333-125483
Filed Pursuant to Rule 424(b)(3)
Registration
No. 333-125483
Registration
No. 333-130122
Prospectus Supplement
to Separate Prospectuses dated
November 18, 2005 and December 5, 2005
This prospectus supplement amends and supplements the following
prospectuses of BPI:
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The prospectus dated November 18, 2005 that is contained in
the Form S-1
registration statement filed by BPI with the SEC on
November 18, 2005 and declared effective by the SEC on
December 2, 2005 (Registration
No. 333-125483),
which covers the offer and sale of 16,595,200 shares of
common stock of BPI by the selling shareholders named therein
(the November 18, 2005 Prospectus); and |
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|
The prospectus dated December 5, 2005 that is contained in
the Form S-1
registration statement filed by BPI with the SEC on
December 5, 2005 and declared effective by the SEC on
December 19, 2005 (Registration
No. 333-130122),
which covers the offer and sale of 18,000,000 shares of
common stock of BPI by the selling shareholders named therein
(the December 5, 2005 Prospectus). |
The November 18, 2005 Prospectus, along with this
prospectus supplement, together constitute the prospectus
required to be delivered by Section 5(b) of the Securities
Act of 1933 with respect to the offering and sale of common
stock of BPI covered by the November 18, 2005 Prospectus.
The December 5, 2005 Prospectus, along with this prospectus
supplement, together constitute the prospectus required to be
delivered by Section 5(b) of the Securities Act of 1933
with respect to the offering and sale of common stock of BPI
covered by the December 5, 2005 Prospectus.
You should rely only on the information contained in this
prospectus supplement and the related prospectus identified
above. We have not authorized any other person to provide you
with information that is different from or in addition to that
contained in this prospectus supplement and the related
prospectus. If anyone provides you with different or
inconsistent information, you should not rely on it.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement is
truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus supplement is March 21, 2006
TABLE OF CONTENTS
i
ABOUT THIS PROSPECTUS SUPPLEMENT
Our disclosure consists of two parts. The first part is either
the November 18, 2005 Prospectus or the December 5,
2005 Prospectus, depending upon which prospectus is required to
be delivered to you by the selling shareholder. The second part
is this prospectus supplement. You should review both this
prospectus supplement and the related prospectus in their
entirety before making a decision to invest in BPIs common
stock. This prospectus supplement sets forth BPIs
financial statements for the quarterly period ended
January 31, 2006, managements discussion and analysis
of financial condition and results of operations, and recent
developments in BPIs business since the dates of the
respective prospectuses identified above. In the event of any
inconsistency between this prospectus supplement and the related
prospectus, you should rely on the information contained in this
prospectus supplement.
1
FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED
JANUARY 31, 2006
BPI ENERGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
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January 31, 2006 | |
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July 31, 2005 | |
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(Unaudited) | |
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ASSETS |
Current Assets:
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Cash and cash equivalents
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|
$ |
26,623,707 |
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|
$ |
7,251,503 |
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Accounts receivable
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|
|
159,634 |
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|
|
34,671 |
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Other current assets
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|
270,445 |
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|
23,534 |
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Total current assets
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27,053,786 |
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7,309,708 |
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Property and equipment, at cost:
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Oil and gas properties, full cost method of accounting:
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Proved, net of accumulated depreciation, depletion and
amortization of $142,023 and $58,523
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15,970,561 |
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10,190,929 |
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Unproved
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3,244,807 |
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3,149,372 |
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Net oil and gas properties
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19,215,368 |
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13,340,301 |
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Other property and equipment, net of accumulated depreciation
and amortization of $462,530 and $398,988
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4,434,311 |
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1,769,812 |
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Net property and equipment
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23,649,679 |
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15,110,113 |
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Investment in Hite Coalbed Methane, L.L.C.
