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 March 31, 2008
 
 
o
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. 000-51903
 
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.)
 
11111 Katy Freeway, Suite 910
Houston, Texas 77079
(Address of principal executive offices)
 
(713) 973-5720
(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   þ     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 þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨     No   þ  
 
At April 30, 2008, the registrant had 18,525,181 shares of common stock, $0.001 par value, issued and outstanding.


INDEX

PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Consolidated balance sheets as of March 31, 2008 (Unaudited) and December 31, 2007
3
     
 
Consolidated statements of operations for the three months ended March 31, 2008 (Unaudited), for the three months ended March 31, 2007 (Unaudited) and for the period from February 28, 2006 (Inception) through March 31, 2008 (Unaudited)
4
     
 
Consolidated statement of stockholders’ equity for the three months ended March 31, 2008 (Unaudited)
5
     
 
Consolidated statements of cash flows for the three months ended March 31, 2008 (Unaudited), for the three months ended March 31, 2007 (Unaudited) and for the period from February 28, 2006 (Inception) through March 31, 2008 (Unaudited)
6
     
 
Notes to consolidated financial statements
7-12
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13-17
     
Item 3.
Qualitative and Quantitative Disclosures About Market Risk
17
     
Item 4.
Controls and Procedures
18
     
     
PART II. OTHER INFORMATION  
 
     
Item 1A.
Risk Factors
19
     
Item 6.
Exhibits
20-21
     
Signatures
 
22





NEW GENERATION BIOFUELS HOLDINGS, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
 
            
            
   
  March 31,
 
December 31,
 
   
  2008
 
2007
 
ASSETS
             
               
Current assets:
             
Cash
 
$
4,493,574
 
$
1,644,145
 
Prepaid expenses
   
78,559
   
84,968
 
Total current assets
   
4,572,133
   
1,729,113
 
               
License agreement
   
8,061,300
   
8,061,300
 
               
TOTAL ASSETS
 
$
12,633,433
 
$
9,790,413
 
               
               
LIABILITIES AND STOCKHOLDER'S EQUITY
             
               
Current liabilities:
             
               
Accounts payable and accrued expenses
 
$
533,371
 
$
634,587
 
Loan payable-related party
   
50,000
   
50,000
 
License agreement payable-current portion
             
(net of unamortized discount of $453,410 and $78,153)
   
1,396,590
   
921,847
 
Accrued dividend on preferred stock
   
290,813
   
210,275
 
Liability under registration rights agreement
   
149,038
   
78,956
 
Total current liabilities
   
2,419,812
   
1,895,665
 
               
License agreement payable
             
(net of unamortized discount of $1,464,131 and $1,993,830)
   
3,535,869
   
4,006,170
 
     
5,955,681
   
5,901,835
 
               
               
Stockholders' equity:
             
Series A Cumulative Convertible Preferred Stock: $100 stated
             
value, 300,000 shares authorized, 39,550 and 42,050 shares
             
issued and outstanding as of March 31, 2008 and
             
December 31, 2007, respectively
   
1,528,199
   
1,624,798
 
Series B Cumulative Convertible Preferred Stock: $100 stated
             
value, 250,000 shares authorized, 43,986 shares issued and
             
outstanding as of March 31, 2008
   
3,007,375
   
-
 
Common stock, $0.001 par value, 100,000,000 shares
             
authorized; 18,285,964 and 18,165,793 shares issued and
             
outstanding as of March 31, 2008 and December 31, 2007, respectively
   
18,286
   
18,166
 
Additional paid-in-capital
   
22,576,974
   
18,955,101
 
Deficit accumulated during the development stage
   
(20,453,082
)
 
(16,709,487
)
Total stockholders' equity
   
6,677,752
   
3,888,578
 
               
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
12,633,433
 
$
9,790,413
 


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

3

  NEW GENERATION BIOFUEL HOLDINGS, INC.
  (A Development Stage Enterprise)
  Consolidated Statements of Operations
 
 
                     
     
For the Three Months Ended March 31, 2008
   
For the Three Months Ended March 31, 2007
   
For the Period from February 28, 2006 (Inception) to March 31, 2008
 
Operating expenses:
                   
Research and development expenses
 
$
196,841
   
103,282
 
$
1,060,291
 
Merger expenses
   
-
   
-
   
340,000
 
General and administrative expenses
   
1,899,427
   
1,119,848
   
13,717,544
 
  Total operating expenses
   
2,096,268
   
1,223,130
   
15,117,835
 
                     
Net loss from operations
   
(2,096,268
)
 
