Namliong SkyCosmos, Inc. - Quarter Report: 2008 March (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

KREIDO BIOFUELS, INC.

NEVADA		20-3240178
(State or Other Jurisdiction of Incorporation Organization)		(I.R.S. Employer Identification No.)

1070 Flynn Road, Camarillo, California 93012
(Address of Principal Executive Offices)

(805) 389-3499
(Issuer’s telephone number, including area code)

N/A

Indicate by check mark whether the issuer (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 issuer was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes þ No o

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

		Large accelerated filer o		Accelerated filer o
		Non-accelerated filer (Do not check if a smaller reporting company) o		Smaller reporting company þ

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

At May 7, 2008 the issuer had 52,645,992 shares of common stock issued and outstanding.

 

 

FORM 10-Q QUARTERLY REPORT

QUARTERLY PERIOD ENDED MARCH 31, 2008

TABLE OF CONTENTS

Item				Page
PART I
1.		Condensed Consolidated Financial Statements			3
2.		Management's Discussion and Analysis or Plan of Operation			12
3.		Quantitative and Qualitative Disclosures About Market Risk			19
4.		Controls and Procedures			19
PART II
1.		Legal Proceedings			19
1A.		Risk Factors			19
2.		Unregistered Sales of Equity Securities and Use of Proceeds			32
3.		Defaults upon Senior Securities			32
4.		Submission of Matters to a Vote of Security Holders			32
5.		Other Information			32
6.		Exhibits			33
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Kreido Biofuels, Inc.
(A Development Stage Company)
Condensed Consolidated Balance Sheets

		March 31,				December 31,
		2008				2007
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	3,527,000			$	6,470,000
Other current assets			70,000				56,000
Total current assets			3,597,000				6,526,000
Property and equipment — net			15,596,000				14,148,000
Patents, less accumulated amortization of $219,000 and $201,000 at March 31, 2008 and December 31, 2007, respectively, and a valuation reserve of $241,000 and $223,000 at March 31, 2008 and December 31, 2007, respectively			418,000				421,000
Other assets			437,000				437,000
Total assets		$	20,048,000			$	21,532,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of capital leases		$	55,000			$	57,000
Accounts payable			2,329,000				1,538,000
Accrued expenses			255,000				250,000
Total current liabilities			2,639,000				1,845,000
Capital leases, less current portion			77,000				86,000
Total liabilities			2,716,000				1,931,000
Stockholders’ equity
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding were zero shares			—				—
Common stock, $0.001 par value. Authorized 300,000,000 shares; issued and outstanding were 52,545,992			52,000				52,000
Restricted common stock, $0.001 par value; issued and outstanding were 100,000			—				—
Additional paid-in capital			47,483,000				47,253,000
Deferred compensation			(25,000	)			(31,000	)
Deficit accumulated during the development stage			(30,178,000	)			(27,673,000	)
Net stockholders’ equity			17,332,000				19,601,000
Total liabilities and stockholders’ equity		$	20,048,000			$	21,532,000

See notes to unaudited condensed consolidated financial statements

Kreido Biofuels, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)

		Three Months				Three Months				Period from January 13,
		Ended March 31,				Ended March 31,				1995 (Inception)
		2008				2007				to March 31, 2008
Operating expenses
Research and development		$	227,000			$	20,000			$	17,145,000
General and administrative			1,596,000				704,000				10,601,000
Loss on impairment of property and equipment			716,000				—				716,000
Loss on sale of property and equipment			—				—				89,000
Loss from retirement of assets			5,000				—				326,000
Loss from operations			(2,544,000	)			(724,000	)			(28,877,000	)
Other income (expense)
Interest expense			—				—				(3,082,000	)
Interest income			41,000				192,000				794,000
Other income			—				—				1,154,000
Other expenses			—				—				(154,000	)
Total other income (expense)			41,000				192,000				(1,288,000	)
Loss before income taxes			(2,503,000	)			(532,000	)			(30,165,000	)
Income tax expenses			2,000				1,000				13,000
Net loss		$	(2,505,000	)		$	(533,000	)		$	(30,178,000	)
Net loss per share — basic and diluted		$	(0.05	)		$	(0.01	)		$	(0.57	)
Shares used in computing net loss per share			52,645,992				52,532,202				52,645,992

See notes to unaudited condensed consolidated financial statements

Kreido Biofuels, Inc.
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)

																										Deficit
																										Accumulated
										Restricted Common								Additional								During the
		Common Stock								Stock								Paid-In				Deferred				Development				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Compensation				Stage				Equity
Balance, January 1, 2008			52,545,992			$	52,000				100,000			$	—			$	47,253,000			$	(31,000	)		$	(27,673,000	)		$	19,601000
Compensation expense			—				—				—				—				230,000				6,000				—				236,000
Net loss			—				—				—				—				—				—				(2,505,000	)			(2,505,000	)
Balance, March 31, 2008			52,545,992			$	52,000				100,000			$	—			$	47,483,000			$	(25,000	)		$	(30,178,000	)		$	17,332,000

See notes to unaudited condensed consolidated financial statements

Kreido Biofuels, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Three Months				Three Months				Period from January 13,
		Ended March 31,				Ended March 31,				1995 (Inception)
		2008				2007				to March 31, 2008
Cash flows from operating activities
Net Loss		$	(2,505,000	)		$	(533,000	)		$	(30,178,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			76,000				44,000				1,699,000
Loss on impairment of property and equipment			716,000				—				716,000
Loss on sale of assets			—				—				89,000
Patent write-down and reserve			18,000				—				488,000
Loss on retirement of assets			5,000				—				326,000
Noncash stock compensation			236,000				11,000				1,845,000
Amortization of convertible debt discount			—				—				1,236,000
Inducement to convert debt discount			—				—				152,000
Inducement to convert debt			—				—				58,000
Changes in operating assets and liabilities:
Prepaid and other assets			(14,000	)			(57,000	)			(558,000	)
Accounts payable and accrued expenses			796,000				40,000				3,338,000
Accrued interest on notes			—				—				669,000
Net cash used in operating activities			(672,000	)			(495,000	)			(20,120,000	)
Cash flows from investing activities
Purchase and construction of property and equipment			(2,227,000	)			(1,554,000	)			(16,853,000	)
Proceeds from sale of assets			—				—				95,000
Investments in patent application			(33,000	)			(32,000	)			(1,547,000	)
Net cash used in investing activities			(2,260,000	)			(1,586,000	)			(18,305,000	)
Cash flows from financing activities
Proceeds from the issuance of Series A convertible preferred stock			—				—				938,000
Proceeds from the issuance of Series B convertible preferred stock			—				—				1,500,000
Proceeds from the issuance of Series C convertible preferred stock			—				—				2,424,000
Proceeds from the issuance of Series B1 preferred stock			—				—				720,000
Proceeds from the issuance of common stock warrants			—				—				217,000
Proceeds from the issuance of common stock			—				23,044,000				22,849,000
Proceeds from issuance of long-term debt			—				—				14,381,000
Principal repayment of long-term debt and capital leases			(11,000	)			(136,000	)			(1,077,000	)
Net cash provided by (used in) financing activities			(11,000	)			22,908,000				41,952,000
Net increase (decrease) in cash and cash equivalents			(2,943,000	)			20,827,000				3,527,000
Cash and cash equivalents at beginning of period			6,470,000				59,000				—
Cash and cash equivalents at end of period		$	3,527,000			$	20,886,000			$	3,527,000
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest		$	—			$	13,000			$	354,000
Income taxes			2,000				1,000				13,000

See notes to unaudited condensed consolidated financial statements.

Kreido Biofuels, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Three Months				Three Months				Period from January 13,
		Ended March 31,				Ended March 31,				1995 (Inception)
		2008				2007				to March 31, 2008
Supplemental disclosure of noncash investing and financing activities
Acquisition of property and equipment through capital leases		$	—			$	73,000			$	867,000
Additions to property and equipment through settlement of capital lease			—				—				61,000
Additions to property and equipment through issuance of common stock			—				—				100,000
Conversion of notes payable into Series A preferred stock			—				—				1,180,000
Conversion of notes payable into Series C preferred stock			—				—				5,530,000
Conversion of accounts payable into Series C preferred stock			—				—				30,000
Conversion of accrued interest into Series C preferred stock			—				—				441,000
Warrants issued in connection with convertible notes			—				—				2,007,000
Conversion of Series A preferred stock into Series A1 preferred stock			—				—				2,118,000
Conversion of Series B preferred stock into Series A1 preferred stock			—				—				1,511,000
Conversion of Series C preferred stock into Series B1 preferred stock			—				—				8,414,000
Conversion of notes payable into Series B1 preferred stock			—				—				850,000
Conversion of accrued interest into Series B1 preferred stock			—				—				18,000
Conversion of notes payable into common stock			—				5,257,000				5,257,000
Conversion of accrued interest into common stock			—				863,000				863,000
Conversion of Series A preferred stock into Series A1 common stock			—				3,628,000				3,628,000
Conversion of Series B preferred stock into Series A1 common			—				10,011,000				10,011,000
Conversion of Kreido Laboratories common stock into common stock			—				155,000				155,000

See notes to unaudited condensed consolidated financial statements

Kreido Biofuels, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2008

NOTE 1 BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Kreido Biofuels, Inc. (“Kreido” or “the Company”) at March 31, 2008 and for the three month periods ended March 31, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. They do not include all information and notes required by United States generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes contained in Kreido’s Annual Report on Form 10-KSB as amended by Form 10-KSB/A for the period from inception (January 13, 1995) through December 31, 2007.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2 ORGANIZATION

Kreido Biofuels, Inc. was incorporated as Gemwood Productions, Inc. under the laws of the State of Nevada on February 7, 2005. Gemwood Productions, Inc. changed its name to Kreido Biofuels, Inc. on November 2, 2006. The Company took its current form on January 12, 2007 when Kreido Laboratories (“Kreido Labs”), completed a reverse triangular merger with Kreido Biofuels, Inc. The Company wholly-owns two subsidiaries, Kreido Chicago LLC and Kreido Wilmington LLC, which are currently not active, as well as Kreido Labs; its operating subsidiary.

