H2 Diesel Report

H2Diesel Holdings Inc

THE COMPANY

H2Diesel (OTC BB: HTWO) is a development stage company that holds an exclusive perpetual license for North America, Central America and the Caribbean to a proprietary patent pending technology for the manufacture of a biofuel produced from vegetable oil and animal fats that can be utilized anywhere diesel or other distillate fuel oil are used today. The company’s license also includes the right of first offer for any other country or territory except Italy and Paraguay.

THE PRODUCT

H2Diesel’s biofuel is a blend of feedstock (vegetable oil/animal fats), proprietary additives and water under atmospheric conditions at room temperature. Its unique properties include:

1. it can be made from a wide variety vegetable oils (soybean, canola, palm, sunflower, cotton seed, jatroba, restaurant waste) and animal fats; importantly, there are no petroleum based products in this fuel.

2. its ‘cloud point’ (temperature at which it begins to gel) is below minus 15 degrees Fahrenheit versus 32 degrees Fahrenheit for conventional biodiesel.

3. it is very stable and therefore can be easily stored or shipped with no product instability.

4. it can be run in conventional diesel engines without the need for modification save the cleaning of storage tanks and fuel lines; further it can be customized per customer applications.

5. it possesses lubricating qualities that lessen engine wear versus petroleum based fuels

6. when burned it produces 80% less carbon dioxide and almost 100% less sulfur dioxide than conventional diesel fuel.

7. the company has completed a successful technical and environmental test burn with Dynergy, Inc., a major US utility, to validate its properties in a commercial facility and is awaiting the environmental impact study.

THE PRODUCTION PROCESS

Because production is essentially an emulsification process:

1. there are no significant by products. That means that there nothing to dispose of and there are no environmental permits required to build the production facility. Only a building permit is needed.

2. the production facility is relatively small (6000 square feet for a 25 million gallon a year production unit) and inexpensive to build.

3. labor costs are very moderate: again for a 25 million gallon a year production unit, it takes a total of 8 people to operate 3 shifts/5 days a week.

4. in fact the production process is so simple, the company expects certain customers to license the process from H2 and pay toll on the gallonage it produces.

5. when Federal tax credits are factored into its production costs, it can be produced at a competitive price to conventional diesel and cheaper than biodiesel fuel.

6. the company has established a relationship with Twin Rivers Technologies, an oleochemical manufacturer that is a spin off from Proctor and Gamble. Twin Rivers is a potential source of supply for vegetable oil feedstock. In addition, Twin Rivers jointly developed with H2 a 3 million gallon production test facility on one of its properties; that test was successful. Further, H2 has entered into an agreement with Twin Rivers to build a 25 million gallon a year production facility on a second Twin Rivers facility.

THE MARKET

As a replacement for diesel fuels, the US market is approximately 65 billion gallons a year.

The initial US market segment (600 million gallons a year) that H2 has targeted is the peaking utility power plant industry (facilities that are utilized by utilities only during times of peak power usage). The power plants in this market segment are typically (1) small, (2) gas turbine powered, (3) liquid fueled, (4) old, i.e. inefficient, generate high emission rates and therefore are saddled with environmental issues, (4) marginally profitable, but (5) are nonetheless critical to ‘keeping the lights on’ during periods of peak demands.

The advantage that H2 brings to this market; (1) a lower cost fuel, (2) makes plants’ output eligible for ‘Renewable Energy Credits’, a premium priced product, (3) will generate carbon credits [when and if applicable], (4) reduce environmental pressure, and (5) improve local neighbor relations.

Following the successful penetration of the above market, H2 intends to focus on the cruise ship industry (2 billion gallons a year) and the heating (oil) industry (4.4 billion gallons a year).

Helping to drive the future usage of biofuels are:

(1) the Federal Energy Policy Act of 2005, which establishes minimum nationwide requirements for the production of renewable fuels,

(2) the Federal 2005 Renewal Fuel Standards which requires national production of renewable fuels to exceed 7.5 billion gallons by 2012,

(3) mandates and incentives from more than 30 states for the use of biofuels,

(4) 24 states have established Renewal Portfolio Standards requiring the use of renewable sources to generate electricity.

H2 has entered into an agreement with eBarton, a renewable energy finance company, to assist it to market its product to utilities and independent power producers in the US. According to the company, eBarton has extensive energy industry experience and contacts in the upper echelons of the power generation industry.

FINANCIAL

The company is basically a start up and is not expected to generate revenue until late 2008 and will not likely reach cash flow breakeven until 2009. It is in the process of raising $30 million to (1) clean up its capital structure, (2) finance the construction of the 25 million gallon production facility mentioned above, and (3) provide working capital to sustain the company until it is cash flow sufficient.

Ordinarily, for a start up company to go public through a reverse merger (which H2 did) is, in my opinion, more of a detriment than a positive to its development. However, the scientist that developed the biofuel which the founders licensed insisted that he would only deal with a public company. Hence, the H2 founders had no choice but to go this route.

RISKS

1. H2 is a start up company and hence has a limited operating history, no revenue and no earnings.

2. If H2 fails to meet its financial obligations to the inventor of the biofuel, its license can be terminated.

3. If H2 is unable to secure the financing required to build a production facility, it has nothing to sell.

4. H2’s feed stock and final product are both subject to volatility in commodity prices that could impact its ability to price its product competitively.

5. H2 common stock is illiquid which could cause investors difficulty in both buying and selling shares.

6. Environmental laws are subject to political issues; any change from the current status could be detrimental to H2 biofuel’s ability to meet any new standards.

MY STANDARD ADMONITION

This investment is highly speculative. It is appropriate for only those investors that can afford to lose their entire investment. Even then, investors should buy a position that is substantially less than that which is normally appropriate.