(1,223,130
)
 
(15,117,835
)
                     
Interest income
   
5,269
   
-
   
54,803
 
                     
Interest expense
   
(154,442
)
 
(193,683
)
 
(1,566,907
)
                     
Other expense
   
-
   
-
   
(250,000
)
                     
(Loss) gain on fair value adjustment
   
(20,404
)
 
445,995
   
611,032
 
                     
Net loss
   
(2,265,845
)
$
(970,818
)
 
(16,268,907
)
                     
Preferred dividends
   
(1,477,750
)
 
-
   
(4,184,175
)
                     
Net loss available to common shareholders
 
$
(3,743,595
)
$
(970,818
)
$
(20,453,082
)
                     
Basic and diluted net loss per share
 
$
(0.21
)
$
(0.06
)
     
                     
Weighted average number of
                   
shares outstanding
   
18,227,292
   
17,091,250
       


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

4


(A Development Stage Enterprise)
 
Condensed Statement of Changes in Stockholders' Equity
For the Period from February 28, 2006 (Inception) to March 31, 2008
(Unaudited)
 
 
 
 
Common Stock
 
  Preferred Stock - Series A
 
Preferred Stock - Series B
 
 
Additional
 
Deficit Accumulated During the Development
     
     
Shares
 
Amount
 
  Shares
 
  Amount
 
  Shares
 
  Amount
 
Capital
 
Stage
 
Total
 
                                                   
Balance at January 1, 2008
       
18,165,793
 
$
18,166
   
42,050
 
$
1,624,798
   
-
 
$
-
 
$
18,955,101
 
$
(16,709,487
)
$
3,888,578
 
                                                             
Compensation expense associated with options
       
-
   
-
   
-
   
-
   
-
   
-
   
791,969
   
-
   
791,969
 
Issuance of options and warrants for services rendered
       
-
   
-
   
-
   
-
   
-
   
-
   
269,435
   
-
   
269,435
 
Issuance of preferred stock and warrants in private offering, net of costs
       
-
   
-
   
-
   
-
   
43,986
   
3,007,375
   
1,066,778
   
-
   
4,074,153
 
Dividend associated with the beneficial conversion feature of the preferred stock
       
-
   
-
   
-
   
-
   
-
   
-
   
1,397,212
   
(1,397,212
)
 
-
 
Conversion of preferred stock into common stock
       
62,500
   
63
   
(2,500
)
 
(96,599
)
 
-
   
-
   
96,536
   
-
   
-
 
Exercise of warrants into common stock
       
57,671
   
57
   
-
   
-
   
-
   
-
   
(57
)
 
-
   
-
 
Dividends accrued on preferred stock
       
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(80,538
)
 
(80,538
)
Net loss
     
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(2,265,845
)
 
(2,265,845
)
                                                             
Balance at March 31, 2008
     
18,285,964
 
$
18,286
   
39,550
 
$
1,528,199
   
43,986
 
$
3,007,375
 
$
22,576,974
 
$
(20,453,082
)
$
6,677,752
 


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

5


NEW GENERATION BIOFUELS HOLDINGS, INC.
(A Development Stage Enterprise)
Consolidated Statement of Cash Flows
 
 
     
For the Three Months ended March 31, 2008
   
For the Three Months ended March 31, 2007
   
For the Period from February 28, 2006 (Inception) to March 31, 2008
 
     
(Unaudited)
   
(Unaudited)
   
  (Unaudited)
 
                     
CASH FLOWS FROM OPERATING ACTIVITIES:
                   
                     
Net loss
 
$
(2,265,845
)
$
(970,818
)
$
(16,268,907
)
Adjustments to reconcile net loss to net cash used in operating activities:
                   
Amortization of discount
   
154,442
   
193,683
   
1,566,907
 
Compensation expense associated with stock options
   
791,969
   
610,744
   
5,783,359
 
Issuance of common stock, options and warrants for services rendered
   
269,435
   
-
   
2,554,918
 
Penalty share expense
   
49,678
   
-
   
49,678
 
Loss (gain) on fair value adjustment
   
20,404
   
(445,995
)
 
(611,032
)
                     
Changes in operating assets and liabilities:
                   
Prepaid expenses
   
6,409
   
(30,658
)
 
(78,559
)
Accounts payable and accrued expenses
   
(101,216
)
 
144,889
   
533,371
 
                     
  Net cash used in operating activities
   
(1,074,724
)
 
(498,155
)
 
(6,470,265
)
                     