Kreido Labs, formerly known as Holl Technologies Company, was incorporated on January 13, 1995 under the laws of the State of California. Since incorporation, Kreido Labs has been engaged in activities required to develop, patent and commercialize its products. Kreido Labs is the creator of reactor technology that is designed to enhance the manufacturing of a broad range of chemical products. The market for these products is developing in parallel to the Company’s activities.

The cornerstone of Kreido Labs’ technology is its patented STT^® (Spinning Tube in Tube) diffusional chemical reacting system, which is both a licensable process and a licensable system. In 2005, the Company demonstrated how the STT^® could make biodiesel from vegetable oil rapidly with almost complete conversion and less undesirable by-products. The Company has continued to pursue this activity, has built and tested, a pilot biodiesel production unit and is in the process of developing the first of its commercial biodiesel production plants in the United States that it expects will produce approximately 33 million to 50 million gallons per year.

The Company considers itself a development stage enterprise because it has not yet earned significant revenue from its commercial products or biodiesel production plants. The Company builds and intends to own or license innovative chemical and bio-chemical reacting systems and biodiesel production plants.

NOTE 3 LIQUIDITY AND GOING CONCERN ISSUES

The Company, a development stage company, has suffered recurring losses from operations and at March 31, 2008 had an accumulated deficit of $30,178,000 that raises substantial doubt about its ability to continue as a going concern.

The Company currently is in the process of attempting to raise approximately $25 million in net financing. The Company believes that it can satisfy its cash requirements for at least the next four months and has implemented some preliminary cost reductions in overhead and tightened cash payments, however it will need to obtain the additional $25 million in the second quarter of 2008 in order to support its current plan’s funding needs as follows:

	•		completing construction of the first plant (approximately $17 million),
	•		funding the purchase of starting raw materials and the start-up of plant operations (approximately $3.5 million), and
	•		supporting corporate operations and overhead through June 30, 2009 (approximately $4.5 million).

Thereafter it expects projected operating results may provide sufficient cash to fund its projected operations for the immediately foreseeable future and believes additional financing will be available if and when needed. If the Company is unable to achieve projected operating results and/or obtain such additional financing in the second quarter, management will be required to curtail growth plans or suspend planned development activities.

No assurances can be given that the Company will be successful in raising additional financing. The condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern.

NOTE 4 PROPERTY AND EQUIPMENT

Property and equipment at March 31, 2008 and 2007 is summarized as follows:

		2008				2007
Furniture and fixtures		$	150,000			$	151,000
Machinery and equipment			846,000				857,000
Office equipment			136,000				136,000
Leasehold improvements			254,000				254,000
Spare plant parts and equipment			515,000				—
Construction in progress			14,297,000				13,301,000
Total			16,198,000				14,699,000
Less accumulated depreciation and amortization			(602,000	)			(551,000	)
Net book value		$	15,596,000			$	14,148,000

The Company has manufactured spare STT^® Reactors, which are in various stages of completion, and has purchased spare parts for these reactors. These reactors and spare parts will be used as backup for the plant under construction or used in other plants once the technology is proven. As of March 31, 2008, because the technology of the STT^® Reactors has not been proven under commercial production conditions and due to funding limitations, the Company has reserved $716,000 of the capitalized overhead and labor costs of these reactors as well as a portion of the cost of the spare parts and equipment as a possible impairment. No other property and equipment is considered impaired.

Depreciation expense for the three months ended March 31, 2008 and 2007 was $58,000 and $26,000, respectively, including related depreciation for capital leases. Equipment recorded under capital leases totaled $230,000 and $347,000 at March 31, 2008 and 2007, respectively.

NOTE 5 CONSTRUCTION IN PROGRESS AND PLANT DEVELOPMENT ACTIVITIES

In October 2007, the Company completed the construction and test operation of a pilot biodiesel production unit (“pilot plant”) at an existing biodiesel production facility operated by Foothills Bio-energies, LLC. Full pilot plant operations are expected to begin in the summer of 2008. Kreido has commenced development of one of its full scale biodiesel production plants (“full scale plant”). The Company is in the process of finalizing the lease for the site of the full scale plant. The Company expects to substantially complete the construction of the full scale plant in 2008. Total estimated costs to be incurred for construction of the full scale plant is between $30 million and $32 million, which includes approximately $4 million of infrastructure costs that can be utilized by the expansion to a second plant at the same location.

Cost of construction of the full scale plant is comprised of the following: 1) site selection, leasing, permitting and other legal compliance; (2) architectural, design and engineering; (3) labor, overhead and materials to build in-house the four STT^® Reactors; (4) designing, engineering and manufacturing of the plant production unit which includes components such as centrifuges, tanks, control panels and other equipment being built by third parties for delivery to the plant site; and (5) the general contractor fees, engineering and construction of the buildings and physical improvements including tanks, piping, boilers and various lab and other equipment and machinery comprising the plant. As of March 31, 2008, development expenditures of $14.3 million have been incurred and recorded as construction-in-progress and, approximately $3.0 million was committed through purchase orders issued to sub-contractors and equipment vendors for services and equipment to be provided after March 31, 2008. The Company will probably enter into additional purchase orders and contracts.

NOTE 6 NET LOSS PER COMMON SHARE

Basic net loss per common share is calculated by dividing the net loss applicable to common shares by the weighted-average number of common and common equivalent shares outstanding during the period. For the three months ended March 31, 2008, there were no potential common equivalent shares used in the calculation of weighted-average common shares outstanding as the effect would be anti-dilutive because of the net loss. During the three months ended March 31, 2008 and 2007, the Company issued additional stock option shares of 75,000 and 1,355,384, respectively. The Company also cancelled stock options of 6,250 and 149,868 shares for the three months ended March 31, 2008 under its 2006 Equity Incentive Plan and 1997 Stock Compensation Program, respectively. No options were cancelled for the same period in 2007.

						Period from
						Inception
		Three Months				(January 13,
		Ended				1995) through
		March 31, 2008				March 31, 2008
Weighted-average shares used to compute basic and diluted net loss per common share:			52,645,992				52,645,992
Securities convertible into shares of common stock not used to compute net loss per share because the effect would be anti-dilutive:
Stock options under the 2006 Equity Incentive Plan			3,289,150				3,289,150
Stock options under the 1997 Stock Compensation Program			1,015,116				1,015,116
Stock associated with warrants arising from private placement of common stock			18,498,519				18,498,519
Other stock associated with warrants			437,355				437,355
			23,240,140				23,240,140

NOTE 7 STOCK-BASED COMPENSATION

Effective January 1, 2006 the Company adopted SFAS 123(R) “Share Based Payment” using the modified prospective approach and accordingly prior periods have not been restated to reflect the impact of SFAS 123(R).

Upon the adoption of SFAS123(R), the Company recorded $1,000 and $7,000 of compensation costs for the three months ended March 31, 2008 and 2007, respectively, relating to stock options granted to employees and non-employees from 2003 to 2006. The compensation costs are based on the fair value of the stock options at the grant date.

In December 2007, the Company issued 100,000 shares restricted common stock to one of its officers. The shares are subject to repurchase by the Company for $1,000 if the officer terminates his employment voluntarily or is terminated for cause before May 31, 2009. This transaction was recorded under deferred compensation and amortized over a period of 18 months. Compensation expense for the three months ended March 31, 2008 was $5,000.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards. The fair value of the options issued during the year ended March 31, 2008 was estimated using the Black-Scholes option-pricing model with the following assumptions: risk free interest rates 2.75%, expected life range of 5.25 to 5.583 years and expected volatility of 92%. The expected stock price volatility assumption was based on the average volatility of similar public companies for the period prior to the Company’s reverse merger. The expected term assumption used in the option pricing model was based on the “safe harbor” approach under SEC Staff Accounting Bulletin (SAB) No. 107, (SAB 107), where the “expected term = ((vesting term + original contractual term) / 2).” The risk free interest rate assumption was based on the implied yield currently available on U.S. Treasury zero coupon issues with remaining term equal to the expected term. A projected dividend yield of 0% was used as the company has never issued dividends.

Summary stock option activity is as follows:

		Number of				Weighted Average
		Options				Exercise Price
Balance at December 31, 2007			4,385,384			$	0.65
Granted			75,000				0.33
Exercised			—				—
Cancelled			(156,118	)			1.35
Balance at March 31, 2008			4,304,266			$	0.44

The Company has recorded in general and administrative expenses, $4,000 of compensation expense for the three month period ended March 31, 2007, relating to stock options issued to non-employees for services rendered during that period. There was no compensation expense for stock options issued to non-employee for the three months ended March 31, 2008.

The following table summarizes information regarding options outstanding and options exercisable at March 31, 2008:

		Options Outstanding												Options Exercisable
						Weighted-Average
Range of Exercise		Outstanding at				Remaining				Weighted-Average				Exercisable at				Weighted-Average
Prices		March 31, 2008				Contractual Life				Exercise Price				March 31, 2008				Exercise Price
$0.09 – 0.19			860,572				2.02			$	0.10				845,529			$	0.10
$0.20 – 0.89			2,692,856				9.05				0.35				893,006				0.32
$0.90 – 1.85			750,725				9.02				1.17				750,725				1.17
$1.86 – 2.53			113				2.05				1.86				113				1.86
			4,304,266				7.64			$	0.44				2,489,373			$	0.50

On February 1, 2008, the compensation committee of the board of directors agreed to reprice the unvested options held by the Company’s employees under its 2006 Equity Incentive Plan. These options were repriced for only those granted in 2007, with an exercise price above the closing market price on February 1, 2008, which was $0.33 per share. The Company determined the additional compensation expense under SFAS 123(R) to be $22,000. Since the repricing only affected unvested shares, it does not affect amounts already recorded and the increased amount will be recorded over the remaining vesting period.

