e10ksbza

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB/A


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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006


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

FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-130606

KREIDO BIOFUELS, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)


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


1140 Avenida Acaso, Camarillo, California (Address of Principal Executive Offices)		93012 (Zip Code)

Issuer’s telephone number, including area code: (805) 389-3499
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act: NONE

Indicate by check mark whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. þ

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 that disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. 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

State issuer’s revenues for the most recent fiscal year approximately $0

The aggregate market value of the voting and nonvoting common stock held by non-affiliates of the issuer, computed by reference to the price at which the common stock was sold, as of June 21, 2007 was approximately $42,400,275 (officers and directors of the issuer are considered affiliates).

At June 21, 2007 the issuer had 52,532,202 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Transitional Small Business Format (check one): Yes o No þ

EXPLANATORY NOTE

Kreido Biofuels, Inc., (“Kreido” or the “Company” or we) is filing this Amendment to our Form 10-KSB for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission on April 4, 2007, to reflect the reclassification of redeemable preferred stock of Kreido Laboratories outstanding on December 31, 2006 (and converted to common stock of the Company in January, 2007) as mezzanine financing rather than in stockholders equity, as required by Rule 5-02 of SEC Regulation SX. The changes, which constitute a restatement, do not affect Kreido Laboratories’s or the Company’s assets, liabilities or statements of operations or cash flows at December 31, 2006. This Amendment includes the restated financial statements of Kreido Laboratories at December 31, 2005 and December 31, 2006 and a discussion of the disclosure controls considerations derived from the restatement. The associated report of our independent auditors is set forth in this Amendment and that firm’s consent is filed as an Exhibit to this Amendment.

As a result of this amendment, we are also filing the certifications pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002 as exhibits to this Amendment.

Except as otherwise expressly stated for the items amended in this Form 10-KSB/A, this Amendment and the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 4, 2007 continue to speak as of the date of the filing of the Annual Report on Form 10-KSB, and we have not updated the disclosure contained herein to reflect events that have occurred since the date of that filing. This is necessary to preserve the nature and character of the information set forth in the items of the Annual Report as originally filed. Accordingly, this Amendment should be read in conjunction with the Annual Report on Form 10-KSB.

Pursuant to SEC Rule 12b-15, this Amendment sets forth the complete text of each item of Form 10-KSB referenced above as amended.

Part I

Item 7 FINANCIAL STATEMENTS

The audited financial statements of Kreido Laboratories (“Kreido Labs”) for the fiscal years ended December 31, 2006 and December 31. 2005, as restated, begin at page F-1.

Item 8A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of Amendment No. 3 to our Registration Statement Form SB-2, our principal accounting officer, John Philpott CPA, communicated to our independent auditors, Vasquez & Company LLP, management and our Audit Committee the existence of an internal control deficiency that may constitute a material weakness under standards established by the Public Company Accounting Oversight Board. A material weakness is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of financial statements will not be prevented or detected. As a result of our communications with Vasquez & Company LLP and further review conducted by management and our Audit Committee, we believe the following possible material weakness existed during the period covered by this Annual Report:

Our failure to present redeemable preferred stock in mezzanine equity, outside of permanent equity, as a public company under Rule 5-02 of Regulation SX. Preferred stock issued by Kreido Labs in fiscal 2004 and converted into shares of common stock in January 2007 in connection with the Merger was not classified as mezzanine equity on the December 31, 2005 and 2006 balance sheets as prescribed under applicable SEC accounting rules. This oversight resulted in the restatement of our financial statements for the fiscal year ended December 31, 2006 and the quarter ended March 31, 2007, as described in this Amendment. The restatement has no effect on the assets, liabilities, or statements of operations or cash flows of Kreido Labs or the Company.

Our management and our independent auditors, Vasquez & Company LLP, have discussed the possible material weakness described above with our Audit Committee. By implementing the remedial measures discussed below, management intends to improve its internal control over financial reporting and to avoid future material misstatements of our financial statements. Since the end of the period covered by this Amendment, we have implemented or are implementing the following measures:

On an ongoing basis, the Chief Accounting Officer will continue to review SEC accounting rules, including rules changes and interpretations, to determine applicability to the Company. The Company will obtain general educational guidance regarding applicable SEC accounting rules, including Rule 5-02 and the accounting classification of complex financial instruments from its independent auditors, Vasquez & Company LLP. After obtaining general educational guidance, the Company may also consult with other auditors for detailed educational guidance and implementation. The Chief Accounting Officer will report changes in SEC accounting rules, GAAP and interpretations of SEC accounting rules and GAAP, that may be applicable to the Company with the Chief Executive Officer, the Chief Financial Officer and the Audit Committee.

We are monitoring the effectiveness of these measures, and may take further action as we deem appropriate to strengthen our internal control over financial reporting. However, we do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been or will be detected.

An evaluation was performed, under the supervision of, and with the participation of, the Company’s management, including the Chief Executive Officer and Principal Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-(e) to the Securities Exchange Act of 1934). Based on that evaluation, due to the required reclassification described above, the Company’s management, including the Chief Executive Officer and Principal Accounting Officer, has concluded that the Company’s disclosure controls and procedures were not effective, as of the end of the period covered by this Annual Report. However, management believes that the consolidated financial statements included in this Annual Report fairly present, in all material respects, the financial position, results of operation and cash flows of Kreido Labs for the periods presented.

Item 8B. OTHER INFORMATION

Changes in Internal Controls

No significant changes in the Company’s internal controls over financial reporting that occurred during the year ended December 31, 2006 that materially affected, or was reasonably likely to materially affect, the Company’s internal control over financial reporting. However, the recently adopted changes in the Company’s internal controls over financial reporting described above do materially affect the Company’s internal controls over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Kreido Laboratories

We have audited the accompanying balance sheets of Kreido Laboratories, formerly known as Holl Technologies Company (a development stage company), as of December 31, 2006 and 2005, and the related statements of operations, stockholders’ equity (capital deficit) and cash flows for the years then ended and for the period from January 13, 1995 (inception) to December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

As discussed in Note 10, the accompanying financial statements have been restated.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kreido Laboratories as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended and for the period from January 13, 1995 (inception) to December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As more fully discussed in Note 3 to the financial statements, the Company has incurred significant losses in recent years, has an accumulated deficit of $23,126,000 and a total capital deficit of $19,499,000 at December 31, 2006. It has used all of its available cash in its operating activities in recent years and has a significant working capital deficiency. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in these regards are also discussed in Note 3 to the financial statements. The aforementioned financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Vasquez & Company LLP

Los Angeles, California
March 30, 2007
(except for Notes 10 & 13, as to which the date is June 21, 2007)

F-1

Kreido Laboratories

(A Development Stage Company)

Balance Sheets


	December 31
	2006			2005
	(As Restated)			(As Restated)

ASSETS
Current assets
Cash and cash equivalents	$	59,000		$	1,002,000
Accounts receivable		—			1,000

Total current assets		59,000			1,003,000
Property and equipment — net (Note 4)		322,000			252,000
Patents, less accumulated amortization of $278,000 and $216,000 in 2006 and 2005, respectively		788,000			753,000
Other assets		21,000			6,000

Total assets	$	1,190,000		$	2,014,000

LIABILITIES AND STOCKHOLDERS’ EQUITY (CAPITAL DEFICIT)
Current liabilities
Current portion of convertible notes payable, net of discount of $1,044,000 and $1,172,000 in 2006 and 2005, respectively (Note 9)	$	5,637,000		$	4,139,000
Current portion of capital leases (Note 8)		50,000			31,000
Accounts payable		346,000			226,000
Accrued expenses (Notes 9)		951,000			435,000

Total current liabilities		6,984,000			4,831,000
Capital leases, less current portion (Note 8)		66,000			29,000