CASH FLOWS FROM INVESTING ACTIVITIES:
                   
                     
Acquisition of License Agreement
   
-
   
-
   
(1,500,000
)
                     
  Cash used in investing activities
   
-
   
-
   
(1,500,000
)
                     
CASH FLOWS FROM FINANCING ACTIVITIES:
                   
                     
Payments for license agreement payable
   
(150,000
)
 
-
   
(2,650,000
)
Proceeds from issuance of founders' shares
   
-
   
-
   
554
 
Proceeds from private offering issuances of common stock, net of costs
   
-
   
-
   
6,405,483
 
Proceeds from private offering issuance of preferred stock, net of costs
   
4,074,153
   
-
   
7,892,802
 
Proceeds from convertible note payable
   
-
   
-
   
765,000
 
Proceeds from loan payable - related party
   
-
   
-
   
50,000
 
                     
  Net cash provided by financing activities
   
3,924,153
   
-
   
12,463,839
 
                     
Net increase (decrease) in cash and cash equivalents
   
2,849,429
   
(498,155
)
 
4,493,574
 
Cash and cash equivalents - beginning of period
   
1,644,145
   
1,031,923
   
-
 
                     
Cash and cash equivalents - end of period
 
$
4,493,574
 
$
533,768
 
$
4,493,574
 
                     
Supplemental Disclosure of Non-Cash Investing and Financing Activities
                   
                     
Payable for License Agreement (net of discount)
 
$
-
 
$
-
 
$
6,015,552
 
License Agreement acquired in exchange for issuance of common stock
 
$
-
 
$
-
 
$
545,747
 
Preferred Stock Dividend
 
$
80,538
 
$
-
 
$
290,813
 


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

6

New Generation Biofuels Holdings, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
Note 1   -   ORGANIZATION AND PLAN OF OPERATION

New Generation Biofuels Holdings, Inc. (the “Company”), formerly known as H2Diesel Holdings, Inc., a Florida corporation, is a development stage company that through its wholly owned subsidiary, New Generation Biofuels, Inc., formerly known as H2Diesel Inc., a Delaware corporation, holds an exclusive license for North America, Central America and the Caribbean to utilize proprietary technology (the “Technology”) to manufacture biofuel that is intended to be marketed as a new class of biofuel for power generation, heavy equipment, marine use and as heating fuel.
 
The Company is in the development stage and has not generated any revenues. As a result, the Company has incurred a net loss of $16.3 million and negative cash flows from operating activities of $6.5 million since Inception. The Company is obligated to pay $6.85 million in additional payments under the Master License, of which $0.85 million was paid in April 2008, and $1.0 million is due in March 2009. The Company’s continued existence beyond 2008 is dependent upon several factors, including obtaining additional debt or equity financing, production of its products, developing a market for its products, and achieving certain levels of sales volume and profitability from the sale of its products and sublicenses of its technology. Management is investigating various sources of debt or equity financing and is developing marketing and production plans for its products.
 
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation
 
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The interim financial statements are unaudited, but in the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair statement of the results of these interim periods have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the operating results that may be expected for any other interim period or a full fiscal year.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company’s most significant estimate is the value of its exclusive license. Other significant estimates include the valuation of shares, warrants or options issued for services and the estimated useful life of the exclusive license used to calculate amortization. The Company evaluates its estimates on an ongoing basis. Actual results could differ significantly, especially as to the estimated value of its exclusive license from those estimates under different assumptions or conditions.
 
 
7

New Generation Biofuels Holdings, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
Loss per Common Share
 
Loss per share (“EPS”) is computed based on the weighted average number of common shares outstanding and excludes any potential dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock, which would then share in the earnings of the Company. The shares issuable upon the exercise of stock options and warrants are excluded from the calculation of net loss per share as their effect would be antidilutive. As of March 31, 2008 and 2007, there were 11,036,028 and 5,771,500, respectively, shares of common stock equivalents including options (6,005,000 shares of common stock as of March 31, 2008 and 4,200,000 shares of common stock as of March 31, 2007), non employee options (1,531,000 shares of common stock as of March 31, 2008) and warrants (3,500,028 shares of common stock as of March 31, 2008 and 1,571,500 shares of common stock as of March 31, 2007 ) that could potentially dilute EPS in the future that were not included in the computation of EPS because to do so would have been antidilutive. As of March 31, 2008 there were 39,550 shares of Series A Convertible Preferred Stock and 43,986 shares of Series B Convertible Preferred Stock, which are convertible into 2,023,722 shares of common stock that were not included in the computation of EPS because to do so would have been antidilutive as well.