In accordance with the provisions of SFAS 123(R), the Company has recorded stock-based compensation expense of $230,000 for the three months ended March 31, 2008, which includes the compensation effect for the options repriced. The stock-based compensation expense is based on the fair value of the options at the grant date. There was no stock-based compensation expense for the three months ended March 31, 2007.

NOTE 8 CONTINGENCY

In March 2004, Kreido Labs and a former officer and shareholder of Kreido Labs reached agreement on the terms of a settlement of disputes arising out of the termination of the former officer and shareholder’s employment with Kreido Labs. The settlement was never completed. The former officer and shareholder recently demanded implementation of the settlement including the payment of approximately $190,000 plus interest. Kreido Labs disputes any obligation to the former officer and shareholder. The Company will continue to assess the progress of the dispute.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

THE FOLLOWING DISCUSSION AND ANALYSIS PROVIDES INFORMATION WHICH OUR MANAGEMENT BELIEVES IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. THIS DISCUSSION SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO OUR CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE INCLUDED IN THIS REPORT, AND WITH OUR ANNUAL REPORT ON FORM 10-KSB FILED ON MARCH 31, 2008 AS AMENDED BY FORM 10-KSB/A FILED ON APRIL 30, 2008.

In addition to historical information, this discussion and analysis contains forward-looking statements that relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as “anticipates,” “believes,” “estimates,” “expects,” “hopes,” “targets,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects” or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied in the forward-looking statements.

As used in this report, the terms “we,” “us,” and “our,” mean Kreido Biofuels, Inc. and our subsidiaries, unless otherwise indicated.

We took our current form on January 12, 2007, when our wholly-owned subsidiary, Kreido Acquisition Corp., or Acquisition Sub, and Kreido Laboratories, or Kreido Labs, executed a Merger Agreement and Plan of Reorganization, or the Merger Agreement. On January 12, 2007, Acquisition Sub merged with and into Kreido Labs, with Kreido Labs remaining as the surviving corporation and as our wholly-owned subsidiary, or the Merger. Also contemporaneously with the closing of the Merger, we split-off another wholly-owned subsidiary, Gemwood Leaseco, Inc., a Nevada corporation, through the sale of all of the outstanding capital stock of Gemwood Leaseco, Inc., or the Split-Off. As a consequence of the sale of Gemwood Leaseco, Inc., we discontinued all of our business operations which we conducted prior to the closing of the Merger, and spun off all material liabilities existing prior to that date in any way related to our pre-closing business operations. Our primary operations are now those operated by Kreido Labs.

The Merger was treated as a recapitalization of our company for accounting purposes. Our historical financial statements before the Merger were replaced with the historical financial statements of Kreido Labs in all filings with the SEC subsequent to January 12, 2007.

As the result of the Merger, the Split-Off and the change in our business and operations from an unrelated services business to a technology company focusing on the production of biofuel, a discussion of the pre-January 1, 2007 financial results of Kreido Biofuels, Inc. is not pertinent, and our financial results as consolidated with Kreido Labs, the accounting acquirer, are presented here. Thus, the discussion of our financial results for fiscal year 2006 addresses only Kreido Labs. The discussion of our financial results for fiscal year 2007 addresses our company, including our subsidiaries on a consolidated basis.

Kreido Labs is a corporation founded to develop proprietary technology for building micro-composite materials for electronic applications. In 1995, Kreido Labs began to develop the technology used in the design and assembly of our STT^® Reactor. Kreido Labs thereafter sought to develop the technology to improve the speed, completeness and efficiency of certain chemical reactions, including esterifications and transesterifications, in the pharmaceutical and chemical industries. We designed and developed the STT^® Reactor which incorporates our proprietary and patented “spinning tube-in-tube” design configuration to improve the speed and yield of chemical reactions. One of the Environmental Protection Agency’s largest laboratories has been using our STT^® Reactor-based technology since 2004 to develop and evaluate new chemical processes and develop and optimize protocols for use of the STT^® Reactor by public and private entities. Beginning in the last quarter of 2005, Kreido Labs began to evaluate the advantages of the STT^® Reactor specifically for the production of biodiesel. In the first quarter of 2006, Kreido Labs elected to focus almost exclusively on the biodiesel industry and began to prepare and execute our current business plan. On January 12, 2007, as a result of the Merger, Kreido Labs became a wholly-owned subsidiary of Kreido Biofuels, Inc.

Plan of Operations

We plan to commercialize our proprietary equipment system for biodiesel production on an industrial scale and to become one of the leading providers of biodiesel in the United States and elsewhere. We expect to execute our business plan by generating revenues from multiple sources: 1) by building and operating our own STT^® biodiesel Production Units; 2) licensing our STT^® Reactor-based technology to others which may require one of our production units to be in operation, and 3) in the longer term, by providing technology and investing in businesses that will develop or use our STT^® Reactor-based technology for production of biofuels and other products.

We have selected a 3.8 acre site at the Port of Wilmington in North Carolina as our flagship biodiesel production plant, the Wilmington Plant. We will lease the site from the Wilmington Port Authority. We selected the Wilmington Plant site because of its Mid-Atlantic location, its direct access to a deep water port as well as to a railroad system, and its proximity to the east coast market and the biodiesel market in Europe. We have recently obtained all of the permits and other governmental approvals necessary for us to begin construction of the Wilmington Plant.

The Wilmington Plant will be comprised of our STT^® Production Units, pipelines to and from storage tanks, and an administrative and operations building. We have built four STT^® Reactors, each with approximately 13 Mgpy capacity for use in our Wilmington STT^® Production Units and built four additional STT^® Reactor units to be used for a second plant, as back-up reactors to the Wilmington Plant or for sale to future customers. The initial capacity of the Wilmington Plant will be approximately 33 to 50 Mgpy of biodiesel production. We have the flexibility of constructing a second plant adjacent to the initial Wilmington Plant that may double our capacity to between 66 and 100 Mgpy of biodiesel production. We expect to employ approximately 20 persons, whether hired locally or outsourced, in connection with the 24 hour operations of the Wilmington Plant.

To date, we have accomplished the development and production of our STT^® Reactor internally and the development of the STT^® Production Unit by outsourcing to a professional engineering firm and a manufacturer of engineered packaged systems. Our engineering partner is R.C. Costello & Assoc. Inc. of Redondo Beach, California. This firm provides engineering design and improvements for chemical plants, natural gas plants and refineries, with an emphasis on process intensification. The firm has 11 years’ experience in reaction engineering, distillation and process safety.

Our manufacturing partner is Certified Technical Services L.P. of Pasadena, Texas. This firm has been a heavy industrial contractor and manufacturer of engineered packaged systems for 20 years. It is currently constructing the first STT^® Production Unit in modular form for delivery to the Wilmington Plant site.

We have also entered into a letter agreement with the Vopak Terminal Wilmington, Inc. for the use of four bulk storage tanks and the handling of through put by Vopak at its liquid storage tank terminal adjacent to the Wilmington Plant site. We will pay Vopak variable facility and service charges. We expect to finalize a Terminal Agreement shortly which will be for an initial term of ten years subject to automatic five year renewal options. We expect that the base annual occupancy cost for the Wilmington Plant will be approximately $2,750,000. We incurred $645,000 in costs related to the Vopak agreement during the three months ended March 31, 2008.

We plan to use diversified feedstock in our plants. For sales, marketing and distribution, we have engaged ECO Energy, a privately held Tennessee corporation that provides biodiesel marketing capability across North America. ECO Energy is a fully integrated marketing company supported by an experienced sales force, a knowledgeable logistics and scheduling department, customer service, and an online computer system that we will be able to access to streamline all necessary correspondence for daily shipments and transportation transactions. We have engaged this marketing company to handle the sales and transportation logistics of our biodiesel production. ECO Energy has committed to purchasing all of the biodiesel produced at our North Carolina facility based on prices negotiated by ECO Energy and accepted by us.

We anticipate that we will execute our business strategy with the following actions:

•

hire additional manufacturing, production plant operations, sales, marketing and business development personnel;

	•		construct at least one company-owned production plant equipped with STT® Production Units; and
	•		enter into discussion with parties interested in licensing the STT® Production Units for both domestic and international biodiesel production.

We are developing the Wilmington Plant which will employ our STT^® Production Units. The development of the Wilmington Plant will require significant expenditures on equipment and materials and we have used most of the proceeds of our January 2007 private placement in connection with the plant development. As feedstock and biodiesel prices change or as the demand for superior biodiesel production technology increases, we may determine that it is in our best interest to sell or license our STT^® Production Units in lieu of building other plants. We believe that our STT^® Production Unit technologies will provide us with price, efficiency and safety advantages when compared to other persons developing conventional biodiesel plants. In the execution of our business plan, we anticipate that we will increase our number of employees in the next 12 months to approximately 35 employees if we do not outsource the operation of our plant.

We are actively pursuing approximately $25 million of net additional capital for the following uses:

	•		completing construction of the Wilmington plant (approximately $17 million);
	•		funding the purchases of raw materials and the start-up of plant operations (approximately $3.5 million); and
	•		supporting corporate operations and overhead through June 30, 2009 (approximately $4.5 million).

If we do not raise the additional capital, we believe that we can satisfy our cash requirements for the next four months and have begun reducing our operating expenditures through employee headcount and salary reductions, a scale back in corporate operating expenditures as well as deferring the payment of previously ordered equipment for our STT^® Production Units.

