common stock that were excluded from the computation of diluted earnings per share because the inclusion of such shares would have been anti-dilutive. As of September 30, 2010 and 2009, there were 45,785 and 53,660, respectively, shares of Series B Convertible Preferred Stock outstanding which are convertible into 1,850,808 and 1,788,667, respectively, shares of common stock that were excluded from the computation of diluted earnings per share because the inclusion of such shares would have been anti-dilutive.

 
11

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

Fair Value Measurements

Effective January 1, 2009, the Company adopted authoritative guidance for fair value measurements and the fair value option for financial assets and financial liabilities. The Company did not record an adjustment to accumulated deficit as a result of the adoption of the guidance for fair value measurements, and the adoption did not have a material effect on the Company’s consolidated results of operations. The guidance for the fair value option for financial assets and financial liabilities provides companies the irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings. The Company has not elected to measure any financial assets or liabilities at fair value that were not previously required to be measured at fair value.

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 
·
Level 1 - Quoted prices in active markets for identical assets and liabilities.

 
·
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 
·
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

 
The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as follows:

Description
 
September 30,
2010
   
Quoted Prices
in
Active Markets
Level 1
   
Significant
Other
Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
Assets:
                       
Cash and cash equivalents
  $ 216,762     $ 216,762     $     $  
Total assets
  $ 216,762     $ 216,762     $     $  
Liabilities:
                               
Derivative - warrants
  $ 4,400     $     $     $ 4,400  
Antidilution obligation
  $ 27,500     $     $     $ 27,500  
Total liabilities
  $ 31,900     $     $     $ 31,900  
 
12


NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
Description
 
December 31,
2009
   
Quoted Prices
in
Active Markets
Level 1
   
Significant
Other
Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
Assets:
                       
Cash and cash equivalents
 
$
567,647
   
$
567,647
   
$
   
$
 
Total assets
 
$
567,657
   
$
567,647
   
$
   
$
 
Liabilities:
                               
Derivative - warrants
 
$
52,425
   
$
   
$
   
$
52,425
 
Antidilution obligation
 
$
58,449
   
$
   
$
   
$
58,449
 
Total liabilities
 
$
110,874
   
$
   
$
   
$
110,874
 

The following table presents a reconciliation of the assets and liabilities measured at fair value on a quarterly basis using significant unobservable inputs (Level 3):

  
 
Derivative –
 warrants and
antidilution
obligation
 
Balance at January 1, 2010
 
$
110,874
 
Transfers to (from) Level 3 (1)
   
(18,449)
 
Adjustment to fair value included in earnings (2)
   
(7,106)
 
Balance March 31, 2010
 
$
85,319
 
Adjustment to fair value included in earnings (3)
   
12,102
 
Balance June 30, 2010
 
$
97,421
 
Adjustment to fair value included in earnings (4)
   
(65,521)
 
Balance September 30, 2010
 
$
31,900
 

 
(1)
Represents an increase in the antidilution obligation of $40,000 in connection with the February 2010 Private Placement offset by $58,449 for the settlement of the March 2009 Private Placement antidilution obligation. The fair value of the antidilution obligation is calculated using an estimate of the number of shares to be issued to all investors in the March 2009 Private Placement pursuant to the antidilution provisions times an estimated fair market value of the Company’s common stock.

 
(2)
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. The fair value of the antidilution obligation is calculated using an estimate of the number of shares to be issued to all investors in the March 2009 Private Placement pursuant to the antidilution provisions times and an estimated fair market value of the Company’s common stock. For the three months ended March 31, 2010, the net adjustment to fair value resulted in a gain of $7,106 and is included in loss on net change in fair value of derivative liabilities on the accompanying consolidated statements of operations.

 
13

 
 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
(3)
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. The fair value of the antidilution obligation is calculated using a weighted-average probability of a subsequent financing transaction at less than $0.69 per share to determine an estimate of the number of shares to be issued to all investors in the February 2010 Private Placement pursuant to the antidilution provisions times and an estimated fair market value of the Company’s common stock. For the three months ended June 30, 2010, the net adjustment to fair value resulted in a loss of $12,102 and is included in loss on net change in fair value of derivative liabilities on the accompanying consolidated statements of operations.

 
(4)
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. The fair value of the antidilution obligation is calculated using a weighted-average probability of a subsequent financing transaction at less than $0.69 per share to determine an estimate of the number of shares to be issued to all investors in the February 2010 Private Placement pursuant to the antidilution provisions times and an estimated fair market value of the Company’s common stock. For the three months ended September 30, 2010, the net adjustment to fair value resulted in a gain of $65,521 and is included in loss on net change in fair value of derivative liabilities on the accompanying consolidated statements of operations.

 
New Accounting Pronouncements.

In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-17, “Revenue Recognition—Milestone Method,” which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby all or a portion of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments in this ASU provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. The ASU is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. This Company is currently evaluating the impact, if any, of the application of this ASU on their financial condition and results of operations.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This legislation includes an exemption for companies with less than $75 million in market capitalization from the requirement set forth in Section 404(b) of the Sarbanes-Oxley Act of 2002 to include an external auditor’s report on the effectiveness of a registrant’s internal control over financial reporting. As a result of the new legislation, our independent registered public accounting firm will not be required to issue an attestation report with respect to our internal control over financial reporting. However, the Company will continue to be subject to the requirement of Section 404 of the Sarbanes-Oxley Act of 2002 for their management to make an annual assessment of the effectiveness of their internal control over financial reporting.

 
14

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

 
NOTE 2 OPTIONS, RESTRICTED STOCK, STOCK AND WARRANTS

In October 2007, the Company’s board of directors approved an Omnibus Incentive Plan (the “Incentive Plan”) to attract, retain and motivate key employees, to provide an incentive for them to achieve long-range performance goals and to enable them to participate in the long-term growth of the Company. The Company’s shareholders approved the Incentive Plan at their annual meeting in November 2007. Options granted under the Incentive Plan may include non-qualified stock options as well as incentive stock options intended to qualify under Section 422A of the Internal Revenue Code. The aggregate number of shares of common stock that are reserved for issuance under the Incentive Plan must not exceed 2.7 million shares.

In April 2009, the Company’s board of directors and shareholders approved an amendment to the Incentive Plan to increase the number of shares reserved for issuance under the Incentive Plan from 2.7 million to 6.4 million shares. Other than this increase in the number of shares reserved for issuance, all other provisions of the Incentive Plan remained the same as adopted in October 2007 by the Company’s board of directors and in November 2007 by the Company’s shareholders.

In February 2010, the Company’s board of directors approved an amendment to the Incentive Plan to increase the number of shares reserved for issuance under the Incentive Plan from 6.4 million to 10.0 million shares. In July 2010, the shareholders approved this amendment at the annual shareholders meeting. Other than this increase in the number of shares reserved for issuance, all other provisions of the Incentive Plan remained the same as adopted in October 2007 by the Company’s board of directors and in November 2007 by the Company’s shareholders.

Each stock option agreement specifies when all or any installment of the option becomes exercisable. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock on the grant date, generally vest immediately or in equal installments over three years of continuous service and have a ten year contractual term.
 
Employee Options

The fair value of employee stock option awards for the nine months ended September 30, 2010 and 2009 was estimated using the Black-Scholes option pricing model on the date of grant using the assumptions in the following table. The expected volatility in this model is based on the historical volatility of the Company’s 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 Company uses the “simplified” method for determining the expected term of its “plain vanilla” stock options. The expected dividend rate takes into account the absence of any historical dividends paid by the Company and management’s intention to retain all earnings for future operations and expansion.