Note 3   -   OPTIONS
 
The following table summarizes information about the stock options outstanding at March 31, 2008:
 
Weighted Average Exercise Price
$2.69
Expected Life
5 years
Volatility
100.0%
Dividend Yield
0%
Risk-free interest rate
3.08%
 
A summary of the status of the Company’s options outstanding as of March 31, 2008 and the changes during the year ending on that date is presented below:
 

8

New Generation Biofuels Holdings, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

   
Number of Shares
 
  Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life (Years)
 
Aggregate Intrinsic Value
 
 
                  
Options outstanding at December 31, 2007
   
5,605,000
 
$
2.63
   
8.79
       
Granted
   
400,000
 
$
3.50
   
9.79
       
Options outstanding at March 31, 2008
   
6,005,000
 
$
2.69
   
8.62
       
Vested and expected to vest - March 31, 2008
   
4,460,000
 
$
2.63
   
8.55
 
$
14,140,000
 
Options exercisable at March 31, 2008
   
3,415,000
 
$
2.53
   
8.53
 
$
11,263,000
 
 
Options outstanding at March 31, 2008 have an exercise price of $1.50 to $10.50 per share. Options exercisable at March 31, 2008 do not include 1,545,000 performance based options.
 
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on March 31, 2008 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 March 31, 2008. This amount changes based upon changes in the fair market value of the Company’s common stock. As of March 31, 2008, $1,455,409 of the total unrecognized compensation costs related to stock options is expected to be recognized over a period of approximately two years.
 
Note 4     -   LOSS / GAIN ON FAIR VALUE ADJUSTMENT
 
On January 1, 2007, the Company implemented EITF 00-19-2, which requires a company to recognize a liability for registration rights payments when they are probable and the amount is reasonable estimable. As of December 31, 2006, the Company had not filed a “resale” registration statement for the October 2006 offering (the “Offering”). On January 1, 2007, the Company recorded a liability for 6% of the shares issued in the offering. The Company recorded a $1,574,100 contingent liability based on the Company’s stock price at that date. For the three months ended March 31, 2007, the Company recorded a gain on fair value adjustment of $445,995 related to this liability as the Company’s stock price declined during this period.
 
On December 14, 2007, the Company determined that they would not be able to file a “resale” registration statement for the December 2007 Offering (the “Common Offering”) within 30 days. The Company anticipated that they would file by April 30, 2008 and recorded a liability for 2% of the shares issued in the Common Offering. For the three months ended March 31, 2008, the Company recorded a loss on fair value adjustment of $20,404 related to this liability as the Company’s stock price declined during this period.
 

9

New Generation Biofuels Holdings, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

The Company did not file the registration statement by April 30, 2008 and now anticipate that they will file by May 31, 2008 and have recorded an additional liability for 1% of the shares issued in the Common Offering. The Company recorded an expense of $49,678 based on the Company’s stock price at March 31, 2008 which is included in general and administrative expenses on the consolidated statement of operations.
 
Note 5   -   PREFERRED STOCK SALE
 
On March 31, 2008, the Company completed the offering (the “Private Placement”) of a total 43,986 shares of the Company’s newly issued Series B Cumulative Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred Stock”) at a price of $100.00 per share to persons who qualify as “accredited investors” under the Securities Act of 1933, as amended (the “Securities Act”), including 3,218 shares issued as commissions. The gross proceeds from the issuance of 40,768 shares of Series B Preferred Stock was $4,076,800.
 
The Series B Preferred Stock is convertible at the election of the holders into shares of the Company’s common stock, par value $0.001 per share, (the “Common Stock”) at an initial conversion price of $4.25 per share. Each share of Series B Preferred Stock will accrue cumulative dividends on a semi-annual basis at a rate of 8% per annum. To the extent that dividends are not declared or not paid, any amounts of such dividends that are accrued and payable but unpaid shall accumulate and be added to the Stated Value of the Series B Preferred Stock. Dividends will be payable semiannually, in cash, or in shares of Series B Preferred Stock at the Company’s option, on September 30 and March 31 of each year beginning on September 30, 2008 to the holders of record on the 15 th day of the preceding month.
 