Total liabilities		7,050,000			4,860,000

Redeemable preferred stock (Note 10) — Restatement
Series A1 convertible preferred stock, no par value. Authorized 549,474 shares; issued and outstanding 549,474 shares; liquidation preference $4,945,000		3,628,000			3,628,000
Series B1 convertible preferred stock, no par value. Authorized 13,783,783 shares; issued and outstanding 10,011,355 shares; liquidation preference $10,011,000		10,011,000			10,011,000
Series C convertible preferred stock, no par value. Authorized 8,600,000 shares; no shares issued and outstanding		—			—
Series B convertible preferred stock, no par value. Authorized 200,000 shares; no shares issued and outstanding		—			—
Series A convertible preferred stock, no par value. Authorized 500,000 shares; no shares issued and outstanding		—			—

Total redeemable preferred stock		13,639,000			13,639,000

Stockholders’ equity (capital deficit) (Notes 6 and 11)
Common stock, no par value. Authorized 150,000,000 shares issued and outstanding 720,501 shares		103,000			103,000
Restricted common stock, no par value; issues and outstanding 641,786 shares		64,000			64,000
Additional paid-in capital		3,469,000			3,241,000
Deferred compensation		(9,000	)		(35,000	)
Deficit accumulated during the development stage		(23,126,000	)		(19,858,000	)

Net stockholders’ equity (capital deficit)		(19,499,000	)		(16,485,000	)

Total liabilities and stockholders’ equity (capital deficit)	$	1,190,000		$	2,014,000

See accompanying auditor’s report and notes to financial statements

F-2

Kreido Laboratories

(A Development Stage Company)

Statements of Operations

Period from

January 13,

Year Ended

1995 (Inception)

December 31,

to December 31,

2006

2005

2006

Operating expenses

Research and Development

1,520,000

1,913,000

15,836,000

General and administrative expenses (Note 12)

1,004,000

630,000

4,852,000

Loss on sale of property and equipment

24,000

26,000

89,000

Loss from retirement of assets

43,000

275,000

318,000

Loss from operations

(2,591,000

)

(2,844,000

)

(21,095,000

)

Other income (expenses)

Interest expense

(828,000

)

(534,000

)

(3,082,000

)

Interest income

3,000

64,000

Other income

149,000

178,000

1,151,000

Other expenses

—

(154,000

)

Total other income (expenses)

(676,000

)

(353,000

)

(2,021,000

)

Loss before income taxes

(3,267,000

)

(3,197,000

)

(23,116,000

)

Income tax expenses

1,000

10,000

Net loss

(3,268,000

)

(3,198,000

)

(23,126,000

)

Net loss per share — basic and diluted

(2.40

)

(2.35

)

(16.98

)

Shares used in computing net loss per share

1,362,287

See accompanying auditor's report and notes to financial statements

F-3

Kreido Laboratories

(A Development Stage Company)

Statements of Stockholders’ Equity (Capital Deficit)

Period from January 13, 1995 (Inception) to December 31, 2006

(As Restated)



	Common Stock					Restricted Common Stock				Additional Paid-In		Deferred			Deficit Accumulated During			Stockholders’ Equity
	Shares			Amount		Shares		Amount		Capital		Compensation			the Development Stage			(Capital Deficit)
Issuance of common stock to founders		750,000		$	100,000		—	$	—	$	—	$	—		$			$	100,000
Net loss		—			—		—		—		—		—			(67,000	)		(67,000	)

Balance, December 31, 1995		750,00			100,000		—		—		—		—			(67,000	)		33,000
Net loss		—			—		—		—		—		—			(130,000	)		(130,000	)

Balance, December 31, 1996		750,00			100,000		—		—		—		—			(197,000	)		(97,000	)
Net loss		—			—		—		—		—		—			(329,000	)		(329,000	)

Balance, December 31, 1997		750,00			100,000		—		—		—		—			(526,000	)		(426,000	)
Net loss		—			—		—		—		—		—			(292,000	)		(292,000	)

Balance, December 31, 1998		750,00			100,000		—		—		—		—			(818,000	)		(718,000	)
Issuance of Series A preferred stock		—			—		—		—		217,000		—			—			217,000
Stock option issuances		—			—		—		—		318,000		(287,000	)		—			31,000
Net loss		—			—		—		—		—		—			(718,000	)		(718,000	)

Balance, December 31, 1999		750,000			100,000		—		—		535,000		(287,000	)		(1,536,000	)		1,188,000
Retirement of common stock		(30,073	)		—		—		—		—		—			—			—
Deferred compensation — options/warrants		—			—		—		—		101,000		(101,000	)		—			—
Compensation expense		—			—		—		—		—		88,000			—			88,000
Net loss		—			—		—		—		—		—			(1,935,000	)		(1,935,000	)

Balance, December 31, 2000		719,927			100,000		—		—		636,000		(300,000	)		(3,471,000	)		(3,035,000	)
Common stock grant		575			3,000		—		—		—		—			—			3,000
Issuance of warrants in connection with convertible debt		—			—		—		—		304,000		—			—			304,000
Deferred compensation options		—			—		—		—		259,000		(259,000	)		—			—
Compensation expense		—			—		—		—		—		141,000			—			141,000
Net loss		—			—		—		—		—		—			(3,308,000	)		(3,308,000	)

Balance, December 31, 2001		720,502			103,000		—		—		1,199,000		(418,000	)		(6,779,000	)		(5,895,000	)
Issuance of warrants in connection with convertible debt		—			—		—		—		287,000		—			—			287,000
Deferred compensation options		—			—		—		—		61,000		(61,000	)		—			—
Compensation expense		—			—		—		—		—		183,000			—			183,000
Repricing of warrants		—			—		—		—		131,000		—			—			131,000
Net loss		—			—		—		—		—		—			(3,436,000	)		(3,436,000	)

Balance, December 31, 2002		720,502			103,000						1,678,000		(296,000	)		(10,215,000	)		(8,730,000	)
Issuance of warrants in connection with convertible debt		—			—		—		—		74,000		—			—			74,000
Compensation expense		—			—		—		—		—		183,000			—			183,000
Buy back of fractional shares		(1	)		—		—		—		—		—			—			—
Net loss		—			—		—		—		—		—			(2,989,000	)		(2,989,000	)

Balance, December 31, 2003		720,501			103,000		—		—		1,752,000		(113,000	)		(13,204,000	)		(11,462,000	)
Issuance of consulting warrants and warrants in connection with convertible debt		—			—		—		—		—		—			—			—
Issuance of warrants for Conversion of Series C preferred stock to Series B1 preferred stock		—			—		—		—		709,000		—			—			709,000
Compensation expense		—			—		—		—		—		109,000			—			109,000
Issuance of restricted stock		—			—		641,786		64,000		—		(64,000	)		—			—
Net loss		—			—		—		—		—		—			(3,456,000	)		(3,456,000	)

Balance, December 31, 2004		720,501			103,000		641,786		64,000		2,461,000		(68,000	)		(16,660,000	)		(14,100,000	)
Issuance of warrants in connection with convertible debt		—			—		—		—		761,000		—			—			761,000
Issuance of consulting warrants		—			—		—		—		15,000		—			—			15,000
Issuance of stock options		—			—		—		—		4,000		—			—			4,000
Compensation expense		—			—		—		—		—		33,000			—			33,000
Net loss		—			—		—		—		—		—			(3,198,000	)		(3,198,000	)

Balance, December 31, 2005		720,501			103,000		641,786		64,000		3,241,000		(35,000	)		(19,858,000	)		(16,485,000	)

Issuance of warrants in connection with convertible debt		—			—		—		—		191,000		—			—			191,000
Issuance of consulting warrants											37,000								37,000
Compensation expense		—			—		—		—		—		26,000			—			26,000
Net loss		—			—		—		—		—		—			(3,268,000	)		(3,268,000	)

Balance, December 31, 2006		720,501		$	103,000		641,786	$	64,000	$	3,469,000	$	(9,000	)	$	(23,126,000	)	$	(19,499,000	)

See accompanying auditor’s report and notes to financial statements

F-4

Kreido Laboratories

(A Development Stage Company)

Statements of Cash Flows

Period from

January 13,

Year Ended

1995 (Inception)

December 31,

to December 31,

2006

2005

2006

Cash flows from operating activities

Net Loss

(3,268,000

)

(3,198,000

)