 
   
2010
   
2009
 
Weighted average grant date fair value
  $ 0.52     $ 0.77  
Dividend yield
    0.0 %     0.0 %
Risk free rate of return
    2.07-2.60 %     1.54-3.28 %
Expected life in years
    5.0       5.0  
Volatility
    101 %     100 %

A summary of the status of the Company’s employee options outstanding as of September 30, 2010 and the changes during the period ending on that date are presented below:
 
 
15

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
(Years)
   
Aggregate
Intrinsic
Value
 
                         
Options outstanding at December 31, 2009
   
8,954,845
   
$
2.35
     
7.98
       
Granted
   
909,692
   
$
0.78
     
9.36
       
Forfeited or cancelled
   
(988,119
)
 
$
2.51
     
8.14
       
Options outstanding at September 30, 2010
   
8,876,418
   
$
2.18
     
7.35
       
Vested and expected to vest at September 30, 2010
   
7,984,314
   
$
2.30
     
7.17
   
$
 
Options exercisable at September 30, 2010
   
7,147,482
   
$
2.34
     
7.02
   
$
 

 
Options exercisable at September 30, 2010 do not include 892,104 performance based options. The Company recognizes compensation cost for performance based options once it is probable that the performance milestones will be achieved. The applicable portion of the compensation costs earned to date is recognized and the remaining unrecognized expense attributable to the milestone is recorded over the service period.

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on September 30, 2010 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had vested option holders exercised their options on September 30, 2010. This amount changes based upon changes in the fair market value of the Company’s common stock.

The Company recognized $225,809, $759,052, $434,931, and $1,563,307 in compensation expense for stock options issued to employees for the three and nine months ended September 30, 2010 and 2009, respectively, which is included in general and administrative expense in the consolidated statements of operations. As of September 30, 2010, there was approximately $298,000 of total unrecognized compensation expense related to unvested employee stock options. This expense is expected to be recognized over a weighted-average period of approximately 1 year.
 
Non-Employee Options

There were no options granted to non-employees during the nine months ended September 30, 2010. The fair value of non-employee stock option awards for the nine months ended September 30, 2009 was estimated using Black-Scholes option pricing model on the date of grant using the assumptions in the following table. The expected volatility in this model is based on the historical volatility of the Company’s 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 contractual life of the options. The Company uses the contractual term as the expected term of its non-employee stock options. The expected dividend rate takes into account the absence of any historical dividends paid by the Company and management’s intention to retain all earnings for future operations and expansion.
 
   
2009
 
    Weighted average grant date fair value
 
$
0.78
 
    Dividend yield
   
0.0
%
    Risk free rate of return
   
3.7
%
    Expected life in years
   
10
 
    Volatility
   
99
%
 
16


NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
A summary of the status of the Company’s non-employee options outstanding as of September 30, 2010 and the changes during the period ending on that date are presented below:

 
   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
(Years)
   
Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2009
   
1,741,000
   
$
5.59
     
7.50
       
Granted
   
   
$
     
       
Forfeited or cancelled
   
1,450,000
   
$
6.00
     
6.57
       
Options outstanding at September 30, 2010
   
291,000
   
$
3.55
     
7.70
       
Vested and expected to vest at September 30, 2010
   
291,000
   
$
4.87
     
7.36
   
$
 
Options exercisable at September 30, 2010
   
291,000
   
$
4.87
     
7.36
   
$
 

 
Options exercisable at September 30, 2010 do not include 100,000 performance based options. The Company recognizes compensation cost for performance based options once it is probable that the performance milestones will be achieved. The applicable portion of the compensation costs earned to date is recognized and the remaining unrecognized expense attributable to the milestone is recorded over the service period.

The Company recognized $-0-, $3,318, $9,732, and $25,951 in compensation expense for stock options issued to non-employees for the three and nine months ended September 30, 2010 and 2009, respectively, which is included in general and administrative expense in the consolidated statements of operations. As of September 30, 2010, there was $0 of total unrecognized compensation expense related to unvested employee stock options.
 
Restricted Stock Grants

In May 2008, the Compensation Committee of the Company’s board of directors approved a Management Equity Compensation Plan (the “Equity Compensation Plan”) to ensure that equity remains a significant component of management compensation and to align employee and shareholder interests, by providing opportunities for employees to own the Company’s common stock and to motivate and retain key employees with multi-year equity incentives. The Equity Compensation Plan generally contemplates annual restricted stock grants based on achieving certain performance targets and vesting annually over three years. The amount of each award is relative to an employee’s total compensation and based on the individual’s ability to affect the Company’s results, with higher level positions generally receiving grants equal to a greater percentage of their compensation than lower level positions. All shares and options issued under the Equity Compensation Plan are issued pursuant to the Company’s Incentive Plan that has been approved by the Company's shareholders.

In March 2010, the Company granted and issued under the Equity Compensation Plan 477,452 restricted shares to certain employees based on achieving certain 2009 performance targets as determined by the Compensation Committee. The grant was approved by the Compensation Committee. The number of restricted shares issued was calculated based on the dollar value of the award divided by the closing price of the Company’s common stock on the date the grant was approved by the Compensation Committee. The restricted stock was granted at $0.73 per share.

In March 2010, the Company granted and issued under the Equity Compensation Plan 522,547 restricted shares to certain employees as a special employment retainer incentive. The grant was approved by the Compensation Committee. The number of restricted shares issued was also determined by the Compensation Committee with input from management. The restricted stock was granted at $0.73 per share.
 
17

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
In July 2010, upon shareholder approval, the Company granted and issued under the Equity Compensation Plan 357.605 restricted shares to the former Chairman of the Board. Pursuant to his Separation Agreement, these restricted shares vested immediately upon issuance.

During the nine months ended September 30, 2010, the Company cancelled 188,150 shares of previously issued and unvested restricted stock forfeited by several former employees.

The Company recognized $460,839, $1,012,209, $178,621, and $485,682 in compensation expense for restricted stock awards issued to employees for the three and nine months ended September 30, 2010 and 2009, respectively, which is included in general and administrative expense in the consolidated statements of operations. As of September 30, 2010, there was approximately $0.7 million of total unrecognized compensation expense related to unvested employee restricted stock awards. This expense is expected to be recognized over a weighted-average period of approximately 1.1 years.

The Company recognized $-0-, $9,792, $29,375, and $78,333 in compensation expense for restricted stock awards issued to non-employees for the three and nine months ended September 30, 2010 and 2009, which is included in general and administrative expense in the consolidated statements of operations. As of September 30, 2010, there was no unrecognized compensation expense related to unvested non-employee restricted stock awards.

NOTE 3 – CONVERTIBLE NOTES

April 2010 Private Placement

On April 30, 2010, the Company completed a private placement of 90-day secured convertible notes and warrants raising approximately $700,000 in gross proceeds. The securities were issued pursuant to a Note and Warrant Purchase Agreement, dated April 30, 2010, between the Company and accredited investors.
 