The Series B Preferred Stock shall also participate on an as-converted basis with all dividends paid on the shares of Common Stock. Upon any liquidation of the Company, after the Company has made the required distributions to the holders of Series A Preferred Stock, the holders of the Series B Preferred Stock will be entitled to be paid, prior to the Common Stock or any other securities that by their terms are junior to the Series B Preferred Stock (collectively with the common stock, “Junior Securities”), an amount in cash equal to the aggregate liquidation value of Series B Preferred Stock. Any shares of Series B Preferred Stock outstanding on the third anniversary of the Private Placement shall automatically convert into a number of shares of Common Stock into which it is then convertible.
 
Each investor in the 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. At any time after the six month anniversary of the Closing Date and provided that the shares of Common Stock issuable upon exercise of the warrants are not then registered for resale pursuant to an effective registration statement under the Securities Act, the warrants may also be exercised by means of a “cashless exercise.” 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 $1,069,433 based on the Black-Scholes option pricing method.
 

10

New Generation Biofuels Holdings, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

In connection with the 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 the Warrants, all in accordance with a Registration Rights Agreement dated March 31, 2008 among the Company and each of the investors in the Private Placement (the “Registration Rights Agreement”). Under the Registration Rights Agreement, we are required to file the “resale” registration statement with the SEC covering such shares on or before the 30th day following the closing of the Private Placement. The Company anticipates that it will file the registration statement within the 60 th day following the closing of the Private Placement.
 
The Series B Preferred Stock is convertible into 1,034,972 shares of common stock, at the election of the holders, at an initial conversion price of $4.25 per share. The fair market value of this beneficial conversion was calculated based on the difference between the share price of the common stock, at the time of issuance, and the initial conversion price. This resulted in a Series B Preferred Stock dividend in the amount of $1,397,212 recorded during the three months ended March 31, 2008.
 
In connection with the Private Placement, the Company paid a commission of $321,800 by issuing an equivalent 3,218 shares of Series B Preferred Stock and warrants exercisable for 94,725 shares of Common Stock as consideration for investors introduced to the company. The warrants have a fair value of $391,524 based on the Black-Scholes option pricing model. The warrants are considered a cost directly associated with the issuance of stock.

Note 6   -   AGREEMENTS

On March 21, 2008, the Company entered into a Test Burn Agreement with FirstEnergy Corporation for the purpose of evaluating the Company’s proprietary biofuel technology in power generation applications. The Agreement requires the Company to supply our biofuel for a test program to be performed at FirstEnergy’s Edgewater Power Plant combustion turbine facility in Lorain, Ohio. The test program includes the evaluation of both technical and environmental performance characteristics of our biofuel. The agreement also required the Company to pay 50% of all costs of environmental emissions testing conducted in connection with the test program, provided that our aggregate obligation with respect to such expenses shall not exceed $15,000. FirstEnergy is entitled to all revenue arising from sales of electricity generated during the testing. The parties have agreed to negotiate with respect to a mutually agreeable purchase agreement for our biofuel in the event the tests are deemed successful.
 
On March 14, 2008, the Company entered into a lease agreement for office space in Lake Mary, Florida in connection with the relocation of its corporate headquarters to Florida. The lease commitment is for approximately 6,000 square feet of office space commencing in July 2008 for a period of sixty six months. The total rental commitment, for the entire rental period, is approximately $952,000.

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New Generation Biofuels Holdings, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
 
On March 20, 2008, the Company paid $150,000 of the $1,000,000 payment due on March 20, 2008 under the Exclusive License Agreement.
 
On March 23, 2008, the Exclusive License Agreement, as amended, was further amended to extend the due date of the remaining $850,000 that was due on March 20, 2008 to the closing of the Company’s next financing, with net proceeds that exceed $850,000.
 
On March 28, 2008 we changed our corporate name from H2Diesel Holdings, Inc. to “New Generation Biofuels Holdings, Inc.”
 
Note 7   -   SUBSEQUENT EVENTS

On April 3, 2008, the Company paid $850,000 that was due under the Exclusive License Agreement.
 
On May 13, 2008, the Company completed an offering of 35,123 shares of the Series B Preferred Stock, at a price of $100.00 per share and warrants to purchase 206,604 shares of the Company’s common stock. The gross proceeds from the issuance of 35,123 shares of Series B Preferred Stock was $3,512,300. In connection with the offering, the Company paid, as consideration for investors introduced to the Company, a commission of $278,944, which consisted of $249,344 in cash and the issuance of 296 shares of Series B Preferred Stock and warrants exercisable for 83,783 shares of the Company's common stock.
 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
We are a development stage renewable fuels provider that holds an exclusive license for North America, Central America and the Caribbean to commercialize proprietary technology to manufacture alternative biofuels from vegetable oils and animal fats that we intend to market as a new class of renewable fuel for power generation, heavy equipment, marine use and as heating fuel.