Consolidated Results of Operations for the three months ended March 31, 2008 and 2007

Operating Expenses

Operating expenses of $2.5 million for the three months ended March 31, 2008 increased by $1.8 million compared to $724,000 for the same period in 2007. Research and development expense for the three months ended March 31, 2008 were $227,000 compared to $20,000 for the same period in 2007, an increase of $207,000. Research and development expenses increased for the first quarter of 2008 compared to the same period in 2007 due primarily to the hiring of a chief technology officer and a scientist in the second quarter of 2007 whose costs were not reflected in 2007. Overall, research and development expenses will be stable or decreasing due to the shift away from research and development and into the commencement of the construction of the biodiesel production plants and our commercial STT^® Reactor, the related costs of which are being capitalized. General and administrative costs increased to $1.6 million for the three months ended March 31, 2008 from $704,000 for the same period in 2007. The increase was related to costs incurred from the rental of tanks from Vopak, the costs associated with being a public company, an increase in stock compensation expense from the issuance and repricing of stock options to employees and an increase in payroll related costs from the hiring of additional personnel. Also during the quarter, we expensed $716,000 of the labor and overhead allocation and other costs attributed to building extra reactors and acquiring spare parts as an impairment reserve. We expect operating expenses, especially general and administrative costs, to increase over the next few years as construction activities increase and as we grow and add personnel. Additionally, we will continue to incur additional costs associated with tank rentals, the requirements of operating as a public reporting entity and from the issuance of stock and stock options.

Other Income (Expense)

Other income (expense) for the three months ended March 31, 2008 declined to $41,000 from $192,000 for the same period in 2007. Other income for the three months ended March 31, 2008 and 2007 consisted of interest income. We expect interest expense for 2008 to increase to reflect the cost of financing, if and when completed. The interest income decrease reflects the changes in the available cash balances.

Net Loss

Net loss for the three months ended March 31, 2008 was $2,505,000, or about 370% increase compared to the net loss of $533,000 for the same three month period for 2007. There were no net sales or gross profit for the three months ended March 31, 2008 and 2007. We expect to incur net losses for the next couple of years as we continue to construct our biodiesel production plants and implement our business plan.

Liquidity and Capital Resources

A summary of our sources and use of cash for the three months ended March 31, 2008, is as follows:

	•		Source of cash consisted of interest income of $41,000.
	•		Uses of cash consisted of plant development costs including purchases of fixed assets and construction of plant components and reactors of $2.2 million, operating expenses of $1.5 million (net of non-cash expenses such as loss on impairment of property and equipment, stock compensation, and depreciation and amortization), repayment of capital leases of $11,000 and investments in patents of $33,000 for a total use of cash of $3.7 million.
	•		The decrease in cash balance to $3.5 million results from net sources of $41,000 less uses of cash of $3.7 million plus an increase in the amounts due to vendors of $796,000 which will be paid in future periods.

We currently estimate that the cost of our Plant will be approximately $30 million to $32 million. We estimate that we will need approximately $25 million of net additional capital to complete the construction of the Wilmington Plant, acquire our initial inventory of feedstock, and initiate plant operations as well as commence the construction of our STT^® Reactors for the next biodiesel production plant. We are actively pursuing a combination of sources to arrange and obtain additional capital. We are in discussions with various institutional lenders and investors to provide a portion of the funds from fully secured debt that may have an equity linked structure. The nature of this type of debt will require levels of guarantees and covenants and will be at debt costs that we believe are consistent with financing costs of other alternative fuels development stage companies in our current financial situation. We are also considering equity financing alternatives to supplement and provide added security for secured debt financing including offering our warrant holders an opportunity to amend and exercise their warrants currently exercisable at $1.85 per share at a price more comparable to current market value, and the issuance of shares of preferred stock or debt instruments that would be convertible into shares of common stock. We are also in discussion with commercial banks and lenders for equipment and inventory financing, all of which will require some level of security interest and guarantees. New common stock purchase warrants may be issued to providers of capital to us. Our ability to obtain additional capital and the timing and cost of obtaining such capital will be affected by project related factors, specific factors related to our company, such as the performance of our reactor technology, the biodiesel industry conditions and capital market economic conditions which are currently unstable. The construction of our Wilmington Plant could be delayed pending our arranging the complete financing package.

The details of the cash flow activities for the three months ended March 31, 2008 are discussed below.

Net cash used by operating activities for the three months ended March 31, 2008 was $672,000 as compared to $495,000 for the same period in 2007. Net cash used by operations is primarily related to operating costs and an increase in accounts payable which consisted of certain large payments due to vendors associated with the rental of storage tanks and the construction of our biodiesel production plant. In addition, we incurred an increase in stock compensation costs compared to the prior period.

Net cash used by investing activities for three months ended March 31, 2008 was approximately $2.3 million which was an increase from $1.6 million used by investing activities for the same period in 2007. The cash used in 2008 and 2007 consisted primarily of the purchase and construction of equipment and facilities associated with our Wilmington Plant. Costs of the plant consist of: (1) site selection, leasing, permitting and other legal compliance; (2) architectural, design and engineering; (3) labor, overhead and materials to build in-house the STT^® Reactors; (4) designing, engineering and manufacturing of the plant production unit which includes components such as centrifuges, tanks, control panels and other equipment being built by third parties for delivery to the plant site; and (5) the general contractor fees, engineering and construction of the buildings and physical improvements including tanks, piping, boilers and various lab and other equipment and machinery comprising the plant. In addition, approximately $3.0 million was committed through purchase orders issued to sub-contractors and equipment vendors for services and equipment to be provided after March 31, 2008 with additional purchase orders and contracts likely to be entered into in the future months. We also invested $33,000 in patents for three months ended March 31, 2008.

Net cash used by financing activities for three months ended March 31, 2008 was $11,000 which is due to repayment of capital lease obligations. For the same period in 2007, $22.9 million was provided by financing activities consisting primarily of the private placement sale of our common stock netting proceeds to us of approximately $23 million. This was offset by the repayment of outstanding notes and the payment of capital leases of $136,000.

As discussed above, we believe that at least an additional $25 million in net financing will be needed to support our current plan’s funding needs. Since the first plant, and any subsequent plants, will require additional funding to complete, we have not committed to constructing an additional plant only to starting the construction of the next four STT^® Reactors. However, if funding is not available at the level we may need or at terms acceptable to us or our investors, we will need to change or scale back our operating plans, which would negatively affect existing stockholders and we may not be successful in executing our operating plan as anticipated.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Revenue Recognition

Our revenues are expected to be derived from the sale of biodiesel as well as from the licensing of our patented processes, leasing our patented equipment to carry out the licensed processes and providing on-going technical support and know-how. Revenues from product sales will be recorded upon shipment. Revenues from technology licensing will be, based upon the nature of the licensing agreement, recorded upon billing due date established by contractual agreement with the customer or over the term of the agreement. For sales arrangements with multiple elements, we will allocate the undelivered elements based on the price charged when an element is sold separately. Through March 31, 2008, we have recognized no commercial or licensing revenue. It is anticipated that once we have built and begin operating the commercial biodiesel production plants, the majority of revenue will be based upon the sale of biodiesel to distributors.

Research and Development

Research and development costs related to the design, development, demonstration, and testing of reactor technology are charged to operations as incurred.

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents.

Use of Estimates

Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods covered by the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Depreciation and Amortization

The provision for depreciation of property and equipment is calculated when put into service on the straight-line method over the estimated useful lives of the related assets, generally ranging from five to seven years. Leasehold improvements are amortized over the shorter of the useful life of the related asset or the lease term.

Patents

Capitalized patent costs consist of direct costs associated with obtaining patents such as legal expenses and filing fees. Patent costs are amortized on a straight-line basis over 15 years, which is the expected life, beginning in the month that the patent is issued. Patent costs are capitalized beginning with the filing of the patent application. The patents are tested for impairment annually, or more frequently if events or conditions indicate the asset might be impaired and the carrying value may not be recoverable. These conditions may include an economic downturn, new and or competitive technology, new industry regulations and a change in our operations or business direction. The impairment tests include a comparison of estimated undiscounted cash flows associated with the asset’s carrying amount. If the assessment determines that the fair value is less than the carrying amount of the patent, an impairment charge is recorded to reduce the amount of the patent.

Impairment of Long-Lived Assets

We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. When factors indicate that long-lived assets should be evaluated for possible impairment, we use an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, a loss is recorded as the excess of the asset’s carrying amount over its fair value. We have reserved a portion of the amount of its assets for future plants and spare parts. No other assets were determined to be impaired as of March 31, 2008.

Stock-Based Compensation

Effective January 1, 2006, we adopted SFAS 123(R) “Share Based Payment” using the modified prospective approach and accordingly prior periods have not been restated to reflect the impact of SFAS 123(R). Under SFAS 123(R), stock-based awards granted prior to January 1, 2006 will be charged to expense over the remaining portion of their vesting period. These awards will be charged to expense under the straight-line method using the same fair value measurements which were used in calculating pro forma stock-based compensation expense under SFAS 123. For stock-based awards granted on or after January 1, 2006, we determined stock-based compensation based on the fair value method specified in SFAS 123(R), and we will amortize stock-based compensation expense on the straight-line basis over the requisite service period.

For periods prior to January 1, 2006, SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

Fair Value of Financial Instruments

The carrying values reflected in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values due to the short maturity of these instruments. The carrying value of convertible notes payable and capital leases approximates their fair value based upon current market borrowing rates with similar terms and maturities.

Comprehensive Loss

Except for net loss, we have no material components of comprehensive loss, and accordingly, the comprehensive loss is the same as the net loss for all periods presented.

Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will review the effect of the adoption of this statement, and if it applies, it is likely to have a material effect on our future financial position or results of operations.

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement No. 141 (revised 2007), “Business Combinations.” The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This Statement is effective for us starting January 1, 2009 and we currently believe it will have no financial impact on us.

In December, 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective prospectively, except for certain retrospective disclosure requirements, for fiscal years beginning after December 15, 2008. We currently believe this Statement will have no financial impact on us.

In February 2007, the Financial Accounting Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for us on January 1, 2008. We evaluated the impact of the adoption and determined that it does not have any impact on our current financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We evaluated the impact of the adoption and determined that it does not have any impact on our current financial condition or results of operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B, promulgated by the SEC.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was performed, under the supervision of, and with the participation of, our management, including the Chief Executive Officer and Chief Financial Officer (who is also our Chief Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-(e) to the Securities Exchange Act of 1934). In performing this evaluation, management reviewed, among other things, the selection, application and monitoring of our historic accounting policies. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures at March 31, 2008 and thereafter were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported on a timely basis.