In connection with the Purchase Agreement, the Company executed a Secured Convertible Promissory Note and Security Agreement with each note purchaser under the Purchase Agreement (the “April Notes”). The April Notes pay interest at a rate of 10% per annum, will mature ninety (90) calendar days after their date of issuance (or July 29, 2010) and are convertible into shares of the Company’s common stock at a conversion price of $0.90 per share at any time prior to the maturity date, at the election of the noteholder. In the aggregate, the April Notes will be convertible into up to 797,222 shares of our common stock if held to maturity, including interest. The April Notes are secured by (1) a first-priority security interest in Company assets at the Company’s leased Baltimore biofuel production plant and (2) a pledge of a number of shares of the Company’s common stock held by 2020 Energy LLC, the Company’s largest shareholder, equal to 120% of the maximum aggregate principal amount of the April Notes divided by the consolidated closing bid price of the Company’s common stock on the NASDAQ Capital Market immediately prior to entering into binding agreements for this transaction. Pursuant to a Reimbursement Agreement between the Company and 2020 Energy (the “Reimbursement Agreement”), if an event of default occurs under the April Notes and remains uncured and the noteholders exercise their rights against the pledged shares from 2020 Energy, the Company has agreed to reimburse 2020 Energy by issuing to 2020 Energy a number of shares equal to the pledged shares, to the extent permissible by NASDAQ rules.

At any time at the Company’s option, the Company may prepay without penalty the outstanding principal amount of the April Notes plus unpaid accrued interest. Upon the occurrence of an event of default, the outstanding principal and all accrued interest on the April Notes will accelerate and automatically become immediately due and payable. The April Note purchasers, at their option, also have the right to accelerate payment if the Company engages in certain change of control transactions.

In connection with the sale of the April Notes, the Company also issued warrants to purchase in the aggregate 388,889 shares of common stock at an exercise price of $0.90 per share. Each purchaser of the April Notes received warrants to purchase a number of shares of common stock equal to 50% of the note purchase price (as defined in the Purchase Agreement) divided by $0.90. The warrants are exercisable at any time after the six-month anniversary of their date of issuance and will expire on the fifth anniversary of their date of issuance.
 
18

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
Management estimated the fair value of each instrument separately and allocated the proceeds in accordance with the relative fair value method. The amount allocated to the warrants in accordance with this method was $149,949. The convertible notes payable have been recorded on the consolidated balance sheet net of the discount representing the allocation of the relative fair value to the warrant. The Company records interest in the consolidated statements of operations as the discounted April Note is accreted to its face value through maturity, in addition to recording the 10% interest charge. For the three and nine months ended September 30, 2010, amortization expense related to the debt discount totaled $46,651 and $149,949 respectively.
 
The Company has determined the conversion feature does not represent an embedded derivative as the conversion price is known and is not variable making it conventional. Additionally, there is no beneficial conversion feature related to the April Notes as the conversion price assigned to the April Notes is greater than the fair market value of the Company’s common stock on the date of issuance.

The Company agreed to pay commissions to certain finders in connection with the offering based on the proceeds received from the purchasers introduced by each finder. The Company paid each finder a cash commission of 10% of the total proceeds received at closing based on proceeds from purchasers introduced to the Company by such finder and warrants to purchase a number of shares of common stock equal to 10% of the same total proceeds divided by $0.90. The warrants were valued using the Black-Scholes option pricing model. The estimated fair value of the warrants at the date of issuance was $38,165. The Company capitalized these commissions as deferred financing costs totaling $108,165 and is amortizing them over the term of the notes. For the three and nine months ended September 30, 2010 the Company incurred amortization expense of $33,652 and $108,165, respectively, which is included in interest expense in the consolidated statements of operations.
 
In August 2010, the Company obtained an extension from each of the April Note holders. The April Note holder for the $200,000 Note extended the maturity date to August 19, 2010, The April Note holder for the $500,000 Note extended the maturity date to August 31, 2010. As part of the extension agreements each April Note retroactively amended the rate of interest from the original date of the April Note, April 29, 2010, from 10% to 15%.

On September 2, 2010, the Company obtained another extension from the April Note holder of the $200,000 Note and extended the maturity date to February 28, 2011. As part of this extension agreement [retroactively amended] the rate of interest was from the original date of this note, April 29, 2010, from 15% to 12% and amended the conversion price from $0.90 to $0.255 per share. Additionally, the Company also issued warrants to purchase in the aggregate 392,157 shares of common stock at an exercise price of $0.33 per share. The warrants are exercisable at any time after the six-month anniversary of their date of issuance and will expire on the fifth anniversary of their date of issuance. The warrants had a fair value of $49,709 on the date of issuance based on the Black-Scholes options pricing method and were recorded in interest expense during the three and nine months ended September 30, 2010.

On September 26, 2010, the Company entered into a settlement agreement with the $500,000 April Note holder and issued them 5,950,000 shares of their common stock for outstanding principal and accrued interest due of $530,833. Additionally, the Company also issued warrants to purchase in the aggregate 277,778 shares of common stock at an exercise price of $0.25 per share. The warrants are exercisable at any time after the six-month anniversary of their date of issuance and will expire on the fifth anniversary of their date of issuance. The warrants had a fair value of $27,408 on the date of issuance based on the Black-Scholes options pricing method and were recorded in interest expense during the three and nine months ended September 30, 2010.

As of September 30, 2010 accrued interest for the $200,000 April Note was $10,345, which is included in accounts payable and accrued expenses on the consolidated balance sheets.
 
19


NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 4 – COMMON STOCK

March 2009 Private Placement

In March 2009, the Company completed a private placement (the “March 2009 Private Placement”) of 3,957,500 shares of common stock, at a price of $0.80 per share to certain “accredited investors” as defined in Regulation D under the Securities Act of 1933, as amended (the “Securities Act”). The gross proceeds from the March 2009 Private Placement were $3.2 million and net proceeds, after deducting placement agent’s fees and estimated offering expenses payable by the Company, were approximately $3.1 million. Each investor in the March 2009 Private Placement also received a warrant exercisable for a number of shares of common stock equal to the number of shares of common stock purchased by each investor. The exercise price of the warrants is $0.90 per share (the “$0.90 warrants”). The warrants are exercisable at any time after the six month anniversary of the issue date but prior to the fifth anniversary of the issue date. The $0.90 warrants and the March 2009 Placement Agent Warrants had a fair value of $2,163,943 on the date of issuance based on the Black-Scholes options pricing method.

In addition, the Company exchanged new warrants at an exercise price of $1.00 per share with investors that participated in the Company’s 2008 Series B Private Placement (see Note 5) and invested a specified amount in the March 2009 Private Placement (the “$1.00 warrants”). Under this exchange, the Company canceled and reissued warrants to purchase a total of 97,792 shares. The warrants are exercisable at any time after the six month anniversary but prior to the fifth anniversary of the issue date, either for cash or by means of a “cashless exercise.” The $1.00 warrants had a fair value of $50,428 on the date of issuance based on the Black-Scholes options pricing method.

The $1.00 warrants are considered to be a derivative liability to be marked to market at each reporting date due to their exercise price reset feature. As of December 31, 2009 the warrant liability related to the $1.00 warrants was $52,425. At September 30, 2010 after being marked to market the balance was $4,401 with a gain of $19,021 and $48,025, respectively, being recognized and recorded in gain (loss) on net change in fair value of derivative liabilities on the accompanying consolidated statements of operations for the three and nine months ended September 30, 2010. For the three and nine months ended September 30, 2009, the net adjustment to fair value related to the $1.00 warrants resulted in a gain of $60,455 and a loss of $9,635, respectively, and is included in gain (loss) on net change in fair value of derivative liabilities on the accompanying consolidated statement of operations.