(23,126,000

)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

162,000

195,000

1,369,000

Loss on sale of assets

24,000

26,000

89,000

Loss on retirement of assets

43,000

275,000

318,000

Noncash stock compensation

44,000

37,000

819,000

Amortization of convertible debt discount

319,000

160,000

1,236,000

Inducement to convert debt discount

—

152,000

Inducement to convert debt

18,000

15,000

58,000

Warrants issued to consultants

Changes in operating assets and liabilities:

Accounts receivable

1,000

16,000

—

Other assets

(15,000

)

17,000

(72,000

)

Accounts payable

120,000

45,000

375,000

Accrued expenses

516,000

347,000

1,482,000

Net cash used in operating activities

(2,036,000

)

(2,065,000

)

(17,300,000

)

Cash flows from investing activities

Purchase of property and equipment

(39,000

)

(10,000

)

(741,000

)

Proceeds from sale of assets

10,000

85,000

95,000

Investments in patent application

(182,000

)

(242,000

)

(1,319,000

)

Net cash used in investing activities

(211,000

)

(167,000

)

(1,965,000

)

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

—

Proceeds from issuance of long-term debt

1,370,000

3,232,000

14,381,000

Principal repayment of long-term debt and capital leases

(66,000

)

(80,000

)

(856,000

)

Net cash provided by financing activities

1,304,000

3,152,000

19,324,000

Net increase (decrease) in cash and cash equivalents

(943,000

)

920,000

59,000

Cash and cash equivalents at beginning of period

1,002,000

82,000

—

Cash and cash equivalents at end of period

59,000

1,002,000

59,000

Supplemental disclosure of cash flow information

Cash paid during the period for:

Interest

8,000

26,000

334,000

Income taxes

1,000

10,000

See accompanying auditor’s report and notes to financial statements

F-5

Kreido Laboratories

(A Development Stage Company)

Statements of Cash Flows

Period from

January 13,

Year Ended

1995 (Inception)

December 31,

to December 31,

2006

2005

2006

Supplemental disclosure of noncash investing and financing activities

Purchase of property and equipment through capital leases

122,000

—

760,000

Additions to machinery and equipment through settlement of capital lease

—

61,000

Additions to machinery 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

—

761,000

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 in to Series B1 preferred stock

—

850,000

Conversion of accrued interest into Series B1 preferred stock

—

18,000

Conversion of accrued interest into notes payable

—

72,000

See accompanying auditor’s report and notes to financial statements

F-6

NOTE 1 ORGANIZATION

Kreido Laboratories formerly known as Holl Technologies Company (“Kreido” or “the Company”), was incorporated on January 13, 1995 under the laws of the State of California. Since incorporation, the Company has been engaged in activities required to develop, patent and commercialize its products. The market for these products is developing in parallel to the Company’s activities. The Company considers itself a development stage enterprise because it has not yet earned significant revenue from its commercial products. The Company creates and intends to license innovative chemical and chemical reacting systems.

The Company is the creator of reactor technology that is designed to enhance the manufacturing of a broad range of chemical products. Leveraging its proprietary STT® reactor technology (named for its spinning tube-in-tube design), Kreido partners with clients to deliver cost-effective manufacturing solutions. The Company continues to develop partnerships with a variety of global companies. Committed to the progress of green chemistry, Kreido has collaborations with academia, industry, and government agencies like the Environmental Protection Agency (“EPA”).

The cornerstone of the Company’s 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 fuel from vegetable oil in less than a second with complete conversion and less undesirable by-products. The Company has continued to pursue this activity and is in the process of building a pilot production plant and will begin construction of the first of three commercial biodiesel production factories in the United States that it expects will produce approximately 30 million gallon per year.

Kreido Biofuels, Inc. was incorporated as Gemwood Productions, Inc. under the laws of the State of Nevada on February 7, 2005. It changed its name from Gemwood Productions, Inc. to Kreido Biofuels, Inc. on November 2, 2006. The Company took its current form on January 12, 2007 when Kreido Laboratories completed a reverse triangular merger with Kreido Biofuels, Inc. (Note 13).

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company’s revenues are expected to be derived from licensing its patented processes, leasing its patented equipment to carry out the licensed processes, providing on-going technical support and know-how, and in the future, the sale of biodiesel. 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, the Company will allocate the undelivered elements based on the price charged when an element is sold separately. Through the end of 2006, the Company had recognized no significant commercial or licensing revenue. It is anticipated that once the Company has built and begins operating the commercial biodiesel production plants, the majority of revenue will be based upon the sale of biodiesel to distributors.

Cash and Cash Equivalents

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

Depreciation and Amortization

The provision for depreciation of property and equipment is calculated 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,

F-7

beginning in the month that the patent is issued. Patent costs are capitalized beginning with the filing of the patent application.

Research and Development Costs

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

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic value method supplemented by pro forma disclosures in accordance with APB 25 and SFAS 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosures.” Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Under the intrinsic value method, the Company has recognized stock-based compensation common stock on the date of grant.

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). 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, the Company will determine stock-based compensation based on the fair value method specified in SFAS 123(R), and 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. Previously under APB 25 to the extent awards were forfeited prior to vesting, the corresponding previously recognized expense was reversed in the period of forfeiture. There is no stock-based compensation expense for the year ended December 31, 2006.

SFAS 123 requires the Company to provide pro-forma information regarding net loss as if compensation cost for the stock options granted to the Company’s employees had been determined in accordance with the fair value based method prescribed in SFAS 123. Options granted to non-employees are recognized in these financial statements as compensation expense under SFAS 123 using the Black-Scholes option-pricing model.

If the fair value based method under FAS 123 had been applied in measuring stock-based compensation expense for the year ended December 31, 2005, the pro forma effects on net loss and net loss per share would have been as follows:

F-8


				Period from January 13,
	Year Ended December			1995 (Inception) to
	31, 2005			December 31, 2005

Net Loss:
As reported	$	(3,198,000	)	$	(19,858,000	)
Add: stock -based employee compensation expense included in reported net loss		33,000			691,000
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards		(67,000	)		(965,000	)

Pro forma	$	(3,232,000	)	$	(20,132,000	)

Net loss per share — basic and diluted
As reported	$	(2.35	)	$	(14.58	)

Pro forma	$	(2.37	)	$	(14.78	)

The fair value of options granted during 2005 was determined using a minimum value pricing model with the following assumptions: risk-free interest rates from 3.24% to 4.46%, expected lives of five to ten years and volatility of 0.01%. A pro forma income tax benefit has not been reflected due to the Company’s uncertain ability to generate future taxable income.

Use of Estimates

The Company’s management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and expenses and disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those 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, the Company has no material components of comprehensive loss, and accordingly, the comprehensive loss is the same as the net loss for all periods presented.

Net Loss Per Share

The Company calculates earnings per share in accordance with SFAS No. 128, “Earnings per Share.” Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities but does include the restricted shares of common stock issued. Diluted earnings per share reflects the potential dilution that would occur if securities of other contracts to issue common stock were exercised or converted to common stock. Common stock equivalent shares from all stock options, warrants and convertible securities for all years presented have been excluded from this computation as their effect is anti-dilutive.

Basic loss per common share is computed by dividing the net loss by the weighted average shares outstanding during the period in accordance with SFAS No. 128. Since the effect of the assumed exercise of common stock options and other convertible securities was anti-dilutive, basic and diluted loss per share as presented on the consolidated statements of operations are the same.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards 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 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 159 may have on its financial condition or results of operations.

F-9

In September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). This SAB provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects on each of the company’s balance sheets, statements of operations and related financial statement disclosures. The SAB permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. The Company is currently evaluating the impact SAB 108 may have on its financial condition or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Issues No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about 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. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is encouraged, provided that the reporting company has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company does not believe that the adoption of SFAS 157 will have a significant effect on its financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) , which is an interpretation of SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not believe that the adoption of FIN 48 will have a significant effect on its financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 is a replacement of Accounting Principles Board Opinion No. 20 and SFAS No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. SFAS No. 154 also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS No 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is currently evaluating the impact SFAS 154 may have on its financial condition or results of operations.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of non-monetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a

F-10

similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The FASB believes that exception required that some non-monetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the FASB believes this statement produces financial reporting that more faithfully represents the economics of the transactions. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for non-monetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of SFAS 153 shall be applied prospectively. The Company is currently evaluating the impact SFAS 153 may have on its financial condition or results of operations.