Changes in Internal Control Over Financial Reporting

No significant changes in our internal controls over financial reporting has occurred during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. LEGAL PROCEEDINGS

From time to time we may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

Item 1A. RISK FACTORS

An investment in our common stock is highly speculative and involves a high degree of risk. Investors should carefully consider the risks below before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment.

We have had no operating history as a producer of biodiesel or as a producer of equipment systems for the biodiesel industry. Our anticipated results of operation and financial condition are planned and estimated on the basis of our assumptions with respect to our anticipated operations.

We have no operating history in our contemplated biodiesel production business and, to date, have not earned any revenues in connection with that business. We have no experience operating, selling or licensing processing equipment or complete systems to the biodiesel or other fuel industry. We have only recently, in the fourth quarter of 2005, begun to pursue commercial applications for the STT^® Reactor in the biodiesel industry. Accordingly, it may be difficult for investors to evaluate our business prospects or our ability to achieve our business objectives. If our efforts do not result in both revenues and profits, we may be forced to cease operations and liquidate, and investors may lose their entire investment.

If we cannot successfully address these risks, our contemplated business and the anticipated results of our contemplated operations and financial condition would suffer.

Risk Related to the Contemplated Conduct of our Business

We have been a development stage company since 1995 and have a history of significant operating losses. We may not ever achieve or maintain profitability.

We have incurred significant operating losses since our inception, and, as of March 31, 2008, we have accumulated a deficit of approximately $30.2 million. We may continue to incur operating losses, depending largely upon the commercial success of our STT^® Reactor and STT^® Production Units. To date, we have neither sold nor licensed any commercial-scale products. We will need to generate revenues in excess of our expenses to become profitable, and we may be unable to do so. If we do not become profitable, the value of our common stock may decline.

Our operating losses may increase as we continue to incur losses from producing biodiesel and as we continue to incur expenditures for manufacturing, sales and marketing, research and development and legal and general corporate activities. Whether we achieve and maintain profitability depends in part upon our ability, alone or with others, to successfully complete the development of biodiesel production facilities, to sell biodiesel at a profit, to successfully complete the development of our equipment systems and to sell or license those equipment systems at prices that enable us to generate a profitable return.

We will require additional funding to execute our business plan, and additional funding may not be available. If additional funding is available, it may not be offered to us on terms that are satisfactory to our board of directors.

We require additional capital to sufficiently fund the construction of our Wilmington Plan and our on-going operations. We may not be able to obtain additional capital on terms favorable to us or at all.

Based upon our projected activities, we believe that we will need at least an additional $25 million, net, in the second quarter of 2008 to support our current plan’s funding needs of completing construction of the Wilmington Plant, acquiring our initial feedstock inventory, funding initial plant operations and commencing the construction on the STT^® Reactors for the next biodiesel production plant. Since the first and any subsequent plants will require additional funding to complete we have not committed to constructing an additional plant, only to the construction of the next four STT^® Reactors and purchasing of some spare parts. However, if funding is not available at the level we may need or at terms acceptable to us or our investors, we may need to change or scale back our operating plans, which would negatively affect existing stockholders. If adequate funds are not available, we likely will not be successful in executing our business plan as anticipated and, as a result, we may be forced to curtail growth, suspend operations and explore other alternatives in an effort to realize value for our stockholders.

We are considering a combination of funding sources including debt or convertible debt financing, an equipment and raw materials inventory lines-of-credits, a warrant exchange offer, a preferred stock offering financing, and local government bond financing. Challenging market conditions and our current financial stability have affected the availability and cost of funds from various sources and there will have to be some level of collateral and guarantees provided for many of the financing alternatives. We cannot be certain that additional financing will not be needed beyond our current and projected needs or will be available when required and, if available, that it will be on terms satisfactory to us. These financings will likely be dilutive to existing stockholders. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet our funding requirements, this would adversely affect our anticipated results of operations and financial condition.

We may be required to adapt our business plan to capital market and alternative energy market changes.

We may find it necessary or advisable to substantially alter or materially change our commercialization activities to respond to changes that occur in the future. In October 2007, we modified our business plan to focus on the development of the Wilmington, North Carolina location, the location of our first biodiesel production plant, with a plan and permits to expand the site to occupy an additional plant when time and capital permits.

Although core to our business plan is to own and operate biodiesel production plants in the United States for our own account, part of our contemplated business strategy is to license STT^® Production Units to others both within and outside of the United States. The portion of our contemplated business model that calls for us to license STT^® Production Units to others is dependent on the market’s willingness to adopt a new biodiesel production technology. Our STT^® Production Unit may never gain acceptance from the biodiesel market, which would put in jeopardy that portion of our business model that relies on licensing STT^® Production Units to others. This risk is amplified by the fact that, although we are currently building our first commercial-scale STT^® Production Units, we have not completed building our first such unit. None of our products are currently being used to produce biodiesel on a commercial scale of the size of our currently planned plant.

Should biodiesel producers fail to adopt our STT^® Biodiesel Production Units, or should a superior competing technology be developed, it may not be possible to fund our operations as expected. The degree of market acceptance of our STT^® Biodiesel Production Units will depend on numerous factors, including the effectiveness of our product, and the biodiesel market’s willingness to use a new processing technology.

Our ability to execute our business plan is dependent on the growth and maintenance of substantial demand for biodiesel in the United States. It is impossible to predict what the current demand for biodiesel is since so little of it is currently being produced and we believe most, if not all, is being sold. Accordingly, the failure of a biodiesel market to develop could adversely affect our anticipated results of operations and financial condition. Additionally, we are dependent on the use of vegetable oils as the key raw material in the production of biodiesel. The cost of vegetable oils has continued to rise to record levels over the last nine months which has made it more difficult for biodiesel production plants to make positive cash flow and profits. If we are unable to make positive cash flows and profits over a reasonable period of time we may have to change or scale back our business plan.

We have not produced or operated any commercial-scale STT^® Reactors or STT^® Production Units.

We have designed, built, and licensed two bench-scale STT^® Reactors to the specialty chemical and pharmaceutical markets and have designed and built pilot-scale STT^® Reactors ranging from 8 to 100 ml capacity. We have also designed and are now building commercial-scale STT^® Production Units for producing biodiesel. We have yet to license our first STT^® Production Unit or install one in our own biodiesel production plant. All full size STT^® Reactors for use in our first plant have been tested for limited operations in our manufacturing facility. We do not know if our commercial-scale STT^® Production Unit will produce biodiesel fuel to ASTM standard in the volumes that we anticipate or whether our equipment systems will gain commercial acceptance in the biodiesel industry. Therefore, we are uncertain whether we will be able to sell, license or lease any STT^® Biodiesel Production Units to any third parties. If we are unable to produce and operate our equipment systems on a commercial scale and generate biodiesel to ASTM standard, then we may be forced to cease operations or to obtain additional capital to further develop our equipment systems. Additional capital may not be available on terms acceptable to us or at all.

A substantial part of our assumptions regarding our financial advantages in the biodiesel production business are estimates and therefore may not be correct.

We believe that our STT^® Production Units will have higher yields and a less per gallon cost than conventional biodiesel production systems that use vegetable oil as feedstock. This is based, in part, on what we believe will be favorable facilities construction costs and operating efficiencies. If actual costs exceed the costs that we project to construct our planned biodiesel production facilities, it would increase financing costs and adversely affect the amortization of our capital costs. This in turn would decrease or eliminate certain of our anticipated cost advantages with respect to conventional biodiesel plants.

We believe that our per gallon cost of producing biodiesel will be less than conventional biodiesel producers that use vegetable oil as feedstock based primarily on the higher yield or less usage of vegetable oil and less cost incurred from energy usage, labor needed and the catalyst material used in making our biodiesel. If the actual use of energy, labor and catalyst material is more than expected then the cost advantages that we anticipate may not be present, and we may not be able to achieve our expected profits or any profits at all.

Many Biodiesel producers are using animal fats as feedstock which reduces their biodiesel production cost. We are currently only able to use animal fats with low free fatty acids that are 1% or less which may limit our production costs advantage.

Due to the high and volatile cost of vegetable oil feedstocks over the last nine months, many biodiesel producers have begun using animal fats with free fatty acid levels up to 20%, and possibly higher, as their source of feedstock. Though the availability of animal fats is limited, the yields are less using animal fats, and additional operating costs and equipment investment is needed, the cost of purchasing the animal fats is currently significantly lower. Our Wilmington plant is currently being constructed to handle animal fats with free fatty acids averaging approximately 1% thus our biodiesel production costs could be higher than those biodiesel producers using animal fats as feedstock and therefore some of our production costs advantages may be mitigated.

The cost of soybean, palm oil and canola/rapeseed oil and the market price of biodiesel has been fluctuating and is subject to supply and demand conditions which may affect our profitability and cash flow.

The demand for soybean oil, palm oil and canola/rapeseed oil increased throughout 2007 and into the first part of 2008 and may continue to do so in the future. The increase in demand has increased the cost significantly of these feedstock raw materials. According to the Energy Management Institute Alternative Fuels Index^sm, the average producer price of B100 diesel across 52 major metropolitan areas in the United States during the week ending May 1, 2008 was $5.04 per gallon, and net of site specific transportation and handling costs, it was $4.49 per gallon. It is possible that this price range will not remain the relevant price range for biodiesel in and after 2008. It is possible that potential supply and demand conditions may adversely affect the various cost of raw materials or the price level for biodiesel. If the cost of these feedstock raw materials remains high and if the wholesale price for biodiesel does not remain at a level that permits us to generate revenues in excess of our costs, after taking into account tax incentives and credits, then we may not become or remain profitable or have positive cash flow, in which case it will likely affect our financial condition and viability as an on-going business.

Our ability to execute our business plan depends on conditions the satisfaction of which is not under our control.