Our business commenced in February 2006. Our activities since inception have included acquiring our exclusive license, conducting research and development to improve our product, entering into test burn agreements and conducting test burns at power generation facilities, entering an agreement with our strategic partner Twin Rivers to construct a pilot production facility and raising capital. Although we have completed successful test burns, we have not yet entered into any contracts for the sale of our biofuel or generated revenues from our principal business. 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 March 31, 2008, we had an accumulated deficit of $20.5 million.
 
The operation and development of our business will require substantial additional capital to fund our operations, payments due under the exclusive license, the acquisition or development of manufacturing plants, research and development, and other initiatives, including potentially the financing of future acquisitions.
 
Our long-term business strategy consists of developing two revenue streams: (1) direct sales from manufacturing plants that we may purchase or build (either directly or through joint ventures) in order to process, market and sell our chemical additive and/or biofuel using our proprietary technology and (2) the collection of royalties through sublicensing our proprietary technology. Our near-term business strategy is focusing on direct sales of our biofuel produced at manufacturing plants that we may purchase or build, either directly or through joint ventures. To execute this strategy, we are pursuing an active test burn program where we are working with a number of energy producers to validate our biofuel. We have completed a number of test burns and are scheduled to conduct more in the near future. In addition, we are working to improve our ability to produce our biofuel and have entered into negotiations for the construction of a manufacturing plant. We are engaged in a highly competitive business where we compete with petroleum-based fuels and other alternative fuels, but, we believe we have a competitive advantage because we are able to utilize multiple raw materials in the production of our biofuel without significant impact on the performance of our product. We are actively pursuing our eligibility and qualification for tax credits and other government incentives. To date, we have not recognized any revenue or any costs of revenue. Our costs have consisted mainly of research and development relating to our product and general and administrative costs.



Financial Operations Overview
 
Research and Development Costs
 
We have established a research and development group, headed by our Chief Technology Officer, Andrea Festuccia, which is based in Rome, Italy and in Milford, Connecticut. We have conducted additional development of the product, as well as testing in laboratory conditions of the performance of biofuel made with our technology. From inception through March 31, 2008, we have incurred aggregate research and development costs of approximately $1.1 million.
 
Our research and development costs consist of expenses incurred in identifying, developing and testing our product. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers, costs of consultants and the costs of manufacturing batches of our biofuel for use in conducting test burns.
 
 
General and administrative expenses consist primarily of the costs associated with our general management, including salaries, benefits and professional fees such as legal and accounting expenses. Continued increases will also likely result from the additional hiring of operational, financial, accounting, marketing and information systems personnel. We have seven employees, all of whom are full time executives.
 
Interest and Other Income (Expense), Net
 
Interest income consists of interest earned on our cash and short-term investments. Interest expense consists of interest incurred related to the license agreement payable.
 
Income Taxes
 
We have not recognized any deferred tax assets or liabilities in our financial statements since we cannot assure their future realization. Because realization of deferred tax assets is dependent upon future earnings, a full valuation allowance has been recorded on the net deferred tax assets, which relate primarily to net operating loss carry-forwards.
 
Results of Operations
 

Research and Development Expenses
 
Research and development expenses were approximately $0.2 million for the three months ended March 31, 2008 compared to $0.1 million for the three months ended March 31, 2007. The increase in research and development expenses in 2008 reflects primarily the cost of conducting test burns and costs from conducting tests to evaluate additional customized fuel formulations using our proprietary blending technology.
 
General and Administrative Expenses
 
General and administrative expenses were $1.9 million for the three months ended March 31, 2008 compared to $1.1 million for the three months ended March 31, 2007. The increase of $0.8 million in 2008 over the prior period was primarily attributable to increased expense associated with stock options and warrants and an increase in personnel and related costs to support the company’s growth.

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Interest Expense
 
Interest expense was approximately $154,000 for the three months ended March 31, 2008 compared to approximately $194,000 for the three months ended March 31, 2007. Interest expense consists of interest incurred related to the License Agreement payable.
 
Gain/Loss on fair value adjustment
 
Loss on fair value adjustment was $20,404 for the three months ended March 31, 2008 compared to a gain of approximately $446,000 for the three months ended March 31, 2007.
 
Liquidity and Capital Resources
 
Liquidity
 
At March 31, 2008, we had $4.5 million in cash.
 