NOTE 3 LIQUIDITY AND GOING CONCERN ISSUES

The Company, a development stage company, has suffered recurring losses from operations and at December 31, 2006 had a net capital deficiency that raises substantial doubt about its ability to continue as a going concern.

The Company currently expects that cash raised from financing will continue to 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 if and when needed, management will be required to curtail growth plans and scale back planned development activities. No assurances can be given that the Company will be successful in raising additional financing should such financing be required by future operations.

Subsequent Events

In January 2007, the Company, in connection with the completion of a reverse triangular merger with a publicly traded company, Kreido Biofuels, Inc. (Kreido Biofuels), completed a private placement offering of $25 million with net proceeds to Kreido Biofuels of $23.1 million and the cancellation of $250,000 in indebtedness and the repayment of $123,000 in notes outstanding (Note 13).

NOTE 4 PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2006 and 2005 is summarized as follows:


	2006			2005

Furniture and fixtures	$	43,000		$	43,000
Machinery and equipment		617,000			461,000
Office equipment		115,000			110,000
Leasehold improvements		47,000			47,000

Total		822,000			661,000
Less accumulated depreciation and amortization		(500,000	)		(409,000	)

Net book value	$	322,000		$	252,000

Depreciation expense for the years ended December 31, 2006 and 2005 was $92,000 and $130,000, respectively, including related depreciation for capital leases. Equipment recorded under capital leases totaled $348,000 and $226,000 at December 31, 2006 and 2005, respectively.

NOTE 5 INCOME TAXES

Income taxes principally consist of minimum franchise taxes for the State of California. At December 31, 2006 and 2005, the Company had available net operating loss carry forwards totaling approximately $16,700,000 and $14,500,000 for both federal income tax purposes and California state tax purposes, which expire beginning in tax year 2010.

F-11

Additionally, at December 31, 2006, the Company had state tax credits of approximately $400,000. For federal net operating losses generated before 1997, the carryforward period is 15 years. For federal net operating loss generated after 1997, the carryforward period is 20 years. For California state tax purposes, the Company’s net operating losses were classified under Eligible Small Business (ESB). For ESB net operating loss generated from January 1, 1994 through December 31, 1999, the carryforward period is 5 years. For ESB net operating loss generated beginning on January 1, 2000, the carryforward period is 10 years.

Deferred tax assets consist principally of the tax effect of net operating loss carry forwards. In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. Due to the uncertainty surrounding the realization of the benefits of its tax attributes, including net operating loss carry forwards in future tax returns, the Company has fully reserved its deferred tax assets as of December 31, 2006 and 2005.

In addition, the utilization of net operating loss carry forwards may be limited due to restrictions imposed under applicable federal and state income tax laws due to a change in ownership.

NOTE 6 STOCK-BASED COMPENSATION

The Company has recorded in general and administrative expenses, $5,000 and $4,000 of compensation expense in 2006 and 2005, respectively, relating to stock options issued to non-employees for services rendered during those years.

Upon the adoption of SFAS123(R), the Company recorded $41,000 of compensation costs relating to stock options granted to employees. The amounts recorded represent equity-based compensation expense related to options that were issued in from 2001 to 2006. The compensation costs are based on the fair value at the grant date. There was no such expense recorded during our fiscal year 2005.

The fair value of the options issued during the year ended December 31, 2006 was estimated using the Black-Scholes option-pricing model with the following assumptions: risk free interest rates between 4.45% and 5.18 %, expected life of five (5) years and expected volatility or 0.01%.

Summary stock option activity is as follows:


				Weighted Average
	Number of Options			Exercise Price

Balance at December 31, 2004		471,853		$	0.70
Granted		861,786			0.14
Exercised		—			—
Cancelled		(152,908	)		0.10

Balance at December 31, 2005		1,180,731			0.13

Granted		50,950			0.10
Exercised		—			—
Cancelled		(199,125	)		0.11

Balance at December 31, 2006		1,032,556		$	0.28

For options granted under the intrinsic-value-based method, the Company recorded $5,000 and $4,000 of deferred compensation as additional paid-in capital based on the difference between the market price of the common stock and the option exercise price at the date of grant during 2006 and 2005, respectively. Related compensation expense of $14,000 and $33,000 was recognized in 2006 and 2005, respectively.

The following table summarizes information regarding options outstanding and options exercisable at December 31, 2006:

F-12

Options Outstanding

Options Exercisable

Weighted-

Average

Weighted-

Exercisable at

Weighted-

Range of Exercise

Outstanding at

Remaining

Average Exercise

December 31,

Average Exercise

Prices

December 31, 2006

Contractual Life

Price

2006

Price

$0.10

767,357

5.18

0.10

602,747

0.10

$0.70

3,000

2.68

0.70

3,000

0.70

$0.85

187,372

4.22

0.85

128,500

0.85

$1.00

45,948

3.48

1.00

45,948

1.00

$1.40

22,779

0.83

1.40

22,779

1.40

$2.10

6,100

1.26

2.10

6,100

2.10

1,032,556

0.32

809,074

0.32

NOTE 7 COMMITMENTS

Operating Leases

The Company has entered into two operating leases for corporate offices and laboratory space, with termination dates ranging from November 14, 2006 to August 31, 2007. Rent expense for the years ended December 31, 2006 and 2005 was $79,000 and $94,000, respectively.

At December 31, 2006, future minimum payments under these non-cancelable lease agreements are $37,000 for 2007 with no lease commitments beyond 2008, currently.

NOTE 8 CAPITAL LEASES

The Company has entered into capital leases for various equipment.

At December 31, 2006, future minimum lease payments on these leases are as follows:


Year Ending December 31,	Amount

2007	$	68,000
2008		31,000
2009		28,000
2010		25,000

Total lease payments		152,000
Less — interest		36,000

Present value of lease payments		116,000
Less — current portion		50,000

	$	66,000

NOTE 9 CONVERTIBLE NOTES PAYABLE

During 2001, the Company issued $2,519,000 of unsecured convertible notes payable with interest rate of 9% and were due at various dates from January through November 2002. The notes were automatically convertible into the Series of Preferred Stock having the lowest conversion price of Series A, B or C Preferred Stock upon the occurrence of certain events, as defined.

During 2002, the Company secured additional financing of $2,575,000 in convertible notes payable. On April 12, 2002, the Company amended all existing notes to a due date of November 30, 2002 in accordance with a Bridge Financing — Series C Preferred Stock offering. Warrant coverage was provided for the extension of the existing loans as well as new bridge financing. In December 2002, $4,803,000 of these notes, including accrued interest of $423,000 and accounts payable of $29,000, were converted into Series C Convertible Preferred Stock (Note 11).

The remaining two convertible notes of $171,000 bore interest of 8% per annum and were due December 24, 2003. In April 2004, the balance of these notes, including accrued interest of $21,000 were converted into new notes with interest at 10% per annum and extended the maturity dates to May 31, 2004 and December 31, 2004.

F-13

During 2003, the Company issued secured convertible notes for $727,000. On October 1, 2003, the Company amended all the notes issued in 2003 to a due date of November 30, 2003 in accordance with a Bridge Financing — Series C preferred stock second closing. On November 13, 2003, these notes and accrued interest of $18,000 were converted into Series C convertible preferred stock (Note 11).

From January to March 2004, the Company issued secured convertible notes for $850,000. These notes bore interest of 10% per annum and were due June 30, 2004. In April 2004, these notes, including accrued interest of $18,000 were converted into Series B1 preferred stock (Note 11).

Also in April 2004, notes due December 24, 2003 for $192,000 were converted to new convertible notes bearing an interest of 10% per annum due December 31, 2004.