Our ability to successfully execute our business plan depends on the satisfaction of several business (in addition to capital) conditions, including:

•

obtaining all required permits, consents and regulatory approvals from government agencies and other third parties for our anticipated construction and operation of owned biodiesel production plants and related facilities, as well as for the future operation of those facilities;

	•		successfully commercializing the STT® Reactor technology for biodiesel;
	•		arranging reasonably priced insurance to cover operating risks and other adverse outcomes which could impair the business; and
	•		market conditions for feedstocks and fuels that make biodiesel a competitively priced product.

Since we have yet to begin full operation as a biodiesel business, there is no certainty that we will be able to achieve satisfaction of any or all of the above conditions. If we fail to do so, we may be forced to cease operations and to liquidate, in which case investors may not be able to receive any return of their invested capital. Also, the process of obtaining permits in certain locations may increase the cost and delay plant construction.

Strategic relationships with feedstock suppliers, fabricators, building contractors, equipment suppliers and other unrelated third parties on which we rely are subject to change.

Our ability to develop our business will depend on our ability to identify feedstock suppliers, construction contractors, equipment fabricators and customers and to enter into suitable commercial arrangements with those suppliers, contractors, fabricators and customers. Our success in this area will also depend on our ability to select and evaluate suitable projects, as well as to consummate transactions in a highly competitive environment.

The demand for construction and contract manufacturing companies that are qualified to build biodiesel production plants and equipment has increased. Some companies report that their construction backlogs are as many as four years. While we have the capacity to manufacture our STT^® Reactors in house, we do not have the capability in-house to construct and fabricate the entire biodiesel production plant and equipment and we intend to rely on strategic relationships with third-party construction and fabrication companies, some of which we have not yet developed. Furthermore, the recent growth in biodiesel plant construction has caused a backlog on certain specialized equipment. One example of such specialized equipment is centrifuges, for which there was a reported backlog of six months for some models. The failure to secure agreements with construction companies and/or for the requisition of such specialized equipment may adversely affect our anticipated results of operations and financial condition.

To develop our business, we plan to use the business relationships of our management to form strategic relationships. These relationships may take the form of joint ventures with other private parties or local government bodies, contractual arrangements with other companies, including those that supply feedstock that we will use in our business, or minority investments from third parties. We may not be able to establish these strategic relationships, or, if established, we may not be able to maintain these relationships, particularly if members of the management team leave us. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake to fulfill our obligations to these partners or maintain these relationships. If we do not successfully establish or maintain strategic relationships, we may not be able to achieve our business goals and that could adversely affect our anticipated results of operations and financial condition.

We are dependent upon our officers for management and direction, and the loss of any of these persons could adversely affect our anticipated results of operations and financial condition.

We are dependent upon our officers for implementation of our current stage of development for our business plan. The loss of any of our key officers, including G. A. Ben Binninger, our Chief Executive Officer, Philip Lichtenberger, our Chief Operating Officer and Alan McGrevy, our Vice President of Engineering, could have a material adverse effect upon the anticipated results of our contemplated operations and financial condition and would likely delay or prevent the achievement of our contemplated business objectives. We do not maintain “key person” life insurance for any of our officers.

We may be unable to effectively manage our growth.

Our strategy envisions expanding our business beyond our status as a development stage company. We anticipate significant expansion in our manpower, facilities and infrastructure in the future and expect that greater expansion will be necessary to address potential growth in our customer base and market opportunities. To manage the expected growth of our operations and personnel, we will need to improve our transaction processing, operational and financial systems, procedures and controls. The current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. We may be unable to hire, train, retain and manage required personnel or to identify and take advantage of existing and potential strategic relationships and market opportunities.

If we fail to effectively manage our growth, our anticipated results of operation and financial condition could be adversely affected. Growth may place a strain on our management systems and resources. We must continue to refine and expand our business development capabilities, our systems and processes, and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. We cannot assure that if we do expand our business that we will be able to:

	•		meet our capital needs;
	•		expand our systems effectively, efficiently or in a timely manner;
	•		allocate our human resources optimally;
	•		identify and hire qualified employees or retain valued employees; or
	•		incorporate effectively the components of any business that we may acquire in our effort to achieve growth.

We may be unable to attract and retain key personnel.

Our development and success is dependent upon our management’s ability to effectuate our transition into a biodiesel technology-development and production company. Our anticipated product development and manufacturing efforts capability will require additional management not yet part of us. There is intense competition for qualified management, research, development and manufacturing personnel in the chemical, engineering and biofuels fields. Therefore, we may not be successful in attracting and retaining the qualified personnel necessary to develop our business.

New technologies could render our biodiesel production system obsolete.

The development and implementation of new technologies may result in a significant reduction in the costs of biodiesel production. For instance, any technological advances in catalysis and/or large scale micro-channel reactor systems could have an adverse effect on our contemplated business. We cannot predict whether new technologies may become available, the rate of acceptance of new technologies by competitors or the costs associated with new technologies. In addition, advances in the development of alternatives to biodiesel could significantly reduce demand for or eliminate the need for biodiesel.

Any advances in technology that require significant capital expenditures to remain competitive or that reduce demand or prices for biodiesel could adversely affect our anticipated results of operations and financial condition.

Our anticipated production, sale and distribution of biodiesel are dependent on the sufficiency of necessary infrastructure, which may not be put into place on a timely basis, if at all. In this case, our anticipated results of operations and financial condition would be adversely affected by these infrastructure disruptions.

Substantial development of infrastructure will be required by persons and entities outside our control for our operations, and the biodiesel industry generally, to grow. Areas requiring expansion include, but are not limited to:

	•		adequate rail capacity, including sufficient numbers of dedicated tanker cars;
	•		the availability of ships and ports to receive raw materials from domestic and international sources and to transport our products to domestic and international destinations;
	•		sufficient storage and transport facilities for feedstock and biodiesel;
	•		increases in truck fleets capable of transporting biodiesel within localized markets; and
	•		expansion of blending facilities and pipelines to handle biodiesel.

Substantial investment is required for these infrastructure changes and expansions may not be made or may not be made on a timely basis. Additionally, our Wilmington plant will rely on the availability of larger feedstock and biodiesel storage containers leased from Vopak Terminals North America. If our relationship with Vopak becomes strained or our agreement gets terminated under certain terms such as lack of timely payments, then a substantial investment in storage tanks and related infrastructure would be required. Any delay or failure in making the changes to or expansion of infrastructure could hurt the demand and/or prices for our products, impede our delivery of products, impose additional costs on us or otherwise have a material adverse effect on our anticipated results of operations or financial condition. Our business is dependent on the continuing availability of infrastructure, and any infrastructure disruptions could adversely affect our anticipated results of operations and financial condition.

We may be unable to locate suitable plant sites and obtain the development rights needed to build and expand our business.

Our business plan focuses in part on designing, building and operating biodiesel production plants for our own account within existing liquids-handling terminals adjacent to river, lake and seaports. Our ability to secure suitable plant locations could create unanticipated costs and delays in implementing our business plan. If we are not successful in identifying and obtaining development rights on suitable properties for building and operating biodiesel production plants, our future prospects for profitability will likely be substantially limited, and adversely affect our anticipated results of operations and financial condition.

We may be adversely affected by environmental, health and safety laws, regulations and requirements, any of which could require us to pay or satisfy costs or incur expenses substantially in excess of our business plan.

As we pursue our business plan, we will become subject to various federal, state, local and foreign environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. The cost of compliance with environmental, health and safety laws could be significant. A violation of these laws, regulations and/or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns, as well as civil liabilities to affected property owners. In addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws or other developments could require us to make additional significant expenditures.

The hazards and risks associated with producing and transporting biodiesel, including the presence of methanol at the plant (such as fires, natural disasters, explosions and abnormal pressures and blowouts) may also result in personal injury claims or damage to property and third parties. As protection against operating hazards, we intend to maintain insurance coverage against some, but not all, potential losses. However, we could sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. Events that result in significant personal injury or damage to our property or third parties or other losses that are not fully covered by insurance could have a material adverse effect on the anticipated results of our contemplated operations and financial condition.

Our anticipated results of operation and financial condition will suffer if we cannot obtain or maintain governmental permits or licenses that are necessary for the operation of our biodiesel production units.

Our biodiesel production facilities operations will require licenses and permits from various governmental authorities. We believe that we will be able to obtain all necessary licenses and permits to carry on the activities that we contemplate. However, our ability to obtain, sustain or renew such licenses and permits will be subject to governmental regulations and policies which are subject to change. Our inability to obtain or retain any of these licenses or permits may have a material adverse effect on our anticipated results from operations and financial condition.

Our success will depend in part on our ability to protect our intellectual property.

Our success, competitive position and future revenues will depend in large part on our ability, to obtain, secure and defend patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights, and to operate without infringing on the proprietary rights of third parties. Our interest in these rights is complex and uncertain.

We hold five issued patents (plus one pending application for U.S. patents) on our STT^® technology for biodiesel production in the United States and internationally. These issued patents expire between 2011 and 2023. We will seek to obtain additional patents that we believe may be required to commercialize our products, technologies and methods. We also have patent applications pending in several foreign jurisdictions. We anticipate filing additional patent applications both in the United States and in other countries, as appropriate. However, we cannot predict:

	•		the degree and range of protection any patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our patents;
	•		if and when patents will issue;
	•		if our issued patents will be valid or enforceable;
	•		whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications; or
	•		whether we will need to initiate litigation or administrative proceedings which may be costly whether we win or lose.

Even issued patents may later be found unenforceable, or be restricted or invalidated in proceedings instituted by third parties before various patent offices and courts. Changes in either the patent laws or in the interpretation of patent laws in the United States and other countries may diminish the value of our intellectual property. We are therefore unable to predict the scope of any patent claims in our or in third-party patents that may be issued or may be enforceable.

To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements with our employees, consultants and advisors. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.

A dispute regarding the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be costly and result in delays in our commercialization activities. Our success depends, in part, on our ability to operate without infringing on or misappropriating the property rights of others.