The March 2009 Private Placement contains certain antidilution provisions. If the Company issues additional shares of common stock or convertible securities in a financing transaction in the succeeding fifteen (15) months from the March 2009 Private Placement with a purchase price or conversion price less than $0.80 per share, the Company will issue additional shares of its common stock to the investors in the March 2009 Private Placement, up to a maximum cap of 82,322 additional shares. This cap ensures that the number of shares issued to all investors in the March 2009 Private Placement and pursuant to the antidilution provisions in the aggregate will not exceed the maximum number of shares that the Company can issue under NASDAQ rules without shareholder approval, which is slightly less than 20% of the Company’s common stock outstanding prior to the March 2009 Private Placement. Similarly, if the Company issues additional warrants in a financing transaction in the succeeding fifteen (15) months from the March 2009 Private Placement with an exercise price less than $0.90 per share, the Company will reduce the exercise price of the warrants issued in the March 2009 Private Placement to the price of the warrants in the subsequent financing transaction (but the number of shares underlying the warrants will not change). The antidilution adjustments do not apply to certain excluded issuances of equity securities or warrants, such as securities not issued in capital raising transactions (for example, to customers, suppliers, joint venture partners or the Company's Technology licensor) or in connection with equity awards that the Company grants to employees, consultants and directors under employee benefit plans approved by the Company's board of directors.

The Company has determined that the antidilution provisions in the March 2009 Private Placement are, in effect, a net share settled written put option and that the valuation of the antidilution obligation should be classified as a liability and marked-to-market at each balance sheet date with the change in liability being recorded as gain/loss on fair value adjustment. The Company estimated the fair value of the antidilution obligation to be $102,500 at the issuance date. There was no change in fair value of this liability for the three and nine months ended September 30, 2009. At December 31, 2009, the fair value of the antidilution obligation of $58,449 was calculated using an estimate of the number of shares (82,322 shares) to be issued to all investors in the March 2009 Private Placement pursuant to the antidilution provisions times an estimated fair market value ($0.71) of the Company’s common stock. The carrying value of the antidilution obligation requires the input of highly subjective assumptions. For the three and nine months ended September 30, 2010, no gain or loss was recorded because shares were issued to settle the obligation of $58,449 on March 31, 2010 at a fair market value of $0.71.
 
20


NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
The Company agreed to take steps to allow investors to sell their shares under Rule 144 but did not enter into any registration rights agreements in connection with the March 2009 Private Placement.

The $0.90 warrants are considered to be a derivative liability to be marked to market at each reporting date due to their exercise price reset feature. The Company recorded a $2,063,562 common stock warrant liability at the issuance date related to the $0.90 warrants.

For services rendered in connection with the March 2009 Private Placement, the Company paid the March 2009 Placement Agent cash commissions of $122,080 and issued warrants to purchase 190,750 shares of common stock (the “March 2009 Placement Agent Warrants”). The March 2009 Placement Agent Warrants had a fair value of $100,381 on the date of issuance based on the Black-Scholes option pricing model. The March 2009 Placement Agent Warrants are considered to be a derivative liability to be marked to market at each reporting date due to their exercise price reset feature. The Company recorded a $100,381 common stock warrant liability at the issuance date related to the March 2009 Placement Agent Warrants.

For the three and nine months ended September 30, 2009, the net adjustment to fair value related to the $0.90 warrants and March 2009 Placement Agent Warrants resulted in a gain of $1,283,122 and loss of $1,889,100 and is included in gain (loss) on net change in fair value of derivative liabilities on the accompanying consolidated statements of operations.
 
On June 29, 2009, the Company entered into a Warrant Waiver Agreement with an investor in the March 2009 Private Placement. The investor agreed to waive the exercise price reset feature in the $0.90 warrants. On the effective date of this amendment, the change in fair value from the most recent reporting date to the effective date of the amendment was recorded in the consolidated statements of operations and the then-current fair value of the warrants $2,648,883 was reclassified from common stock warrant liability to additional paid-in capital.

On September 23, 2009, the Company entered into Warrant Waiver Agreements with the remaining investors and the March 2009 Placement Agent in the March 2009 Private Placement. The investors and the March 2009 Placement Agent agreed to waive the exercise price reset feature in the remaining $0.90 warrants. On the effective date of these amendments, the change in fair value from the most recent reporting date to the effective date of the amendment was recorded in the consolidated statements of operations and the then-current fair value of the warrants $1,404,161 was reclassified from common stock warrant liability to additional paid-in capital.

In connection with the Warrant Waiver Agreements described in the preceding paragraphs, the Company issued new five-year warrants to purchase 414,825 shares of common stock at $0.90 per share. The warrants had a fair value of $405,304 on the date of issuance based on the Black-Scholes option pricing model. The estimated fair value of the warrants is included in additional paid-in capital.

February 2010 Private Placement

In February 2010, the Company completed a private placement (the “February 2010 Private Placement”) of 1,890,858 shares of Common Stock, at a price of $0.69 per share to certain “accredited investors” as defined in Regulation D under the Securities Act. The gross proceeds from the February 2010 Private Placement were $1.3 million and approximately $1.1 million in net proceeds, after deducting finders’ fees. Each investor in the February 2010 Private Placement also received a warrant exercisable for a number of shares of common stock equal to the number of shares of common stock purchased by each investor. The exercise price of the warrants is $0.90 per share. The warrants are exercisable at any time after the six month anniversary of the issue date but prior to the fifth anniversary of the issue date. The warrants have a fair value of $1,082,362 on the date of issuance based on the Black-Scholes options pricing method.
 
21

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
Each investor who subscribed for units will have an option to purchase additional units consisting of shares of common stock and warrants during an exercise period ending 30 days after a registration statement registering shares issued in the February 2010 Private Placement is declared effective by the SEC. The option warrants will have the same exercise price, terms and conditions as the other warrants issued in the February 2010 Private Placement. Subject to NASDAQ listing approval and determination that shareholder approval is not required for the issuance of option units, the option will permit purchases of up to the number of units initially purchased in the 2010 February Private Placement.

The 2010 February Private Placement also included certain antidilution provisions for the benefit of investors. If at any time prior to six (6) months after the registration statement is declared effective the Company issues additional equity securities in a “financing transaction” (as defined in the transaction documents) with a purchase price less than the unit price or issues convertible securities with a purchase price less than the unit price, the Company is obligated to issue additional shares of common stock to investors in the 2010 February Private Placement so that the aggregate number of shares received by the investor is equal to the number of shares of common stock that the investor would have received if the same dollar amount had been invested at the purchase price of the additional equity securities. There are no anti-dilution provisions in the warrants. The total number of shares issued to all investors in the 2010 February Private Placement and pursuant to anti-dilution provisions will not exceed the maximum number of shares that may be issued without the Company obtaining shareholder approval under NASDAQ listing rules.
 
The Company has determined that the antidilution provisions in the February 2010 Private Placement are, in effect, a net share settled written put option and that the valuation of the antidilution obligation should be classified as a liability and marked-to-market at each balance sheet date with the change in liability being recorded as gain/loss on fair value adjustment. date. The fair value of the antidilution obligation is calculated using an estimate of the number of shares to be issued to all investors in the February 2010 Private Placement pursuant to the antidilution provisions times an estimated fair market value of the Company’s common stock. The carrying value of the antidilution obligation requires the input of highly subjective assumptions. The Company estimated the fair value of the antidilution obligation to be $40,000 at the issuance date. At September 30, 2010 after being marked to market the balance was $27,500 with a gain of $46,500 and $12,500 being recognized and recorded in gain (loss) on net change in fair value of derivative liabilities on the accompanying consolidated statement of operations for the three and nine months ended September 30, 2010, respectively.

The Company agreed to take steps to allow investors to sell their shares under Rule 144 and has entered into registration rights agreements in connection with the February 2010 Private Placement.