From June to October 2004, the Company issued convertible notes for $1,405,000. These notes bore interest of 10% per annum and were due November 29, 2004. In November 2004, the Company paid off all existing notes and raised additional working funds by issuing new secured convertible notes totaling $2,068,000 bearing interest of 10% per annum and due July 29, 2005. A portion of the new funds were held in escrow to be released by the note holders in January 2005 at their discretion.

From January to October 2005, the Company issued convertible notes totaling $3,233,000. These notes bore interest ranging from 10% to 12% per annum and were due February 28, 2006. A portion of the new funds were held in escrow to be released by the note holders in 2006 at their discretion.

From July to December 2006, the Company issued convertible notes totaling $1,370,000. Notes for $1,000,000 bore interest of 12% while the remaining notes for $370,000 are non-interest bearing. The notes matured in January 2007.

The balances of convertible notes payable at December 31, 2006 and 2005 were $6,671,000 and $5,301,000, respectively. All notes were either paid off or converted into equity in January 2007.

In 2004, the Company issued a non-interest bearing unsecured note payable to a former officer in the amount of $17,000. This note was payable in monthly installments of $3,000 and was fully paid in April 2005. In 2005, in conjunction with a consulting contract, the Company issued a new non-interest bearing unsecured note payable to this same former officer in the amount of $12,000 payable in full on December 31, 2008 with an initial payment of $2,000. The balance of this note payable at December 31, 2006 was $10,000 and was paid off in January 2007.

NOTE 10 RESTATEMENT AND REDEEMABLE PREFERRED STOCK

Restatement and Redeemable Preferred Stock

The Company is restating its previously issued financial statements for the year ended December 31, 2006 and 2005 due to the misclassification of redeemable preferred stock as stockholders’ equity.

The effect on the Company’s previously issued 2006 financial statements is summarized as follows:


	As Previously			Increase
Balance Sheet Data	Reported			(Decrease)			Restated

Total Assets	$	1,190,000		$	—		$	1,190,000
Total Liabilities		7,050,000			—			7,050,000
Total Redeemable Preferred Stock		—			13,639,000			13,639,000
Total stockholder’s equity (capital deficit)		(5,860,000	)		(13,639,000	)		(19,499,000	)

The effect on the Company’s previously issued 2005 financial statements is summarized as follows:


	As Previously			Increase
Balance Sheet Data	Reported			(Decrease)			Restated

Total Assets	$	2,014,000		$	—		$	2,014,000
Total Liabilities		4,860,000			—			4,860,000
Total Redeemable Preferred Stock		—			13,639,000			13,639,000
Total stockholder’s equity (capital deficit)		(2,846,000	)		(13,639,000	)		(16,485,000	)

The following schedule shows the movement of the redeemable preferred stock from inception date (January 13, 1995).

F-14


																											Total
	Series A						Series B						Series C						Series A1				Series B1				Redeemable
	Convertible Stock						Convertible Stock						Convertible Stock						Convertible Stock				Convertible Stock				Preferred
	Shares			Amount			Shares			Amount			Shares			Amount			Shares		Amount		Shares		Amount		Stock
Issuance of Series A preferred stock		242,561		$	1,480,000			—		$	—			—		$	—			—	$	—		—	$	—	$	1,480,000

Balance, December 31, 1999		242,561			1,480,000			—			—			—			—			—		—		—		—		1,480,000
Conversion of notes to Series A preferred stock		106,925			637,000			—			—			—			—			—		—		—		—		637,000
Retirement of common stock		—			—			200,000			1,500,000			—			—			—		—		—		—		1,500,000
Issuance of Series B preferred stock		—			—			—			11,000			—			—			—		—		—		—		11,000

Balance, December 31, 2000		349,486			2,117,000			200,000			1,511,000			—			—			—		—		—		—		3,628,000

Balance, December 31, 2001		349,486			2,117,000			200,000			1,511,000			—			—			—		—		—		—		3,628,000

Issuance of Series C preferred stock		—			—			—			—			1,995,000			1,995,000			—		—		—		—		1,995,000
Conversion of notes, accrued interest and accounts payable to Series C preferred stock		—			—			—			—			5,255,785			5,256,000			—		—		—		—		5,256,000

Balance, December 31, 2002		349,486			2,117,000			200,000			1,511,000			7,250,785			7,251,000			—		—		—		—		10,879,000
Issuance of Series C preferred stock		—			—			—			—			428,500			428,000			—		—		—		—		428,000
Conversion of notes and accrued interest payable to Series C preferred stock		—			—			—			—			744,510			745,000			—		—		—		—		745,000
Buy back of fractional shares		(9	)		—			(3	)		—			(12	)		—			—		—		—		—		—

Balance, December 31, 2003		349,477			2,117,000			199,997			1,511,000			8,423,783			8,424,000			—		—		—		—		12,052,000
Issuance of Series B1 preferred stock		—			—			—			—			—			—			—		—		720,000		720,000		720,000
Conversion of notes and accrued interest payable to Series B1 preferred stock		—			—			—			—			—			—			—		—		867,572		867,000		867,000
Conversion of Series A preferred stock to Series A1 preferred stock		(349,477	)		(2,117,000	)		—			—			—			—			349,477		2,117,000		—		—		—
Conversion of Series B preferred stock to Series A1 preferred stock		—			—			(199,997	)		(1,511,000	)		—			—			199,997		1,511,000		—		—		—
Conversion of Series C preferred stock to Series B1 preferred stock		—			—			—			—			(8,423,783	)		(8,424,000	)		—		—		8,423,783		8,424,000		—

Balance, December 31, 2004		—			—			—			—			—			—			549,474		3,628,000		10,011,355		10,011,000		13,639,000

Balance, December 31, 2005		—			—			—			—			—			—			549,474		3,628,000		10,011,355		10,011,000		13,639,000

Balance, December 31, 2006		—		$	—			—		$	—			—		$	—			549,474	$	3,628,000		10,011,355	$	10,011,000	$	13,639,000

Redeemable Preferred Stock

The rights, preferences and privileges of the Series A1 and Series B1 preferred stock are listed below:

Conversion Rights

Each share of the preferred stock outstanding is convertible, at the option of the holder, into common stock at the rate of one share of common stock for each share of the preferred stock, adjustable for certain dilutive events.

Such conversion will occur automatically upon the closing of a registered public offering of the Company’s common stock that yields aggregate proceeds to the Company of at least $30,000,000 at a per share price of at least $5.00.

Dividend Rights

Each fiscal year, the holders of shares of Series B1 Preferred Stock are entitled to receive, before any dividends are paid or declared and set aside for the Series A1 Preferred Stock or the Common Stock, out of funds legally available for that purpose, cumulative dividends at a rate of eight percent (8%) per annum, payable in cash only. Such cumulative dividends accrue from the date of issuance and are calculated through the earliest of (I) the conversion of Series B1 Preferred Stock into Common Stock, (ii) the redemption of Series B1 Preferred Stock or (iii) the liquidation, dissolution or winding up of the Company. The holders of the Series B1 Preferred Stock are entitled to participate, on an as-converted basis, in all dividends, whether payable in cash, property or stock, that are declared on any of the Common Stock. Cumulative dividends for Series B1 Preferred Stock as of December 31, 2006 and 2005 were $2,155,000 and $1,354,000, respectively.

Each fiscal year, the holders of shares of Series A1 Preferred Stock are entitled to receive, before any dividends are paid or declared and set aside for the Common Stock, out of funds legally available for that purpose, cumulative dividends at a rate of eight percent (8%) per annum, payable in cash only. Such cumulative dividends accrue from the date of issuance and are calculated through the earliest of (I) the conversion of Series A1 Preferred Stock into Common Stock, (ii) the redemption of Series A1 Preferred Stock or (iii) the liquidation, dissolution or winding up of the Company. The holders of the Series A1 Preferred Stock are entitled to participate, on an as-converted basis, in all dividends, whether payable in cash, property or stock, that are declared on any of the Common Stock. Cumulative dividends for Series A1 Preferred Stock as of December 31, 2006 and 2005 were $850,000 and $534,000, respectively.