Any legal action claiming damages or seeking to enjoin commercial activities relating to the affected products, methods, and processes could require us to obtain a license to continue to use, manufacture or market the affected products, methods or processes, which may not be available on commercially reasonable terms, if at all, or could prevent us from making, using or selling the subject matter claimed in patents held by others and subject us to potential liability damages or could consume a substantial portion of our managerial and financial resources whether we win or lose.

Risks Related to our Participation in the Biodiesel Industry

Increases in the construction of biodiesel production plants may cause excess biodiesel production capacity in the market. Excess capacity may adversely affect the price at which we are able to sell the biodiesel that we produce and may also adversely affect our anticipated results of operation and financial condition.

The National Biodiesel Board reports that, as of January, 2008, there were approximately 171 commercial biodiesel refineries in the U.S. with an annual production capacity of approximately 2.2 billion gallons per year. In addition, the National Biodiesel Board reports that there were 55 commercial biodiesel refineries under construction and 3 existing commercial biodiesel refineries undergoing expansion in the U.S. The total additional anticipated annual production capacity of these plants under construction or expansion is approximately 1.1 billion gallons per year.

With such an increase in biodiesel production capacity in the United States, compared to historical biodiesel production levels, there is risk that there will be a significant amount of excess biodiesel production capacity, thereby resulting in significant price competition and the closure of less competitive biodiesel facilities. Although this existing and pending capacity growth is very large compared to historical biodiesel production levels, we believe that the market will purchase as much biodiesel as is available, so long as the prices for biodiesel (net of the impact of tax credits and other similar incentives) are competitive with those of petrodiesel.

Our anticipated results of operations, financial condition and business outlook will be highly dependent on commodity prices and the availability of supplies, both of which are subject to significant volatility and uncertainty.

Our operating results will be substantially dependent on commodity prices, especially prices for biodiesel and petroleum diesel, as well as feedstock, equipment and materials used in the construction and operation of our biodiesel production plants. As a result of the volatility of the prices and the scarcity of these items, our results may fluctuate substantially, and we may experience periods of declining prices for our products and increasing costs for our raw materials, which could result in operating losses. Although we may attempt to offset a portion of the effects of fluctuations in prices by entering into forward contracts to supply biodiesel or purchase feedstock or other items or by engaging in transactions involving exchange-traded futures contracts, the amount and duration of these hedging and other risk mitigation activities may vary substantially over time, and these activities also involve substantial risks.

The price of feedstock is influenced by market demand, weather conditions, animal processing and rendering plant decisions, factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. The principal feedstocks for biodiesel currently are soybean oil, palm oil and canola/rapeseed oil and are the feedstocks most susceptible to price risk due to market demand. Factors affecting crop yield and planting decisions include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply. The significance and relative effect of these factors on the price of feedstock is difficult to predict.

Any event that tends to negatively affect the supply of feedstock, such as increased demand, adverse weather or crop disease, could increase feedstock prices and potentially harm our business. In addition, we may also have difficulty, from time to time, in physically sourcing feedstock on economical terms due to supply shortages. Such a shortage could require us to suspend operations until feedstock is available at economical terms, which would have a material adverse effect on our business, anticipated results of operations and financial condition. The price we pay for feedstock at a facility could increase if an additional multi-feedstock biodiesel production plant is built in the same general vicinity or if alternative uses are found for lower cost feedstock.

Biodiesel fuel is a commodity whose price is determined based in part on the price of petroleum diesel, world demand, supply and other factors, all of which are beyond our control. World prices for biodiesel fuel have fluctuated widely in recent years. We expect that prices will continue to fluctuate in the future. Price fluctuations will have a significant impact upon our revenue, the return on our investment in biodiesel production plants and our general financial condition. Price fluctuations for biodiesel fuel may also impact the investment market and our ability to obtain investor capital. Although market prices for biodiesel fuel rose to record levels during the first part of 2008, there is no assurance that these prices will remain at current levels. Future decreases in the prices of biodiesel or petroleum diesel fuel may have a material adverse effect on our financial condition and anticipated results of operations.

We also use other raw materials such as methanol and sodium hydroxide, which are commodities and subject to price fluctuations and supply uncertainty. If the availability or the cost of these raw materials changes significantly, our production volume or cost to produce biodiesel could be affected.

Both supply and demand in the United States biodiesel industry are highly dependent upon federal and state legislation.

The production of biodiesel is made significantly more competitive by federal and state tax incentives. The federal excise tax incentive program for biodiesel was originally enacted as part of the JOBS Act but is scheduled to expire on December 31, 2008. This program provides blenders, generally distributors, with a one cent tax credit for each percentage point of virgin vegetable oil-derived biodiesel blended with petroleum diesel. For example, distributors that blend virgin soybean-derived biodiesel with petroleum diesel into a B20 blend biodiesel would receive a 20 cent per gallon excise tax credit. The program also provides blenders of recycled oils, such as yellow grease from restaurants, with a one-half cent tax credit for each percentage point of recycled oil-derived biodiesel blended with petroleum diesel. For example, distributors that blend recycled oil-derived biodiesel with petroleum diesel into a B20 blend biodiesel would receive a 10 cent per gallon excise tax credit. In addition, approximately 31 states provide mandates, programs and other incentives to increase biodiesel production and use, such as mandates for fleet use or for overall use within the state, tax credits, financial grants, tax deductions, financial assistance, tax exemptions and fuel rebate programs. These incentives are meant to lower the end-users’ cost of biodiesel in comparison to petroleum diesel. Currently, we plan to sell B100 or B99 blended biodiesel that we produce to blenders that blend their biodiesel blend with petroleum diesel and therefore we expect to receive a price from our biodiesel purchasers that includes the $1.00 or $0.99 excise tax credit. This excise tax credit expires at the end of 2008 and its extension is currently not part of the recent farm bill legislation. Though other legislation is expected to include this extension of the excise tax credit, there can be no guarantee that it will be extended or it may be extended but reduced. The elimination or significant reduction in the federal excise tax incentive program or state incentive programs benefiting biodiesel could adversely affect our anticipated results of operations and financial condition.

Reductions in support of biodiesel from government, consumer or special interest groups could adversely impact our business plan and our anticipated results of operation and financial condition.

Federal, state and local governments in the United States and governments abroad have implemented incentives and mandates in support of biodiesel. Similarly, there has been support from consumers and special interest groups, such as agricultural and environmental groups. Support has even come from the petroleum industry itself, such as BP’s (formerly known as British Petroleum) “beyond petroleum” marketing campaign, and the automobile industry, such as General Motors’ “live green, go yellow” flex-fuel ethanol marketing campaign. However, there are risks that conditions will change in an adverse manner. These risks include, but are not limited to, laws or policies affecting mandates or incentives to promote the use of biodiesel, environmental issues, land use, air emissions, water use, zoning, workplace safety, food use limitations, restrictions imposed on the biodiesel fuel industry such as restrictions on production, substantial changes in product quality standards, restrictions on feedstock supply, price controls and export controls. Any changes in biodiesel fuel, financial incentives, investment regulations, policies or a shift in political attitudes are beyond our control and could adversely affect our anticipated results of operations and financial condition.

We may be unable to effectively compete in the biodiesel industry.

In many instances, our competitors and potential competitors have, or will have, substantially greater financial, technical, research, and other resources and larger, more established marketing, sales, distribution, and service organizations than we have. Moreover, competitors may have longer operating histories and greater credit worthiness (i.e., in competing for feedstock) than we have, and competitors may offer discounts as a competitive tactic. Our competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products, or that would render our technologies and products obsolete. Also, we may not have the financial resources, technical expertise, or marketing, distribution, or support capabilities to compete successfully in the future.

We anticipate that competition for the licensing of biodiesel reactors will come primarily from companies that offer competing novel biodiesel production technologies. To compete effectively in licensing biodiesel production technology, we will need to demonstrate the advantages of our STT^® Reactor over well-established, traditional chemical reactors, as well as novel technologies and systems. We will also experience competition from other producers of biodiesel.

Our ability to succeed as a biodiesel production company will depend, to a large extent, on our ability to compete for, and obtain, feedstock, obtaining suitable properties for constructing biodiesel production plants and sales of biodiesel and related products. Competition will likely increase as energy prices on the commodities market, including biodiesel and petrodiesel, rise as they have in recent years. This increased competition may also have an adverse impact on our ability to obtain additional capital from investors.

A substantial reduction in crude petroleum oil prices could have an adverse impact on our contemplated business plan by making biodiesel fuel relatively more expensive compared to petrodiesel. Were such a reduction to occur, it would likely adversely affect our anticipated results of operation and financial condition.

With the current elevated prices compared to historical prices of crude petroleum oil, and by extension, petrodiesel, biodiesel can be produced for a cost that is economically practical when compared to the cost to produce petrodiesel. However, if the price of crude petroleum oil should drop substantially, this could have a material adverse effect on the entire biodiesel industry and us.

Risks Related to Investment in our Common Stock

The public market for our common stock is volatile.

Our common stock is currently quoted for trading on the OTC Bulletin Board and since the closing of our private placement offering in January 2007 the trading price has been volatile. An active public market for the common stock may not be sustained.

The market price of our common stock may fluctuate significantly in response to factors, some of which are beyond our control, including the following:

	•		actual or anticipated variations in operating results;
	•		the limited number of holders of the common stock, and the limited liquidity available through the OTC Bulletin Board;
	•		the timing and type of financing and related dilution impact on the stockholders;
	•		changes in the cost or availability of feedstock on commercially economic terms;
	•		changes in the demand for biodiesel fuel, including changes resulting from the expansion of other alternative fuels;
	•		changes in the market for biodiesel fuel commodities or the capital markets generally, or both;
	•		a change or announcement by relevant domestic and foreign government agencies related to incentives for alternative energy development programs, especially a reduction in the $1.00 excise tax credit.