May 2010 Separation Agreement

On May 7, 2010 the Company entered into a Separation Agreement with Lee Rosen, the former Chairman of the Board. As part of the agreement, Mr. Rosen was given the right to receive an additional $105,000 in the form of a note or by making a stock election. On May 17, 2010 the election was made by Mr. Rosen to receive $105,000 in the form of Company stock. The number of shares awarded was 164,062 which was calculated using the closing stock price of $0.64 on May 17, 2010.

June 2010 Offering

On June 14, 2010, the Company closed a registered direct offering with one institutional investor under which the Company issued 1,111,112 shares of Common Stock (the “June 2010 Offering”), and warrants to purchase 555,556 shares of common stock. The gross proceeds from the June 2010 Offering were $500,000, and the net proceeds, after deducting the placement agent’s fee and the estimated offering expenses payable by the Company, were approximately $407,000. The shares and warrants were sold such that for each share purchased, the investor received a warrant to purchase 0.50 shares of Common Stock at an exercise price of $0.60 per share. Each share was purchased at a price of $0.45. The warrants have a five year term from the date of issuance, are not exercisable prior to six months after issuance and include provisions providing for cashless exercise and for adjustments to the number of shares exercisable thereunder upon stock dividends, stock splits and similar events. The warrants have a fair value of $222,944 on the date of issuance based on the Black-Scholes options pricing method.
 
22

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
In connection with the transaction the Company entered into a placement agent agreement pursuant to which the placement agent received a fee equal to 7% of the gross proceeds of the offering and a warrant to purchase shares of common stock equal to 5% of the number of shares of common stock sold by the Company in the offering at an exercise price of $0.5625 per share.

 
Consulting Agreements

 
The Company entered into consulting agreements with several investor relations firms during the third quarter of 2010. Under the terms of these agreements, the Company issued an aggregate of 7,200,000 shares of the Company’s Common Stock as compensation for their services over a twelve month period. The Common Stock was valued based on the share price on the date of each agreement. The Company recognized $323,750 in expense for the three and nine months ended September 30, 2010, which is included in general and administrative expense in the consolidated statements of operations. As of September 30, 2010, there was approximately $1,462,000 of total unrecognized compensation expense related to this Common Stock which is included in prepaid assets and other current assets on the consolidated balance sheets.

August 2010 Offering

On August 16, 2010, the Company closed a registered direct offering by entering into a securities purchase agreements with institutional investors under which the Company issued 5,000,000 shares of its common stock (the “August 2010 Offering”), and warrants to purchase 1,250,000 shares of common stock. The gross proceeds from the August 2010 Offering were $1,000,000, and the net proceeds, after deducting the placement agent’s fee and the estimated offering expenses payable by the Company, were approximately $890,000. The shares and warrants were sold such that for each share purchased, the investor received a warrant to purchase 0.25 shares of Common Stock at an exercise price of $0.30 per share. Each share was purchased at a price of $0.20. The warrants have a five year term from the date of issuance, are not exercisable prior to six months after issuance and include provisions providing for cashless exercise and for adjustments to the number of shares exercisable thereunder upon stock dividends, stock splits and similar events. The warrants have a fair value of $191,740 on the date of issuance based on the Black-Scholes options pricing method.
 
In connection with the transaction the Company entered into a placement agent agreement pursuant to which the placement agent received a fee equal to 7% of the gross proceeds of the offering.

 
September 2010 Offering

On September 22, 2010, the Company closed a registered direct offering by entering into a securities purchase agreements with institutional investors under which the Company issued 3,557,692 shares of its common stock (the “September 2010 Offering”), and warrants to purchase 2,668,269 shares of common stock. The gross proceeds from the September 2010 Offering were $462,500, and the net proceeds, after deducting the placement agent’s fee and the estimated offering expenses payable by the Company, were approximately $442,500. The shares and warrants were sold such that for each share purchased, the investor received a warrant to purchase 0.75 shares of Common Stock at an exercise price of $0.15 per share. Each share was purchased at a price of $0.13. The warrants have a five year term from the date of issuance, are not exercisable prior to six months after issuance and include provisions providing for cashless exercise and for adjustments to the number of shares exercisable thereunder upon stock dividends, stock splits and similar events. The warrants have a fair value of $286,978 on the date of issuance based on the Black-Scholes options pricing method.

In connection with the transaction the Company entered into a placement agent agreement pursuant to which the placement agent received a fee equal to 7% of the gross proceeds of the offering in the form of Common Stock of the Company. Each share of Common Stock issued as compensation to the Placement Agent was valued at $0.13 per share.
 
23

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 5 – PREFERRED STOCK

Series A Preferred Stock

On May 9, 2007, the Company completed the offering (the “Series A Private Placement”) of 27,950 shares of the Company’s newly issued Series A Cumulative Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) at price of $100.00 per share to certain “accredited investors” as defined in Regulation D under the Securities Act. The gross proceeds were $2,795,000. Under the terms of the Series A Private Placement, each investor had the option to purchase additional securities up to the amount initially purchased on the same terms as those of the Series A Private Placement (the “Subscriber Option”). On June 8, 2007, the Company sold an additional 14,600 shares of Series A Preferred Stock at price of $100.00 per share in connection with exercises of the Subscriber Option. The gross proceeds were $1,460,000.

At any time prior to the third anniversary of the initial date of issuance, any holder of Series A Preferred Stock may convert all or a portion of their shares into shares of the Company’s common stock calculated by multiplying the number of shares to be converted by such shares’ “stated value” (i.e. $100 per share plus the amount of all dividends accumulated thereon) and dividing the result by the “conversion price” then in effect. The initial conversion price of each share of Series A Preferred Stock was $4.00, and each share of Series A Preferred Stock was initially convertible into 25 shares of the Company's common stock. Upon the third anniversary of the date of issuance, each share of Series A Preferred Stock automatically, and without any action on the part of the holder, converts into that number of shares of the Company's common stock computed by dividing such share’s “stated value” by the “conversion price” then in effect. The “conversion price” is subject to adjustment upon the occurrence of certain events, including, among others, a stock split, reverse stock split, stock dividend or combination of the Company's common stock. The Series A Preferred Stock is not redeemable.

 
On May 9, 2010 the third anniversary of the date of issuance, each share of Series A Preferred Stock automatically, and without any action on the part of the holder, converted into that number of shares of the Company's common stock computed by dividing such share’s “stated value” by the “conversion price” then in effect. On May 9, 2010 the conversion price of each share of Series A Preferred Stock was $4.00. Each share of Series A Preferred Stock accrued cumulative dividends on a quarterly basis at a rate of 8% per annum. All dividends were paid in shares of common stock having a fair market value at the time of issuance. Pursuant to the terms of the Securities Purchase Agreement the Company issued 582,089 shares of common stock upon the automatic conversion of the Series A Preferred Stock. Accrued dividends for the Series A Preferred Stock were $488,334 through the date of conversion and were $424,313 at December 31, 2009.
 
Series B Preferred Stock

On March 31, 2008, the Company completed the offering (the “Series B Private Placement”) of a total 43,986 shares of the Company’s newly issued Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred Stock”) at a price of $100.00 per share to certain “accredited investors” as defined in Regulation D under the Securities Act. The gross proceeds from the issuance of 40,768 shares of Series B Preferred Stock was $4,076,800. In addition, the Company issued 3,218 shares of Series B Preferred Stock as commission in connection with the Series B Private Placement.

On May 13, 2008, the Company completed a second closing of the Series B Private Placement of a total 35,419 shares of the Company’s Series B Preferred Stock. The gross proceeds from the issuance of 35,123 shares of Series B Preferred Stock was $3,512,300. In addition, the Company issued 296 shares of Series B Preferred Stock as commission in connection with the Series B Private Placement. In summary, in the offering that was closed on March 31, 2008 and May 13, 2008, the Company sold a total of 75,891 shares of Series B Preferred Stock and warrants to purchase 446,413 shares of common stock for total gross proceeds of $7,589,100.
 