Several existing commitments that require significant expenditures may continue to impact our liquidity. Under the license agreement with the inventor of our proprietary technology, we paid $850,000 in April 2008 and are required to pay an additional $1.0 million over each of the next six years, for future aggregate remaining payments totaling $6.0 million. We have to pay various costs under our arrangements with Twin Rivers and will need to fund costs associated with the manufacture of biofuel at our pilot and any future production facilities. We also will continue incurring costs to test our technology, enhance research and development, pay our employees and sustain operations. The operation and development of our business will require substantial additional capital, including funding our operations. Like other development stage companies, we will need additional financing to fund our future operations and cover our losses, even though we expect our cash on hand to be sufficient to fund operations for the remainder of 2008.
 
Cash Flows
 
Net cash used in operating activities was approximately $1.1 million for the three months ended March 31, 2008 primarily reflecting our net loss of $2.3 million, partially offset by $1.1 million in non-cash stock-based compensation expense and approximately $0.2 million in non-cash amortization expense associated with our license agreement payable. Net cash used in operating activities was approximately $0.5 million for the three months ended March 31, 2007, primarily reflecting our net loss of approximately $1.0 million, partially offset by $0.6 million in non-cash stock-based compensation expense, $0.2 million in non-cash amortization expense associated with our license agreement payable and a gain on fair value adjustment of approximately $0.4 million.
 
Net cash used in investing activities was zero for the three months ended March 31, 2008 and 2007.
 
Net cash provided by financing activities was $3.9 million for the three months ended March 31, 2008, and consisted principally of approximately $4.1 million in net proceeds from the issuance of preferred stock, partially offset by approximately $0.2 million in payments for our License Agreement.


 
Net cash provided by financing activities was zero for the three months ended March 31, 2007.
 
Capital Requirements and Resources
 
Our future capital requirements will depend on many factors, including:
 
 
·
the level of cash flows from product sales;
 
 
·
conducting additional testing with utilities, independent power producers or others, including product application testing, to gain market acceptance of our biofuel among customers and equipment manufacturers;
 
 
·
continuing operations at our pilot biofuel production facility and constructing another facility under our arrangements with Twin Rivers or with others to supply our product initially for testing and eventually for the broader biofuel market;
 
 
·
the scope and results of our research and development efforts;
 
 
·
developing a marketing plan for the heating fuel and marine markets and a technology plan that complements the marketing plan;
 
 
·
entering into feedstock supply and transportation logistics agreements to supply our production facilities;
 
 
·
developing additional strategic relationships to attract potential customers and sublicensees and to obtain the capital commitments necessary to engineer, construct and operate biofuel plants in our exclusive territory;
 
 
·
continuing to pursue favorable tax incentives for our biofuel, particularly efforts to include our biofuel in the $1 per gallon credit afforded biodiesel and to have the benefit of such a change extend beyond the current expiration date of December 31, 2008;
 
 
·
recruiting additional key employees to expand the capabilities of our existing management team; and
 
 
·
the costs of maintaining, expanding and protecting our intellectual property portfolio, including litigation costs and liabilities.
 
Although we expect our cash on hand at March 31, 2008 to be sufficient to fund operations for the remainder of 2008, we will need additional financing to fund future operations and cover our net losses . We would likely seek such funding through public or private financings or some combination of them. Additional funding may not be available to us on acceptable terms, or at all. Given our need for capital, we may raise money on an opportunistic basis when the market makes it attractive to do so.

We have financed our operations to date primarily through the sale of our common and preferred stock and warrants in privately negotiated transactions with accredited investors. In March 2008 we raised $4,076,800 in gross proceeds from the sale of shares Series B Convertible Preferred Stock, initially convertible at a conversion price of $4.25 per share, and warrants with an initial exercise price of $6.25 per share.
 
If we raise capital through the sale of equity, or securities convertible into equity, dilution to our then existing stockholders would result. If we raise additional capital through the incurrence of debt, we would likely become subject to covenants restricting our business activities, and holders of debt instruments would have rights and privileges senior to those of our equity investors. In addition, servicing the interest and repayment obligations under these borrowings would divert funds that would otherwise be available to support research and development or commercialization activities.

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If we are unable to obtain adequate financing on a timely basis, we may be required to delay, reduce the scope of or eliminate one or more of our programs, any of which could have a material adverse effect on our business, financial condition and results of operations.
 