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846,766 |
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Restricted cash
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134,000 |
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100,000 |
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Other non-current assets
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161,125 |
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161,125 |
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$ |
50,998,590 |
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$ |
23,527,712 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
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Accounts payable
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$ |
1,486,767 |
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$ |
2,144,066 |
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Current maturity of long-term notes payable
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239,071 |
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42,227 |
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Accrued liabilities and other
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72,145 |
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31,405 |
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Total current liabilities
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1,797,983 |
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2,217,698 |
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Long-term notes payable, less current portion
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94,768 |
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507,595 |
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Other non-current liabilities
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45,949 |
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Total liabilities
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1,938,700 |
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2,725,293 |
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Shareholders equity:
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Common shares, no par value, authorized 100,000,000 shares,
64,378,087 and 43,912,961 outstanding
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64,573,394 |
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34,666,022 |
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Additional paid-in capital
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|
4,891,266 |
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4,493,680 |
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Accumulated deficit
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|
(20,404,770 |
) |
|
|
(18,357,283 |
) |
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Total shareholders equity
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|
49,059,890 |
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20,802,419 |
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$ |
50,998,590 |
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$ |
23,527,712 |
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See Notes to Unaudited Consolidated Financial Statements.
2
BPI ENERGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended January 31 | |
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Six Months Ended January 31 | |
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2006 | |
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2005 | |
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2006 | |
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2005 | |
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Revenues:
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Gas sales
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$ |
327,811 |
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$ |
6,341 |
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$ |
537,505 |
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$ |
6,341 |
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Expenses:
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Lease operating expense
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300,806 |
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461,610 |
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General and administrative expenses
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|
1,165,483 |
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2,752,852 |
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|
2,437,239 |
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|
3,165,087 |
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Depreciation, depletion and amortization
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|
|
117,890 |
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|
34,086 |
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|
|
212,692 |
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|
|
57,672 |
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1,584,179 |
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2,786,938 |
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|
3,111,541 |
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|
3,222,759 |
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Other income (expenses):
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Interest income
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270,186 |
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|
4,353 |
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|
402,804 |
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|
4,847 |
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Interest expense
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|
(6,234 |
) |
|
|
(5,407 |
) |
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|
(13,778 |
) |
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|
(10,582 |
) |
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Other income (expense)
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|
138,191 |
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|
3,246 |
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137,523 |
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3,246 |
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402,143 |
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2,192 |
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526,549 |
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(2,489 |
) |
Loss before income taxes
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|
|
(854,225 |
) |
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|
(2,778,405 |
) |
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|
(2,047,487 |
) |
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|
(3,218,907 |
) |
Deferred income tax benefit
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|
292,562 |
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344,717 |
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Net loss
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$ |
(854,225 |
) |
|
$ |
(2,485,843 |
) |
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$ |
(2,047,487 |
) |
|
$ |
(2,874,190 |
) |
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Basic and diluted loss per share
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$ |
(0.01 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.09 |
) |
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Weighted average common shares outstanding
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63,654,794 |
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34,790,336 |
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57,889,094 |
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32,018,325 |
|
See Notes to Unaudited Consolidated Financial Statements.
3
BPI ENERGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
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Common Shares | |
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Additional | |
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Total | |
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Paid-In | |
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Accumulated | |
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Shareholder | |
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Shares | |
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Amounts | |
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Capital | |
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Deficit | |
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Equity | |
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Balance, July 31, 2005
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43,912,961 |
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$ |
34,666,022 |
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$ |
4,493,680 |
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$ |
(18,357,283 |
) |
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$ |
20,802,419 |
|
Proceeds from stock options exercised
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391,667 |
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379,379 |
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379,379 |
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Proceeds from warrants exercised
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2,073,459 |
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1,644,039 |
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|
1,644,039 |
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Net proceeds from shares issued in private placement
September 23, 2005(1)
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18,000,000 |
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|
27,883,954 |
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27,883,954 |
|
Stock-based compensation
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|
397,586 |
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397,586 |
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Net loss
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|
|
|
|
|
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|
(2,047,487 |
) |
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|
(2,047,487 |
) |
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Balance, January 31, 2006
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64,378,087 |
|
|
$ |
64,573,394 |
|
|
$ |
4,891,266 |
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$ |
(20,404,770 |
) |
|
$ |
49,059,890 |
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(1) |
Net of share issuance costs of $2,619,953 |
See Notes to Unaudited Consolidated Financial Statements.