F-15

Preference Events

Any transactions or series of related transactions, resulting in the sale of 50% or more of the voting power or assets of the Company and any merger, consolidation or similar transaction will be deemed liquidation, triggering the liquidation preference on the Preferred Stock. In the case of any liquidation involving a merger, consolidation, or similar transaction, accrued but unpaid dividends shall be paid to the extent earned.

Liquidation Preference

On any liquidation of the Company holders of Series B1 Stock will receive their purchase price per share, plus accrued but unpaid dividends, if any, which liquidation rights shall be senior to the rights of holders of all other classes or series of capital stock of the Company. After the Series B1 Stockholders have received their liquidation preference, the holders of the Series A1 shall receive $9.00 per share, plus accrued but unpaid dividends. Thereafter, any remaining proceeds shall be divided among the holders of the Preferred Stock (on an as converted basis) and the holders of the Company’s Common Stock on a pro-rata basis.

Redemption Rights

The Company is required to redeem any and all outstanding shares of Convertible Preferred Stock any time prior to the Redemption Deadline, as defined, upon the written request from the holders of at least a majority of the outstanding Convertible Preferred Stock, voting together as a single class on an as-converted basis, to the extent legally permitted, in accordance with the schedule and percentages below:

On or before the fifth anniversary of the Original Issue Date (the “First Redemption Date”), the Company shall redeem 33-1/3% of all shares of Convertible Preferred Stock outstanding on the First Redemption Date (determined on a pro rata basis in accordance with the number of such shares held by each holder thereof). No redemptions of the Series A1 Preferred Stock shall occur unless and until 33-1/3% of all shares of Series B1 Preferred Stock outstanding on the First Redemption Date have been redeemed.

Provided that the Company has fully satisfied the redemption obligations set forth above, on or before the sixth anniversary of the Original Issue Date (the “Second Redemption Date”), the Company shall redeem 50% of all shares of Convertible Preferred Stock outstanding on the Second Redemption Date (determined on a pro rata basis in accordance with the number of such shares held by each holder thereof). No redemptions of the Series A1 Preferred Stock shall occur unless and until 50% of all shares of Series B1 Preferred Stock outstanding on the Second Redemption Date have been redeemed.

Provided that the Company has fully satisfied the redemption obligations set forth above, on or before the seventh anniversary of the Original Issue Date (the “Third Redemption Date”), the Company shall redeem 100% of all shares of Convertible Preferred Stock outstanding on the Third Redemption Date. No redemptions of the Series A1 Preferred Stock shall occur unless and until 100% of all shares of Series B1 Preferred Stock outstanding on the Third Redemption Date have been redeemed.

The price per share to be paid by the Company for the redemption of the Convertible Preferred Stock shall be the then-effective Stated Value of each such share of Convertible Preferred Stock.

Voting Rights

Holders of preferred stock are generally entitled to vote together with holders of common stock on matters presented for shareholder action as if such shares were converted to common stock.

NOTE 11 STOCKHOLDERS’ EQUITY (CAPITAL DEFICIT)

The Company’s Amended and Restated Articles of Incorporation (Articles) authorize the issuance of two classes of shares designated as common stock and preferred stock, each having no par value. The numbers of shares of common stock and preferred stock authorized are 150,000,000 and 100,000,000, respectively. Preferred stock currently consists of Series A1 (549,474 shares designated) and Series B1 (13,783,783 shares designated).

Common Stock

Common stockholders are entitled to receive dividends when and if declared by the Board of Directors, to share ratably in the proceeds of any dissolution or winding up of the Company and to vote on certain matters as provided in the Articles. No dividends can be declared or paid to common stockholders unless and until all accrued and unpaid dividends on the Series B1 preferred stock have been paid to Series B1 preferred stockholders. Shares of common stock are subject to transfer restrictions and certain rights of first refusal relating to the securities laws, the bylaws of the Company and, in certain cases, specific agreements with the Company and the preferred stockholders.

F-16

Restricted Common Stock

Restricted common stock has all the rights of a common stock but is subject to certain vesting schedules as defined in the individual stock grant agreements.

During 1999, in conjunction with the issuance of convertible notes payable, a stockholder of the Company placed 32,221 shares of common stock in escrow. The shares were subject to forfeiture if the convertible notes were converted into shares of Series A convertible preferred stock. In 2000, the convertible debt was converted into Series A convertible preferred stock. The amount of shares forfeited by the stockholder was reduced to 30,073 shares and 2,148 shares were returned to the stockholder. The value of the shares returned to the stockholder was not material to the financial statements.

In April 2004, the Company issued a total of 1,062,534 shares of restricted common stock in exchange for the cancellation of certain stock options. Upon the departure of one of the holders of the restricted common stock, 436,361 shares were cancelled. The total amount of vested shares was 558,348 and 497,856 as of December 31, 2006 and 2005, respectively.

In August 1999, the Company issued 165,000 shares of Series A convertible preferred stock for total cash consideration of $1,155,000. These shares were issued to venture capital firms and private investors. In December 1999, the Company issued an additional 77,561 shares of Series A convertible preferred stock to private investors as consideration for convertible promissory notes payable totaling $543,000.

In August 2000, the Company issued 200,000 shares of Series B convertible preferred stock for total cash consideration of $1,500,000. These shares were issued to venture capital firms and private investors. In addition, throughout 2000, the Company issued an additional 106,916 shares of Series A convertible preferred stock to private investors as consideration for convertible promissory notes payable and accrued interest totaling $637,000.

In December 2002, the Company issued 7,250,785 shares of Series C convertible preferred stock for a total cash consideration of $1,995,000 and conversion of notes payable of $4,803,000, including accrued interest of $423,000 and accounts payable of $29,000. These shares were issued to venture capital firms and private investors.

In November 2003, the Company issued 1,173,010 shares of Series C convertible preferred stock for a total cash consideration of $429,000 and conversion of notes payable of $745,000, which included accrued interest of $18,000. These shares were issued to venture capital firms and private investors.

On November 26, 2003, the Company’s Board of Directors declared a 10 to 1 reverse stock split of all the Company’s issued and outstanding shares of common stock, Series A preferred stock, Series B preferred stock and Series C preferred stock. The number of shares, warrants and options outstanding and per share data has been restated to reflect the reverse stock split.

In connection with the reverse stock split, the Company repurchased the following split shares of common and convertible stock:


	Number of Shares		Amount

Common Stock		1	$	1.00
Series A		9		9.00
Series B		3		3.00
Series C		12		12.00

		25	$	25.00

In April 2004, the Company converted the outstanding amount of Series A and Series B convertible preferred stock into 549,474 shares of Series A1 convertible preferred stock for total of $3,628,000.

In April 2004, the Company issued 10,011,355 shares of Series B1 convertible preferred stock for total cash consideration of $720,000, conversion of notes payable of $868,000, which included accrued interest of $18,000 and conversion of all the outstanding Series C convertible preferred stock of $8,424,000. These shares were issued to venture capital firms and private investors.

In April 2004, certain notes that expired in December 2003 were renegotiated and warrants to purchase 95,803 shares of Common at $0.85 were issued as part of the re-financing. The warrants expire in 5 years.

Accounting for Registration Payment Arrangement

The Company believes the likelihood of liquidated damages is not probable based on the filing of the original Form SB-2 on February 14, 2007. The Company will reevaluate the probability of liquidated damages as facts and circumstance become available in accordance with FSP EITF 00-19-2.

As part of the January 2007 private placement offering, the Company was required to have the registration statement declared effective by the SEC on or before June 14, 2007, otherwise the Company will have to pay each purchaser of Units such number of Units as liquidated damages equal to five percent of the number of Units held by such purchaser. The total liquidated damages will be ten percent if the registration statement is not declared effective on or before July 14, 2007 and fifteen percent if the registration statement is not declared effective by August 13, 2007.

As the Company issued 18,518,519 shares in exchange for $25,000,000, the liquidated damages would be 925,926 shares in five percent increments, if the registration statement is not declared effective prior to June 14, 2007. The Company received an extension to June 29, 2007 on the date of the effectiveness. See further discussion at Note 13.