We expect that our available cash and interest income will be sufficient to finance currently planned activities through March of 2009. These estimates are based on certain assumptions, which could be negatively impacted by the matters discussed under “Risk Factors.” Future capital requirements could vary significantly and will depend on certain factors, many of which are not within our control. These factors include, among others, the extent of development and testing of the technology needed before commercial operation, the nature and timing of licensing and sublicensing activities, costs of plant construction, sales expenses, hiring qualified management and employees, responding to competitive pressures and complying with regulatory requirements. If we are successful, the expansion of our business will require us to commit capital that substantially exceeds our current financial resources. Any needed financing may not be available on favorable terms, if at all.
 
Critical Accounting Policies

Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires we make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expense. Management evaluates the accounting policies and estimates it uses to prepare the financial statements. We base our estimates on assumptions believed to be reasonable under current facts and circumstances. The Company’s most significant estimate is the value of its Master License Agreement. Other significant estimates include the valuation of shares, stock options and warrants issued. Actual amounts and results could differ from these estimates made by management.

Off−Balance Sheet Arrangements
 
We do not have any off−balance sheet arrangement or commitment that will have a current effect on our financial condition, lead to changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable to “smaller reporting companies” under Item 305(e) of Regulation S-K.
 

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ITEM 4. CONTROLS AND PROCEDURES
 
(a) Disclosure Controls and Procedures
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
As required by Rule 13a-15 under the Exchange Act, we are required to evaluate the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision of our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the material weaknesses discussed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, including the detailed discussion of these control deficiencies under Management’s Report on Internal Control over Financial Reporting . A material weakness is a deficiency, or a combination of deficiencies, in disclosure controls or internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. During the quarter ended March 31, 2008, we continued to implement the steps outlined in our 2007 Form 10-K that we believe will eliminate these material weaknesses and improve the effectiveness of our internal controls over financial reporting.

(b) Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION
 
ITEM 1A. Risk Factors

An investment in our common stock involves a high degree of risk.  You should carefully consider the following material risk and those incorporated by reference herein from our Annual Report on Form 10-K for the year ended December 31, 2007, together with the other information contained in our SEC filings, before you decide to invest in our common stock.  If any of these risks actually occur, our business, results of operations and financial condition would likely suffer.  In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.
  
Risks Related to Our Common Stock

Our Series B Preferred Stock and warrants issued in our March and May 2008 private placement include antidilution provisions that, if triggered, could dilute the ownership interests of our existing common stockholders.

Both the Series B Preferred Stock and the warrants issued in our March and May 2008 private placement include antidilution provisions that, if triggered, would result in the issuance of additional shares that would dilute the interests of existing common stockholders. These antidilution provisions will apply if we issue equity in certain capital-raising transactions for a price below the $4.25 conversion price of the Series B Preferred Stock or the $6.25 exercise price of the warrants within the first to occur of one year from the date of registration of the underlying common stock from the private placement or 18 months from the respective closing dates, March 31, 2008 or May 13, 2008. If these provisions are triggered, the conversion price of the Series B Preferred Stock or the exercise price of the warrants would be adjusted downward, but not below a floor of $3.00 per share. Any sales of additional equity that trigger these antidilution provisions could be disproportionately dilutive and adversely affect the prevailing market prices of our common stock. The existence of conversion features also may result in short selling of our common stock that may further depress the market price.
 

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
The following exhibits, which are furnished with this Quarterly Report or incorporated herein by reference, are filed as part of this Quarterly Report.
 
Exhibit Number
Exhibit Description
   
3.1
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed March 31, 2008).
   
3.2
Articles of Amendment to the Articles of Incorporation relating to our Series B Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, filed March 31, 2008).
   
3.3
Amended and Restated Bylaws, dated March 5, 2008 (incorporated by reference to Exhibit 3.3 to the Current Report on Form 10-K, filed March 31, 2008).
   
4.1
Form of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed October 26, 2006).
   
4.2
Form of $6.00 Warrant (incorporated by reference to Exhibit 4.2 to the Current Report on Form 10-K, filed March 31, 2008).
   
4.3
Form of $5.25 Warrant (incorporated by reference to Exhibit 4.3 to the Current Report on Form 10-K, filed March 31, 2008).
   
4.4
Form of $6.25 Warrant (incorporated by reference to Exhibit 4.1 to the Current Report on 8-K filed March 31, 2008).
   
31.1
Certification of the President and Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1
Certification of the President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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32.2
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
 


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized .

Date: May 14, 2008
By:   /s/ David A. Gillespie
 
David A. Gillespie
 
President and Chief Executive Officer
   
 
Date: May 14, 2008
By:   /s/ Cary J. Claiborne
 
Cary J. Claiborne
 
Chief Financial Officer



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