24

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
The Series B Preferred Stock ranks junior to the Series A Preferred Stock and senior to the common stock with respect to the payment of dividends and amounts payable upon liquidation, dissolution or winding up of the Company. The Series B Preferred Stock also is not redeemable.

At any time prior to the third anniversary of the date of issuance, any holder of Series B Preferred Stock may convert all or a portion of their shares into shares of the Company’s common stock calculated by dividing the sum of the stated value and all accrued dividends not previously paid or added to the stated value to the date of such conversion by the Series B Preferred Stock conversion price then in effect. Upon the third anniversary of the initial issue date of the Series B Preferred Stock, each share of Series B Preferred Stock will automatically convert into the number of shares of common stock into which it is then convertible. The initial conversion price is $4.25 per share, subject to adjustment upon the occurrence of certain major corporate events such as reorganizations and stock splits (the “Series B Conversion Price”).

Dividends will be payable from the date of issuance at a rate of 8% per year when and as declared by the board of directors. To the extent that dividends are not declared, or cannot be paid, there will be an increase in the stated value of the Series B Preferred Stock in the amount of 8% per year. In the event dividends are declared by the board of directors and paid by the Company on the common stock, holders of Series B Preferred Stock will either share ratably in such dividends based on the number of shares of common stock into which the Series B Preferred Stock may be converted or (to the extent that dividends are not declared or cannot be paid), there will be a corresponding increase in the stated value. Dividends will be paid semiannually, at the Company’s election, in cash, in shares of Series B Preferred Stock (valued at stated value) or in common stock valued at the market price, on September 30 and March 31 of each year beginning on September 30, 2008 to holders of record on the 15th day of the preceding month. If there is an increase in stated value because dividends were not or could not be paid, that increase will occur semiannually on the dates that dividends would have been paid. As of September 30, 2010 and December 31, 2009, accrued dividends on the Series B Preferred Stock were $973,895 and $653,690, respectively.

The Series B Preferred Stock was convertible into 1,868,367 shares of common stock, at the election of the holders, at the Series B Conversion Price. The fair market value of the beneficial conversion was calculated based on the difference between the share price of the common stock, at the time of issuance, and the Series B Conversion Price. This resulted in a $2,963,995 deemed dividend related to the beneficial conversion feature during the year ended December 31, 2008.

 
Upon any liquidation of the Company, after the Company has made the required distributions to the holders of Series A Preferred Stock (and any other preferred stock then outstanding, if any, ranking in liquidation senior to the Series B Preferred Stock), and before any distribution is made to the holders of common stock (and any other stock ranking in liquidation junior to the Series B Preferred Stock), the holders of Series B Preferred Stock will be entitled to be paid an amount in cash equal to the aggregate liquidation value of Series B Preferred Stock, which equals the stated value plus all accrued dividends not previously paid or added to stated value. As of, September 30, 2010, the liquidation value of the Series B Preferred Stock was $5,552,424.

Each investor in the Series B Private Placement also received a warrant exercisable for a number of shares of common stock equal to 25% of the number of shares of common stock into which the Series B Preferred Stock purchased by such investor is initially convertible. The initial exercise price of the warrants is $6.25 per share. Both the Series B Preferred Stock and the warrants include antidilution provisions that, if triggered, could result in a reduction of the conversion price of the Series B Preferred Stock or the exercise price of the warrants, but not below $3.00 per share. The warrants have a fair value of $2,032,739 based on the Black-Scholes option pricing method. The estimated fair value of the warrants was included in additional paid-in capital.

In connection with the Series B Private Placement, the Company agreed to register the resale of the shares of common stock issuable (i) upon conversion of the Series B Preferred Stock, (ii) as dividends on the Series B Preferred Stock, and (iii) upon exercise of warrants, all in accordance with registration rights agreements among the Company and each of the investors. Under the registration rights agreement, the Company was required to file a “resale” registration statement with the SEC covering such shares on or before the 30th day following the closing of the Series B Private Placement. The Company filed the registration statement on May 30, 2008, within the required time period. Since the registration statement was not declared effective by the SEC within 180 days of the initial required filing date, during the year ended December 31, 2008 the Company recorded an expense of $43,986 for 1% of the shares issued in the March 31, 2008 Series B Private Placement. The registration statement was declared effective by the SEC on November 24, 2008.
 
25

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
If at any time prior to the first to occur of (i) the first anniversary of the registration of the common stock underlying the Series B Preferred Stock or (ii) 18 months after the closing , the Company issues any additional shares of common stock with a purchase price less than the conversion price of the Series B Preferred Stock, or additional convertible securities with a conversion price less than the conversion price of the Series B Preferred Stock, the conversion price of the Series B Preferred Stock will be reduced to the purchase price at which such common stock has been issued or the conversion price of such additional convertible securities, but not below a conversion price of $3.00 per share. The antidilution adjustments in the Series B Preferred Stock and warrants will not apply to certain issuances of equity securities or warrants, including those not issued in capital-raising transactions (such as to customers, suppliers, joint venture partners or in connection with acquisitions of property) or in connection with equity award or options granted by the Company to employees, consultants and directors under employee benefit plans approved by the board of directors under which options generally are granted with exercise prices at least equal to the Company’s stock price on the grant dates.

In conjunction with the March 2009 Private Placement, as noted in Note 4 above, the antidilution provisions were triggered. The conversion price of the Series B Preferred Stock and the exercise price of the warrants were reset to $3.00 per share. The Company recorded $4,005,161 as an additional deemed dividend related to the beneficial conversion feature during the three months ended March 31, 2009. The additional beneficial conversion feature was calculated based on the number of shares that would be received upon conversion based on the adjusted conversion price. The Company then compared the number of shares that would be received upon conversion based on the adjusted conversion price with the number that would have been received prior to the occurrence of the contingent event. The excess number of shares was multiplied by the commitment date stock price to determine the incremental intrinsic value resulting from the resolution of the contingency and the corresponding adjustment to the conversion price.
 
In connection with the Series B Private Placement, the Company paid a commission of $249,288, issued 3,514 shares of Series B Preferred Stock and warrants exercisable for 197,437 shares of common stock as consideration for investors introduced to the Company. The warrants had a fair value of $770,858 on the date of issuance based on the Black-Scholes option pricing model. The estimated fair value of the warrants was included in additional paid-in capital.

In conjunction with the March 2009 Private Placement, as noted in Note 3 above, the antidilution provisions were triggered in the Series B Private Placement common stock purchase warrants. The exercise price of the warrants was reset to $3.00 per share. Accordingly, the change in fair value from the most recent reporting date to the date of March 2009 Private Placement was recorded in the consolidated statements of operations and the then-current fair value of the warrants $158,451 was reclassified from common stock warrant liability to additional paid-in capital.

For the three and nine months ended September 30, 2009, the net adjustment to fair value related to the Series B Private Placement common stock purchase warrants resulted in a gain of $-0- and $101,664, respectively and is included in loss on net change in fair value of derivative liabilities on the accompanying consolidated statements of operations.

The ability of the Company to pay dividends in the future is limited by regulatory requirements, legal availability of funds, recent and projected financial results, capital levels and liquidity of the Company, general business conditions and other factors deemed relevant by the Company’s board of directors.