4
BPI ENERGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended January 31 | |
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2006 | |
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2005 | |
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Operating activities:
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|
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Net loss
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$ |
(2,047,487 |
) |
|
$ |
(2,874,190 |
) |
|
Adjustments to reconcile net loss to net cash used in operating
activities:
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|
|
|
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|
Depreciation, depletion and amortization
|
|
|
212,692 |
|
|
|
57,672 |
|
|
|
Stock-based compensation expense
|
|
|
397,586 |
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|
|
2,200,777 |
|
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|
Gain on sale of investment
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|
(127,416 |
) |
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|
(3,246 |
) |
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|
Deferred income tax benefit
|
|
|
|
|
|
|
(344,717 |
) |
|
|
Other
|
|
|
|
|
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|
14,881 |
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|
Changes in assets and liabilities:
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|
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Accounts receivable
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|
(124,963 |
) |
|
|
(6,341 |
) |
|
|
Other current assets
|
|
|
(246,911 |
) |
|
|
(17,714 |
) |
|
|
Accounts payable
|
|
|
(657,299 |
) |
|
|
(99,039 |
) |
|
|
Accrued liabilities and other
|
|
|
71,922 |
|
|
|
496 |
|
|
|
Other non-current liabilities
|
|
|
45,949 |
|
|
|
|
|
|
|
|
|
|
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|
Net cash used in operating activities
|
|
|
(2,475,927 |
) |
|
|
(1,071,421 |
) |
Investing activities:
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|
|
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|
|
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|
Proceeds from sale of investment
|
|
|
551,000 |
|
|
|
43,956 |
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|
|
Additions to oil and gas properties
|
|
|
(5,958,567 |
) |
|
|
(1,907,403 |
) |
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|
Additions to other property and equipment
|
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|
(2,560,216 |
) |
|
|
(371,736 |
) |
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|
Acquisition of equity interest in joint venture
|
|
|
|
|
|
|
(78,112 |
) |
|
|
Increase in restricted cash
|
|
|
(34,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investment activities
|
|
|
(8,001,783 |
) |
|
|
(2,313,295 |
) |
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term notes payable
|
|
|
(57,458 |
) |
|
|
(14,828 |
) |
|
|
Net proceeds from issuance of common shares
|
|
|
29,907,372 |
|
|
|
14,140,215 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
29,849,914 |
|
|
|
14,125,387 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
19,372,204 |
|
|
|
10,740,671 |
|
Cash and cash equivalents at the beginning of the period
|
|
|
7,251,503 |
|
|
|
970,795 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$ |
26,623,707 |
|
|
$ |
11,711,466 |
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information:
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Non-cash investing and financing activity:
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|
|
|
|
|
|
|
|
|
|
Acquisition of equipment by issuance of notes payable
|
|
$ |
233,475 |
|
|
$ |
|
|
Interest paid approximates interest expense.
See Notes to Unaudited Consolidated Financial Statements.
5
BPI Energy Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
|
|
1. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
These unaudited consolidated interim financial statements
include the accounts of BPI Energy Holdings, Inc. and its wholly
owned U.S. subsidiary, BPI Energy, Inc. (collectively,
the Company). All inter-company transactions and
balances have been eliminated upon consolidation.
BPI Energy Holdings, Inc. is incorporated in British Columbia,
Canada and, through its wholly owned U.S. subsidiary, BPI
Energy, Inc., is involved in the acquisition, exploration and
development of coalbed methane properties located in the United
States of America. The Company conducts its operations in one
reportable segment, which is oil and gas exploration and
production. On December 13, 2005, the Companys common
shares began trading on the American Stock Exchange
(AMEX) under the symbol BPG. As a result of the
shares being listed on the AMEX, the Company voluntarily
de-listed from trading its shares on the TSX Venture Exchange.