	•		changes in financial estimates by securities analysts;
	•		changes in the economic performance and/or market valuations of other energy companies;
	•		our announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
	•		additions or departures of key personnel;
	•		sales or other transactions involving our capital stock;
	•		changes in the social, political and/or legal climate;
	•		announcements of technological innovations or new products available to the biodiesel production industry; and/or
	•		announcements by relevant domestic and foreign government agencies related to incentives for alternative energy development programs.

We may not be able to attract the attention of major brokerage firms.

Because we have not yet actively commenced business, or because we became public through a “reverse merger,” security analysts of major brokerage firms may not provide coverage of us. Moreover, brokerage firms may not desire to provide financial advisory services or to conduct secondary offerings on our behalf in the future.

Our common stock may be considered “a penny stock” and may be difficult to sell.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share and therefore may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell the common stock and may affect the ability of investors to sell their shares. In addition, since the common stock is currently traded on the OTC Bulletin Board, investors may find it difficult to obtain accurate quotations of the common stock and may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price.

A significant number of our shares are eligible for sale, and their sale could depress the market price of our common stock.

Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock. As additional shares of our common stock become available for resale in the public market pursuant to Rule 144, the supply of common stock will increase, which could decrease the price of our common stock. Some or all of the shares of common stock not registered on the Registration Statement on Form SB-2, as amended, or the Registration Statement, may be resold from time to time in the open market pursuant to Rule 144. In general, a person who is not an affiliate of our company who has held restricted shares for a period of six months may sell such shares into the market and persons who are affiliates of our company may, upon filing with the SEC a notification on Form 144, sell into the market shares of common stock in an amount equal to the greater of 1% of the outstanding shares or the average weekly number of shares sold in the last four weeks prior to such sale. Such sales by affiliates may be repeated once every three months. Substantially all of the former shareholders of Kreido Labs have entered into lock-up agreements pursuant to which they agreed to not sell 95% of the company shares issued to them in the Merger for a period of 12 months following the merger date of January 12, 2007, the expiration of which has occurred. The remaining 5% are still being locked-up until January 12, 2009.

Our principal stockholders will have significant voting power and may take actions that may not be in the best interests of other stockholders.

Our officers, directors, principal stockholders, their affiliates and other related persons control a significant percentage of the outstanding shares of common stock. If these stockholders act together, they will be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of the common stock. This concentration of ownership may not be in the best interests of all our stockholders.

Investors should not anticipate receiving cash dividends on our common stock.

We have never declared or paid any cash dividends or distributions on our common stock. We currently intend to retain future earnings to support operations and to finance expansion and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Wrongful acts of our former outside counsel may expose us to investor claims under the securities laws and gives rise claims by us against those associated with the wrongdoing.

On February 28, 2007, we announced that we have conducted an inquiry concerning the improper transfer of shares of our common stock without a restrictive legend to two brokerage accounts controlled by Louis Zehil, a former partner of McGuireWoods, the law firm that represented us in a private offering of company stocks in January 2007. As part of the 18,518,519 unit private offering, a total of approximately 1.5 million units of common stock and common stock purchase warrants were sold to the two private financial entities controlled by Mr. Zehil. The SEC has commenced an enforcement action against Mr. Zehil and U.S. Department of Justice in pursuing criminal proceedings against Mr. Zehil. We have learned that approximately 81,480 shares of common stock were sold in the public markets by the two private financial entities at the direction of Mr. Zehil in January and early February of 2007. These sales were done without our consent or knowledge and in violation of the terms of purchase and purchase covenants, and the representations and warranties on which we relied in satisfying the requirements of the private placement exemption of Regulation D under the Securities Act. We do not anticipate reacquiring any of the 81,480 shares. The high and low trading prices of our common stock during the period that the 81,480 shares were sold were $2.43 and $1.57, respectively. Based upon this range, were we requested by purchasers to reacquire such shares, the aggregate maximum cost to us would be less than $200,000. The remaining 1.4 million shares and the warrants to purchase 1,481,480 shares of common stock are under the control of a court-appointed receiver who has recently filed a report with the court soliciting persons with claims against the two private financial entities to submit those claims. We are evaluating our claims against the two private financial entities, Mr. Zehil and his former law firm and we expect to pursue our claims against the private financial entities, Mr. Zehil and his former law firm in the near future. There is no assurance that we will be able to recover on our various claims. Additionally, if the 1.4 million shares of Kreido were to be sold as part of the liquidation process, the timing and quantity of those sales sold may cause significant deterioration of our stock price. Further, we may incur significant costs resulting from our investigation of this matter, any legal proceedings that we may initiate as a result of our investigation and our cooperation with government authorities. We may not be adequately indemnified for, or otherwise be able to recover, such costs.

We may not be able to continue as a going concern.

Our condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have a history of operating losses that are likely to continue in the future. We have included an explanatory paragraph in Note 3 of our Annual Report on Form 10-KSB, to the effect that our significant losses from operations and our dependence on financing provides substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

Our operations must begin to provide sufficient revenues to improve our working capital position. Additionally, we will require additional capital to construct our planned biodiesel facilities. If we are unable to obtain additional capital we may not be able to continue as a going concern.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS

The following exhibits are either filed herewith or incorporated herein by reference:

Exhibit No.		Description		Reference
2.1		Agreement and Plan of Merger and Reorganization, dated as of January 12, 2007, by and among Kreido Biofuels, Inc., a Nevada corporation, Kreido Acquisition Corp., a California corporation and Kreido Laboratories, a California corporation.		Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
3.1		Amended and Restated Articles of Incorporation of Kreido Biofuels, Inc. (f/k/a Gemwood Productions, Inc.).		Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3, 2006 (File No. 333-130606).
3.3		Amended and Restated Bylaws of Kreido Biofuels, Inc.		Incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 4, 2007 (File No. 333-130606).
4.1		Form of Investor Warrant of Kreido Biofuels, Inc.		Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
4.2		Form of Lock-Up Agreement by and between Tompkins Capital Group and each of the officers and directors of Kreido Biofuels, Inc., and certain stockholders of Kreido Laboratories.		Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
10.1		Escrow Agreement, dated as of January 12, 2007, by and between Kreido Biofuels, Inc., Joel A. Balbien and Gottbetter & Partners, LLP.		Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
10.2		Form of Subscription Agreement, dated as of January 12, 2007, by and between Kreido Biofuels, Inc. and the investors in the Offering.		Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
10.3		Form of Registration Rights Agreement, dated as of January 12, 2007, by and between Kreido Biofuels, Inc. and the investors in the Offering.		Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
10.4		Split-Off Agreement, dated as of January 12, 2007, by and among Kreido Biofuels, Inc., Victor Manuel Savceda, Kreido Laboratories and Gemwood Leaseco, Inc.		Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
10.5		Form of Indemnity Agreement by and between Kreido Biofuels, Inc. and Outside Directors of Kreido Biofuels, Inc.		Incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
10.6		2006 Equity Incentive Plan.		Incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).

Exhibit No.		Description		Reference
10.7		Form of Incentive Stock Option Agreement by and between Kreido Biofuels, Inc. and participants under the 2006 Equity Incentive Plan.		Incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
10.8		Form of Non-Qualified Stock Option Agreement by and between Kreido Biofuels, Inc. and participants under the 2006 Equity Incentive Plan.		Incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2007 (File No. 333-130606).
10.9		Binding Term Sheet by and between Kreido Laboratories and Tompkins Capital Group dated as of September 1, 2006.		Incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 4, 2007 (File No. 333-130606).
10.10		Amendment to Binding Term Sheet by and between Kreido Laboratories and Tompkins Capital Group dated as of October 25, 2006.		Incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 4, 2007 (File No. 333-130606).
10.11		Form of Indemnity Agreement for officers and directors.		Incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 4, 2007 (File No. 333-130606).
10.12		Employment Agreement, dated April 4, 2007, by and between Kreido Biofuels, Inc. and Philip Lichtenberger.		Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 10, 2007 (File No. 333-130606).
10.13		Employment Agreement, dated April 10, 2007, by and between Kreido Biofuels, Inc. and Alan McGrevy.		Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2007 (File No. 333-130606).
10.14		Employment Agreement, dated April 28, 2007, by and between Kreido Biofuels, Inc. and Larry Sullivan.		Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 2, 2007 (File No. 333-130606).
10.15		Purchase Order Agreement, dated May 22, 2007, by and between Kreido Biofuels, Inc. and Certified Technical Services, L.P.		Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2007 (File No. 333-130606).
10.16		Amendment No. 1 to Registration Rights Agreement, dated June 12, 2007, by and between Kreido Biofuels, Inc. and certain investors in the Offering.		Incorporated by reference to Exhibit 10.19 to the Amendment No. 3 to the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on June 21, 2007 (File No. 333-140718).

Exhibit No.		Description		Reference
10.17		Separation Agreement and General Release dated July 27, 2007 by and between Kreido Biofuels, Inc. and Joel Balbien.		Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 2007 (File No. 333-130606).
10.18		Executive Employment Agreement dated July 27, 2007 by and between Kreido Biofuels, Inc. and G. A. Ben Binninger.		Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 2007 (File No. 333-130606).
10.19		Kreido Biofuels, Inc. Outside Director Compensation Program adopted July 27, 2007.		Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 2007 (File No. 333-130606).
10.20		Commercial Lease Agreement by and between Kreido Biofuels, Inc. and Acaso Partners, LLC effective August 1, 2007.		Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 12, 2007 (File No. 333-130606).
10.21		Employment Agreement, dated April 30, 2008, by and between Kreido Biofuels, Inc. and John M. Philpott.		Incorporated by reference to Exhibit 10.21 to the Amendment to the Annual Report on Form 10-KSB/A filed with the Securities and Exchange Commission on April 30, 2008 (File No. 333-130606).
31.1		Certification of the Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934*
31.2		Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934*
32.1		Certification of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2		Certification of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX

Exhibit No.				Description
	31.1			Certification of the Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934*
	31.2			Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934*
	32.1			Certification of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
	32.2			Certification of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*