NOTE 6 – GAIN ON SETTLEMENT OF TRADE PAYABLES AND LEASE TERMINATION

The gain on settlement of trade payables at less than recorded values results from negotiations with various unsecured creditors for settlement and payment of the trade payable at amounts less than the recorded liability. The gain on settlement of lease termination results from the Company terminating their lease agreement with Atlantic Terminaling and therefore recognizing a gain equal to the deferred rent on the date of termination. For the three and nine months ended September 30, 2010, the Company’s gain on settlement of trade payables was as follows:
 
26

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
   
Net Trade
Payables
Settled
   
Other
Liabilities
   
Payments
in Cash
   
Payments
in Equity
   
Gain
 
                               
Trade payables
 
$
 1,882,106
   
$
-
   
$
 (467,405
 
$
(158,376
 
$
1,256,325
 
Deferred rent
   
              -
     
       63,158
     
-
     
-
     
63,158
 
                                         
Total
 
$
 1,882,106
   
$
        63,158
   
$
  (467,405
 
$
  (158,376
 
$
  1,319,483
 

 
NOTE 7 – EXCLUSIVE LICENSE AGREEMENT AND PAYABLE

On March 20, 2006 (the “Effective Date”), the Company entered into an Exclusive License Agreement (the “Perpetual License”) with the inventor of its proprietary technology (the “Technology”), Ferdinando Petrucci (the “Licensor”), to obtain an exclusive Perpetual License to manufacture, use and sell the Technology in North America, Central America and the Caribbean as well as other territories that may be added by mutual agreement of the parties to the Perpetual License.

On February 19, 2010, the Perpetual License, as amended, was further amended, to allow the Company to pay $120,000 in cash on February 19, 2010 and issue 1,100,000 shares of common stock in lieu of making the $500,000 payments due on February 20, 2010 and March 20, 2010. The fair value of the shares issued was $726,000, based on the fair market value on the date of issuance, or $0.66 per share, resulting in a gain on debt extinguishment of $-0- and $154,000 for the three and nine months ended September 30, 2010, respectively.
 
NOTE 8 – COMMITMENTS AND CONTINGENCIES

On or about January 4, 2010, the Company was notified that it was in default under its site lease agreement with Pennington Partners, LLC (the “landlord”) and terminaling services agreement with Atlantic Terminaling, primarily due to its failure to pay rent in the amount of $320,000. Effective August 27, 2010, the terminaling services agreement with Atlantic Terminaling was terminated and the Company was released from paying all amounts due. This termination resulted in a gain on settlement of trade payables and lease termination of $318,466, including derecognition of deferred rent in the amount of $63,158 (see note 6). On August 27, 2010 the Company amended the site lease agreement and successfully negotiated a settlement of the amounts owed and restructured the remaining obligations under the agreements. Effective August 1, 2010, the base rent was reduced to $25,000 per month for the remainder of the initial term. Full satisfaction of the existing defaults was met with payments of $40,000 for the month of July 2010; $100,000 for Base Rent in advance for the period beginning August 1, 2010 and ending November 30, 2010; $150,000 cash; and the issuance of 300,000 shares of unregistered common stock. These payments resulted in gain on settlement of trade payables and lease termination of $255,000. As of September 30, 2010 and December 31, 2009, accrued and unpaid rent under the agreements totaled approximately $-0- and $362,500, respectively, and is included in accounts payable and accrued expenses on the consolidated balance sheets.

On August 5, 2010 the Company appeared before a NASDAQ Continued Listing Hearing Panel to present a plan to regain and sustain compliance with the NASDAQ continued listing standards. The Company was deficient on two continued listing standards as of June 30, 2010 when the Company reported negative stockholders equity of approximately $1.1 million. The Company offered to the panel that closing of the August 2010 registered direct offering coupled with the subsequent negotiated settlement payments and the conversion of the 90-day secured convertible April Notes results in increases in the Company’s stockholders equity. The Company also stated that it expected to be in compliance with the stockholders equity requirement when it files its Form 10-Q for the period ending September, 30, 2010. As of September 30, 2010 the Company was not able to complete all of the anticipated actions and therefore was not compliant with the shareholders equity requirement. On October 4, 2010 the Company completed a registered direct transaction that resulted in gross proceeds of $600,000 which resulting in an increase in shareholders equity to an amount above the requirement. The Company is also deficient with the $1.00 bid price standard and has asked the panel for the 180 day extension to regain compliance. The Company currently has not reached a decision on completing a reverse stock spilt to regain compliance with this standard which requires that the Company maintain a $1 minimum bid price for 10 successive trading days by December 20, 2010.
 
27

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 9 – AGREEMENTS

Resignation of Lee S. Rosen as Chairman and Separation Agreement

On May 7, 2010, the Company’s board of directors accepted the resignation of Mr. Rosen as the Chairman of the Board and as a director. In connection with Mr. Rosen’s resignation, the board of directors negotiated and executed a Separation Agreement, dated May 7, 2010, between the Company and Mr. Rosen (the “Separation Agreement”). Under the Separation Agreement, Mr. Rosen is entitled to the following:
 
 
·
$95,000 in cash, less standard deductions and withholding;
·
the right to receive an additional $105,000, at the election of Mr. Rosen, in the form of (i) a note issued by the Company with a maturity date of three years from date of issuance and an interest rate equal to the interest rate of a three-year United States Treasury Note plus 2.0% on the date of issuance and other customary terms and conditions; or (ii) a number of shares of the Company’s common stock equal to the amount of the cash election divided by the closing price of the Company’s common stock on the NASDAQ Capital Market on the election date. Mr. Rosen may make this election before one (1) business day following the Release Effective Date under the Separation Agreement, which will be no earlier than May 14, 2010;
·
accelerated vesting on certain time-based stock options and stock grants under Mr. Rosen’s previous Amended and Restated Employment Agreement with the Company, dated July 23, 2009 (the “Employment Agreement”), consisting of (1) options to purchase 104,353 shares of the Company’s common stock; and (2) 260,833 shares of the Company’s common stock;
 
·
accelerated vesting on a certain previously granted three-year restricted stock grants, consisting of 226,316 shares of the Company’s common stock;
·
upon receipt of shareholder approval to issue sufficient available shares under the Company’s Incentive Plan, (i) accelerated vesting on additional time-based options to purchase 208,707 shares of the Company’s common stock (the “Conditional Options”) and (ii) issuance of additional restricted stock grants consisting of 521,677 shares of the Company’s common stock less the number of shares equal to $105,000 divided by the closing price of the Company’s common stock on the NASDAQ Capital Market on the election date (the “Conditional Stock Grant”). The Conditional Options and Conditional Stock Grant were granted under Mr. Rosen’s previous Employment Agreement;
 
·
18 months of reimbursement for COBRA premiums in order to provide health and life insurance benefits at least equal to those provided at the time of separation; and
 
·
other accrued amounts under the Employment Agreement, as of May 7, 2010.

The Company has not registered, and is under no obligation to register, the stock grants or the shares underlying the stock options provided under the Separation Agreement.
 
28

 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
Fenix Energy

On May 12, 2010, the Company issued a termination notice to Fenix Energy (“Fenix”) to terminate the Company’s biofuel contract with Fenix as a result of Fenix’s failure to post the mandatory letter of credit equal to one month’s projected sales that the Company requested in March 2010. The termination became effective immediately following a 30 day cure period, which Fenix did not meet. This contract was the Company’s largest single biofuel sales contract, under which Fenix had agreed to purchase a minimum of 750,000 gallons of our biofuel per month for 12 months.