Warrants

On November 7, 2000, the Company issued detachable stock purchase warrants to a bank to purchase 2,333 shares of Series B preferred stock at $7.50 per share in connection with an equipment note payable. The warrants expire on November 7, 2007. The fair value of the warrants on the date of issuance of $11,000 was calculated using the Black-Scholes option pricing model and the following assumptions: contractual life of seven years; no dividends; risk free interest rate of 6.50%; and volatility of 50%. The fair value of the warrants was recorded as debt issuance costs and offset against the Series B convertible preferred stock in the accompanying balance sheet. Debt issuance costs were amortized to interest expense over the term of the note.

F-17

In connection with the issuance of convertible notes payable in 2002 (Note 9), the Company issued detachable stock purchase warrants to purchase 371,125 shares of common stock to the note holders. The warrants expire in five years. The fair value of the warrants at the dates of issuance of $288,000 was calculated using the Black-Scholes option pricing model and the following assumptions: contractual life of five years; no dividends; risk free interest rates of 3.03% to 4.5%; and volatility of 0.01%. The fair value of the warrants was recorded as a discount to the convertible notes and additional paid-in capital in the accompanying balance sheet. This discount was amortized to interest expense upon the conversion of the related notes to Series C convertible preferred stock.

In connection with the issuance of Series C convertible preferred stock in 2002, the Company modified the terms of the existing 779,763 warrants outstanding and adjusted the exercise price to $1.00 per share and the term to six years as an inducement to the note holders to convert. The fair value of the warrants as a result of the modification was $131,000 calculated using the Black-Scholes option pricing model with the following assumptions: contractual life of six years; no dividends; risk free rate of 3.0%; and volatility of 0.01%. The fair value of repriced warrants was recorded as other expense.

In connection with the issuance of convertible notes payable in 2003 (Note 9), the Company issued detachable stock purchase warrants to purchase 213,677 shares of common stock to the note holders. The warrants expire in five years. The fair value of the warrants at the date of issuance of $57,000 was calculated using the Black-Scholes option pricing model and the following assumptions: contractual life of five years; no dividends; risk free interest rates of 2.97% and volatility of 0.01%. The fair value of the warrants was recorded as a discount to the convertible notes and additional paid-in capital in the accompanying balance sheet. This discount was amortized to interest expense upon the conversion of the related notes to Series C convertible preferred stock.

In 2003, the Company issued 71,250 warrants to purchase common stock and Series C preferred stock to a consultant. The warrants expire in six years. The fair value of the warrants at the date of issuance of $16,000 was calculated using the Black-Scholes option pricing model and the following assumptions: contractual life of five years; no dividends; risk free interest rates of 2.97% and volatility of $0.01%.

In connection with the issuance of convertible notes payable from January to March 2004 (Note 9), the Company issued detachable stock purchase warrants to purchase 300,000 shares of Series B1 convertible preferred stock and issued detachable stock purchase warrants to purchase 62,500 shares of common stock to the note holders. The warrants were to expire in five years. The fair value of the warrants at the date of issuance of $40,000 was calculated using the Black-Scholes option pricing model and the following assumptions: contractual life of five years; no dividends; risk free interest rates from 3.03% to 3.58% and volatility of 0.01%. Additionally, convertible debt had a beneficial conversion feature of $42,000. The fair value of the warrants and beneficial conversion feature was recorded as a discount to the convertible notes and additional paid-in capital in the accompanying balance sheet. This discount was amortized to interest expense upon the conversion of the related notes to Series B1 convertible preferred stock.

In connection with the conversion of the notes to Series B1 convertible preferred stock, the Company exchanged existing warrants to purchase 1,057,414 of common and preferred stock into new warrants to purchase common stock at $0.10 per share. The fair value of the new warrants was $21,000 calculated using the Black-Scholes option pricing model with the following assumptions: contractual life of five years; no dividends; risk free rate of 3.58%; and volatility of 0.01%. The fair value of exchanged warrants was recorded as other expense.

In connection with the issuance of convertible notes payable from June to October 2004 (Note 9), the Company issued warrants to purchase 890,289 shares of Series B1 preferred stock and warrants to purchase 1,102,552 shares of default stock. The warrants expire in five years. The fair value of the warrants at the date of issuance of $597,000 was calculated by using the Black-Scholes option pricing model and the

F-18

following assumptions: contractual life of five years; no dividends; risk free interest rates from 3.40% to 3.72% and volatility of 0.01%.

With the issuance of convertible notes payable from January to October 2005 (Note 9), the Company issued warrants to purchase 2,388,065 shares of Series B1 preferred stock. The warrants expire in five years. The fair value of the warrants at the date of issuance of $761,000 was calculated by using the Black-Scholes option pricing model with the following assumptions: contractual life of five years; no dividends; risk free interest rates from 3.72% to 4.32% and volatility of 0.01%.

In connection with the issuance of convertible notes payable from July to December 2006 (Note 9), the Company issued warrants to purchase 500,008 shares of Series B1 preferred stock. The warrants expire in five years. The fair value of the warrants at the date of issuance of $191,000 was calculated by using the Black-Scholes option pricing model and the following assumptions: contractual life of five years; no dividends; risk free interest rates from 4.47% to 5.19% and volatility of 0.01%.

The fair value of the warrants was recorded as a discount to the convertible notes and additional paid-in capital in the accompanying balance sheet. This discount is being amortized to interest expense over the term of the related convertible notes. The net unamortized discount at December 31, 2005 and 2004 were $1,172,000 and $570,000, respectively.

In 2005 and 2004, the Company issued 80,950 and 54,200, respectively, of warrants to purchase Series B1 preferred stock to three consultants. The warrants expire in five years. The fair value of the warrants at the date of issuance of $15,000 in 2005 and $9,000 in 2004 was calculated using the Black-Scholes option pricing model and the following assumptions: contractual life of five years; no dividends; risk free interest rates of 3.37% to 4.35% and volatility of 0.01%.

A summary of warrant activity is as follows:


			Weighted Average
	Number of Options		Exercise Price

Balance at December 31, 2004		3,590,034	$	0.73
Granted		3,658,796		1.00
Exercised		—		—
Cancelled		—		—

Balance at December 31, 2005		7,248,830		0.87
Granted		602,011		1.00
Exercised		—		—
Cancelled		—		—

Balance at December 31, 2006		7,850,841	$	0.88

The weighted average exercise price assumes the default preferred strike price will be $1.00.

NOTE 12 RELATED PARTY TRANSACTIONS

During 2006 and 2005, law firms, of which certain members are stockholders of the Company, were paid $7,000 and $54,000, respectively, for legal services performed on behalf of the Company. As of December 31, 2006 and 2005, amounts due to the law firms were $78,000 and $1,000, respectively. Additionally, one of the board of directors performed consulting services for the Company and was paid $72,000 and $40,000 in 2006 and 2005, respectively.

NOTE 13 SUBSEQUENT EVENTS

In January 2007, Kreido Laboratories completed a reverse triangular merger with a publicly traded company, Kreido Biofuels, Inc. (Kreido Biofuels). In connection with the merger, Kreido Biofuels completed a private placement offering of $25 million with net proceeds to Kreido Biofuels of $23.1 million and the repayment of $123,000 in indebtedness.

F-19

As part of this transaction, all Preferred Stock and convertible notes were converted to Common Stock of Kreido Biofuels and payment of all accumulated Preferred Stock dividends were waived. Additionally, all outstanding warrants were converted to Common Stock of Kreido Biofuels on a net exercise basis as determined by the Board of Directors in conjunction with the reverse merger. The reverse merger was accounted for as a recapitalization for accounting treatment purposes.

KREIDO BIOFUELS, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED BALANCE SHEET

Kreido Biofuels,

Inc. (formerly

Kreido

Gemwood

Pro forma

Laboratories

Productions, Inc.)