Amounts shown are in U.S. Dollars unless otherwise
indicated.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to
Form 10-Q and
Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the quarter and six months ended
January 31, 2006 are not necessarily indicative of the
results that may be expected for the full fiscal year. For
further information, refer to the consolidated financial
statements and notes thereto included in the Companys
Form S-1 filed
with the Securities and Exchange Commission on December 5,
2005. Certain prior period amounts have been reclassified to
conform to current period presentation.
The preparation of these unaudited consolidated financial
statements requires the use of certain estimates by management
in determining the Companys assets, liabilities, revenues
and expenses. Actual results could differ from such estimates.
Depreciation, depletion and amortization of oil and gas
properties and the impairment of oil and gas properties are
determined using estimates of oil and gas reserves. There are
numerous uncertainties in estimating the quantity of reserves
and in projecting the future rates of production and timing of
development expenditures, including future costs to dismantle,
dispose of, and restore the Companys properties. Oil and
gas reserve engineering must be recognized as a subjective
process of estimating underground accumulations of oil and gas
that cannot be measured in an exact way. Proved reserves of oil
and natural gas are estimated quantities that geological and
engineering data demonstrate with reasonable certainty to be
recoverable in the future from known reservoirs under existing
conditions.
The Company follows the full cost method of accounting for oil
and gas properties. Under this method, all costs associated with
the acquisition of, exploration for and development of oil and
gas reserves are capitalized in cost centers on a
country-by-country basis (currently the Company has one cost
center, the United States). Such costs include lease acquisition
costs, geological and geophysical studies, carrying charges on
non-producing properties, costs of drilling both productive and
non-productive wells, and overhead expenses directly related to
these activities. Internal costs associated with oil and gas
activities that are not directly attributable to acquisition,
exploration or development activities are expensed as incurred.
Unevaluated oil and gas properties and major development
projects are excluded from amortization until a determination of
whether proved reserves can be assigned to the properties or
impairment occurs.
6
BPI Energy Holdings, Inc.
Notes to Consolidated Financial
Statements (Continued)
Unevaluated properties are assessed at least annually to
ascertain whether an impairment has occurred. Sales or
dispositions of properties are credited to their respective cost
centers and a gain or loss is recognized when all the properties
in a cost center have been disposed of, unless such sale or
disposition significantly alters the relationship between
capitalized costs and proved reserves attributable to the cost
center.
Capitalized costs of proved oil and gas properties, including
estimated future costs to develop the reserves and estimated
abandonment cost, net of salvage, are amortized on the
units-of-production
method using estimates of proved reserves.
A ceiling test is applied to each cost center by comparing the
net capitalized costs, less related deferred income taxes, to
the estimated future net revenues from production of proved
reserves, discounted at 10%, plus the costs of unproved
properties net of impairment. Any excess capitalized costs are
written off in the current year. The calculation of future net
revenues is based upon prices, costs and regulations in effect
at each year end.