NOTE 10 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets were:
   
September 30, 
2010
   
December 31, 
2009
 
                 
Prepaid consulting fees
  $ 1,462,250     $    
Other prepaid expenses and current assets
    192,722       237,635  
                 
Total
  $ 1,654,972     $ 237,635  
NOTE 11 – SUBSEQUENT EVENTS

Resignation of Cary J. Claiborne as Chief Executive Officer and Separation Agreement

On October 9, 2010, the Company’s board of directors accepted the resignation of Mr. Claiborne as the Chief Executive Officer. In connection with Mr. Claiborne’s resignation, the board of directors negotiated and executed a Separation Agreement, dated October 9, 2010, between the Company and Mr. Claiborne (the “Claiborne Separation Agreement”). Under the Claiborne Separation Agreement, Mr. Claiborne is entitled to the following:
 
 
·
$130,000 in cash, less standard deductions and withholding;
 
·
$60,000 in cash for the 2009 accrued but unpaid bonus;
 
·
within 21 calendar days after the separation date, the Company shall file an S-8 Registration Statement to register all shares and options granted under the Company’s Omnibus Incentive Plan;
 
·
a grant of 1,500,000 shares of common stock , which will be registered as part of the aforementioned S-8 Registration Statement;
 
·
accelerated vesting on certain time-based stock options and stock grants dated December 1, 2007, and April 9, 2009  consisting of (1) options to purchase 65,000 shares of the Company’s common stock; and (2) 300,000 shares of the Company’s common stock respectively;
 
·
accelerated vesting on certain performance-based stock options and stock grants dated December 1, 2007, and April 9, 2009  consisting of (1) options to purchase 125,000 shares of the Company’s common stock; and (2) 307,604 shares of the Company’s common stock respectively;
 
·
accelerated vesting on a certain previously granted three-year restricted stock grants, consisting of 232,026 shares of the Company’s common stock;
 
·
reimbursement for up to $12,000 in documented outplacement services;
 
·
18 months of reimbursement for COBRA premiums in order to provide health and life insurance benefits at least equal to those provided at the time of separation; and
 
·
other accrued amounts under the Employment Agreement, as of October 9, 2010.
 
 
29

 
 
NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

 
Appointment of Chief Executive Officer

On October 9, 2010, the Company entered into an employment agreement with Miles F. Mahoney appointing him  as the Company’s new President and Chief Executive Officer. Mr. Mahoney’s employment agreement with the Company  provides for an indefinite term, but may be terminated by the Company or Mr. Mahoney with or without cause.  The Employment Agreement provides that Mr. Mahoney will receive base compensation of $225,000 per year and will be eligible to earn an incentive cash bonus of up to $125,000 if the Company enters into a definitive agreement with a strategic investor for financing in the Company on or before December 31, 2010.  Additionally, the Company granted Mr. Mahoney an incentive stock option to purchase 1,000,000 shares of the Company’s common stock and also issued Mr. Mahoney 1,000,000 shares of restricted stock, half of which are subject to restrictions until the first anniversary of the grant date.
  
October 2010 Offering
  
On October 4, 2010, the Company closed a registered direct offering by entering into securities purchase agreements with several institutional investors under which the Company issued 4,615,385 shares of its Common Stock (the “October 2010 Offering”) and warrants to purchase 1,846,154 shares of Common Stock.  The gross proceeds from the Offering were $600,000, and the net proceeds, after deducting the placement agent’s fee and the estimated offering expenses payable by the Company, are expected to be approximately $550,000.   The shares and warrants were sold such that for each share purchased, the investor received a warrant to purchase 0.4 shares of Common Stock at an exercise price of $0.13 per share.  Each share was purchased at a price of $0.13. The warrants have a five year term from the date of issuance, are not exercisable prior to six months after issuance and include provisions providing for cashless exercise and for adjustments to the number of shares exercisable thereunder upon stock dividends, stock splits and similar events.  The warrants have a fair value of $154,927 on the date of issuance based on the Black Scholes options pricing method.

November 2010 Offering

On November 1, 2010 the Company completed a private placement of convertible notes (the “November Notes”) with three accredited investors, raising $375,000 in gross proceeds.  The Company executed a Convertible Promissory Note with each note purchaser.  The November Notes will pay interest at a rate of 6% per annum, will mature six months after their date of issuance and are convertible into shares of the Company’s common stock at a conversion price of $0.14 per share (subject to adjustment) at any time prior to repayment, at the election of the noteholder.  In the aggregate, the November Notes will be convertible into up to 2,758,929 shares of the Company’s common stock if held to maturuty, including interest.  The Company may prepay at any time and without penalty the outstanding principal amount of the November Notes plus unpaid accrued interest.   The November Note purchasers, at their option, also have the right to accelerate payment if the Company engages in certain change of control transactions.

The Company has determined the conversion feature does not represent an embedded derivative as the conversion price is known and is not variable making it conventional. Additionally, there is no beneficial conversion feature related to the November Notes as the conversion price assigned to the November Notes is greater than the fair market value of the Company’s common stock on the date of issuance.

Warrant Amendments

On November 1, 2010, the Company amended the warrant agreements entered into as part of the August 2010 Offering, September 2010 Offering, and the October 2010 Offering to reduce the exercise price to $0.015 and made them immediately exercisable. The total number of warrants amended were immediately exercised by the warrant holders and the Company issued them 5,764,423 shares of common stock for proceeds of $86,466.The amended warrants had a fair value of $489,977 on the date of modification based on the Black-Scholes options pricing method.  An expense of $71,959 will be recorded related to this.

 
30

 

NEW GENERATION BIOFUELS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
April Note Amendment
  
On November 1, 2010, the Company amended the $200,000 April Note extending the maturity date to December 31, 2011. Additionally, the conversion rate was reduced from $0.255 to $0.14 for $155,000 of the principal and interest and from $0.255 to $0.01 for $60,000 of the principal and interest. Additionally, there is a beneficial conversion feature related to this April Note amendment as the conversion price assigned to $60,000 of the April Note is greater than the fair market value of the Company’s Common Stock on the date of issuance. The beneficial conversion feature was calculated based on the number of shares that would be received upon conversion based on the adjusted conversion price. The Company then compared the number of shares that would be received upon conversion based on the adjusted conversion price with the number that would have been received prior to this amendment. The excess number of shares was multiplied by the commitment date stock price to determine the incremental intrinsic value resulting from the resolution of the contingency and the corresponding adjustment to the conversion price. A deemed dividend of $540,000 will be recorded related to this beneficial conversion feature. On November 15, 2010, the Company received a conversion notice on a $32,500 portion of the $60,000 principal with a $0.01conversion rate. Accordingly, the Company issued 3,250,000 shares of common stock.
 
 
31

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
Overview
  
New Generation Biofuels Holdings, Inc. (the “Company,” “we,” “our,” or “us”) is 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.  We began generating revenues in 2008.

We produce our biofuels using proprietary blending technologies 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 gives us a competitive advantage by enabling us to produce biofuels that are cleaner and less expensive 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 fuel characteristics will enable us to customize our product to specific customer requirements and react more quickly to trends in the biofuels market.

During the year ended December 31, 2009, we commenced our principal business operations and have exited the development stage.

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 September 30, 2010, we had an accumulated deficit of $57.9 million.  The operation and development of our business will require substantial additional capital to fund our operations, payments due under our exclusive license, the acquisition or development of manufacturing plants, research and development and other initiatives including potentially the financing of future acquisitions.

The Company's independent registered public accounting firm has issued a going concern opinion on the Company's financial statements for the year ended December 31, 2009.
  
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, if sufficient resources are available.  Our longer term strategy includes 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 that would 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 developing our technology to extend it to fuels with additional applications.