Pro forma

Consolidated

December 31,

Consolidating

December 31,

2006

Entry

2006

(audited)

(unaudited)

ASSETS

Current Assets

Cash

59,000

—

23,100,000

(6)

23,159,000

Accounts Receivable

—

Total Current Assets

59,000

—

23,100,000

23,159,000

Furniture & equipment Fixed assets

322,000

—

322,000

Intangible assets — patents

788,000

—

788,000

Other assets

21,000

—

21,000

TOTAL ASSETS

1,190,000

—

23,100,000

24,290,000

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities

Convertible notes payable

5,637,000

—

(5,637,000

)(1)

—

Current portion of capital leases

50,000

—

50,000

Accounts payable

346,000

—

346,000

Advances payable

951,000

—

(864,000

)(1)

87,000

Total Current Liabilities

6,984,000

—

(6,501,000

)

483,000

Capital leases less current portion

66,000

—

66,000

Total Liabilities

7,050,000

(6,501,000

)

549,000

Redeemable Preferred Stock — Restatement

Series A1 convertible preferred stock, no par value. Authorized 549,474 shares; issued and outstanding 549,474

3,628,000

—

(3,628,000

)(2)

—

Series B1 convertible preferred stock, no par value. Authorized 13,783,783 shares, issued and outstanding 10,011,355 shares

10,011,000

—

(10,011,000

)(3)

—

Total Redeemable Preferred Stock

13,639,000

—

(13,639,000

)

—

Stockholders’ Equity (Capital Deficit)

Common Stock , no par value.

Authorized 150,000,000 shares; issued and outstanding 720,501

103,000

—

(103,000

)(4)

—

Restricted common stock, no par value; issued and outstanding 641,786 shares

64,000

—

(64,000

)(4)

—

Common Stock $0.001 par value; 150,000,000 shares authorized; issued and outstanding 52,532,202 shares

3,000

(7)

27,000

(5)

22,000

(6)

52,000

Warrant valuation

—

9,272,000

(6)

9,272,000

Additional paid in capital

3,469,000

44,000

(7)

18,733,000

(5)

15,353,000

(6)

37,599,000

Accumulated deficit

(23,126,000

)

(47,000

)

—

(23,173,000

)

Deferred compensation

(9,000

)

—

(9,000

)

Total Stockholders’ Equity (Capital Deficit)

(19,499,000

)

—

43,240,000

23,741,000

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (CAPITAL)

1,190,000

—

23,100,000

24,490,000

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

F-20

KREIDO BIOFUELS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the three month period ended December 31, 2006

Kreido Biofuels,

Pro forma

Kreido

Inc. (formerly

Consolidating

Pro form

Laboratories

Gemwood)

Entry

Consolidated

(Audited)

(Unaudited)

Sales

—

Cost of goods sold

—

Gross Profit

—

OPERATING EXPENSES

Research and development

1,520,000

—

1,586,000

Administrative expenses

1,004,000

17,000

—

1,021,000

Loss on sale of property and equipment

24,000

—

24,000

Loss on retirement of assets

43,000

—

43,000

Loss from operations

(2,591,000

)

(17,000

)

—

(2,608,000

)

OTHER INCOME (EXPENSES)

Interest expense

(828,000

)

—

(828,000

)

Interest income

3,000

—

3,000

Other income

149,000

—

149,000

Total other income (expense)

(676,000

)

—

(676,000

)

Loss before income taxes

(3,267,000

)

—

(3,284,000

)

Income tax expense

(1,000

)

—

(1,000

)

NET LOSS FOR THE PERIOD

(3,268,000

)

(17,000

)

—

(3,285,000

)

BASIC AND DILUTED LOSS PER SHARE

(2.40

)

(0.06

)

WEIGHTED AVERAGE SHARES OUTSTANDING

1,362,287

52,532,202

(1)


(1)		Shares used in the computation of weighted average shares outstanding consist, of the following:


Stockholders	Share amount
Kreido Biofuels, Inc. existing shareholders		8,750,000
Kreido Labs converted note holders		10,224,177
Kreido Labs Series A1 Preferred Stock		619,946
Kreido Labs Series B1 Preferred Stock		11,770,584
Kreido Labs Common Stockholders		2,648,976
Common Stock pursuant Kreido Biofuels, Inc.’s private placement offering		18,518,519

Total Common Stock outstanding		52,532,202

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

As part of the January 2007 private placement offering the Company was required to have the SEC declare effective the registration statement by June 14, 2007 otherwise the Company would be required to pay liquidated damages. The Company was not able to have the registration statement declared effective by June 14, 2007 and on June 18, 2007 the Company obtained an extension of fifteen (15) days from the private placement investors (“investors”) in order to avoid the liquidated damages for the first required deadline. In return, the Company increased the liquidated damage rate from five percent to six percent of the Units held by the investors if the registration statement is not effective by June 29, 2007. The impact of the six percent in liquidated damages would be the issuance to the investors of 1,111,111 shares of common stock and the increase of 1,111,111 warrant shares for the purchase of shares of the Company’s common stock at an exercise price of $1.85 per share. If the liquidated damages become payable, the Company will record approximately $911,000 as expense based upon the fair value of the common stock issued as of June 14, 2007 and record the fair value of the additional warrant shares issued of approximately $300,000 for the three months ended June 30, 2007.

F-22


Exhibit No.	Description	Reference
23.2.	Consent of Vasquez & Company LLP*

31.3	Certification of the Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934*

31.4	Certification of the Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934*

32.3	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*

32.4	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*


	KREIDO BIOFUELS, INC.
	By:	/s/ Joel A. Balbien
		Joel A. Balbien, CEO and Director
		(Principal Executive Officer)
		Date: June 27, 2007


Signature	Title	Date
/s/ Joel A. Balbien Joel A. Balbien	Chief Executive Officer and Director (Principal Chief Executive)	June 27, 2007
/s/ Philip Lichtenberger Philip Lichtenberger	Chief Financial Officer	June 27, 2007
/s/ John M. Philpott John M. Philpott	Chief Accounting Officer (Principal Accounting Officer)	June 27, 2007
/s/ G.A. Ben Binninger G.A. Ben Binninger	Director	June 27, 2007
/s/ Betsy Wood Knapp Betsy Wood Knapp	Director	June 27, 2007


	Page
Report of Independent Registered Public Accounting Firm		F-1

Balance Sheets – December 31, 2006 and 2005		F-2

Statements of Operations – For the Years Ended December 31, 2006 and 2005 and For the Period From January 13, 1995 (Inception of the Development Stage) to December 31, 2006		F-3

Statements of Stockholders’ Equity (Capital Deficit) – For the Years Ended December 31, 2006 and 2005	F-4

Statements of Cash Flows – For the Years Ended December 31, 2006 and 2005 and For the Period From January 13, 1995 (Inception of the Development Stage) to December 31, 2006	F-5 to F-6

Notes to Financial Statements	F-7 to F-22
EXHIBIT 23.2
EXHIBIT 31.1
EXHIBIT 31.4
EXHIBIT 32.3
EXHIBIT 32.4

Table of Contents

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Item		Page

PART II

7.	Financial Statements

8A.	Controls and Procedures

8B.	Other Information

PART III

13.	Exhibits


(1)		Conversion of notes payable into 10,224,177 shares of Kreido Biofuels, Inc. common stock.

(2)		Conversion of Series A1 Preferred Stock into 619,946 shares of Kreido Biofuels, Inc. common stock.

(3)		Conversion of Series B1 Preferred Stock and certain warrants into 11,770,584 shares of Kreido Biofuels, Inc. common stock and warrants to purchase 294,530 shares of Kreido Biofuels, Inc. common stock.

(4)		Exchange of common stock, restricted common stock and certain warrants for 2,648,976 shares of Kreido Biofuels, Inc. common stock and warrants to purchase 276,804 shares of Kreido Biofuels, Inc. common stock.

(5)		Issuance of 25,263,683 shares of Kreido Biofuels, Inc. common stock for all outstanding common stock of Kreido Laboratories.

(6)		Issuance of 18,518,519 shares of Kreido Biofuels, Inc. Common Stock as part of the $25 million private placement offering. The allocation of the proceeds of $25 million, net of approximately $1.6 million in financing costs and $123,000 in paid Bridge notes.

(7)		8,750,000 shares of Kreido Biofuels, Inc. common stock retained by existing shareholders of Kreido Biofuels, Inc. as part of the merger.


*		Filed Herewith