In general, the Company determines if a property is impaired if
one or more of the following conditions exist:
|
|
|
i) there are no firm plans for further drilling on the
unproved property; |
|
|
ii) negative results were obtained from studies of the
unproved property; |
|
|
iii) negative results were obtained from studies conducted
in the vicinity of the unproved property; or |
|
|
iv) the remaining term of the unproved property does not
allow sufficient time for further studies or drilling. |
|
|
|
Other Property and Equipment |
Property and equipment are stated at cost. Gas collection
equipment is depreciated on the
units-of-production
method based on proved reserves. Support equipment and other
property and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets, ranging
from three to ten years. Major classes of property and equipment
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
January 31 | |
|
July 31 | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Other Property and Equipment:
|
|
|
|
|
|
|
|
|
|
Gas collection equipment
|
|
$ |
3,758,264 |
|
|
$ |
1,332,012 |
|
|
Support equipment
|
|
|
1,058,731 |
|
|
|
760,467 |
|
|
Other
|
|
|
79,846 |
|
|
|
76,321 |
|
|
Less: Accumulated depreciation and amortization
|
|
|
(462,530 |
) |
|
|
(398,988 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,434,311 |
|
|
$ |
1,769,812 |
|
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations |
The Company follows Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a
liability in the period in which it is incurred, if a reasonable
estimate of fair value can be made. The present value of the
estimated asset retirement costs is capitalized as part of the
carrying amount of the associated long-lived asset. Amortization
of the capitalized asset retirement cost is determined on a
units-of-production
method. Accretion of the asset retirement obligation is
recognized over time until the obligation is settled. The
Companys asset retirement obligations relate to the
plugging of wells upon exhaustion of gas reserves. The Company
assessed its asset retirement obligation in prior periods and
deemed
7
BPI Energy Holdings, Inc.
Notes to Consolidated Financial
Statements (Continued)
it to be immaterial. The initial liability for our asset
retirement obligations was recorded as of August 1, 2005 in
the amount of $19,778.
The following table summarizes the activity for the
Companys asset retirement obligations for the six months
ended January 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Ended January 31 |
|
|
|
|
|
2006 | |
|
2005 |
|
|
| |
|
|
Asset retirement obligation at beginning of period
|
|
$ |
19,778 |
|
|
$ |
|
|
Accretion expense
|
|
|
1,335 |
|
|
|
|
|
Liabilities incurred
|
|
|
24,836 |
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation at end of period
|
|
$ |
45,949 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Loss per share is calculated using the weighted average number
of common shares outstanding during the year. Diluted loss per
share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted loss per share
is not disclosed as all common share equivalents were
anti-dilutive for the quarter and six months ended
January 31, 2006. Outstanding options and warrants that
were excluded from the computation of diluted loss per share, as
the effect of their assumed exercises would be anti-dilutive,
totaled 14,844,215 at October 31, 2005 and 13,150,828 at
January 31, 2006.
Prior to December 13, 2005 the Company had a stock-based
compensation plan (the Incentive Stock Option Plan)
under which stock options were issued to directors, officers,
employees and consultants as determined by the Board of
Directors and subject to the provisions of the Incentive Stock
Option Plan. The Incentive Stock Option Plan permitted options
to be issued with exercise prices at a discount to the market
price of the Companys common stock on the day prior to the
date of grant. However, the majority of all stock options issued
under the Incentive Stock Option Plan were issued with exercise
prices equal to the quoted market price of the stock on the date
of grant. Options granted under the Incentive Stock Option Plan
vested immediately and were exercisable over a period not
exceeding five years. The Company had options to
purchase 4,030,612 shares of common stock outstanding
under the Incentive Stock Option Plan at January 31, 2006.
On December 13, 2005, the shareholders of the Company
approved the BPI Industries Inc. 2005 Omnibus Stock Plan (the
Omnibus Stock Plan) and it became effective on that
date. The Omnibus Stock Plan replaces the Incentive Stock Option
Plan under which stock options were previously granted. The
Omnibus Stock Plan will be administered by the Compensation
Committee of the Board of Directors (the Committee)
and will remain in effect for five years. All employees and
Directors of the Company and its subsidiaries, and all
consultants or agents of the Company designated by the
Committee, are eligible to participate in the Omnibus Stock
Plan. The Committee has authority to: grant awards, select the
participants who will receive awards, determine the terms,
conditions, vesting periods and restrictions applicable to the
awards, determine how the exercise price is to be paid, modify
or replace outstanding awards within the limits of the Omnibus
Stock Plan, accelerate the date on which awards become
exercisable, waive the restrictions and conditions applicable to
awards, and establish rules governing the Omnibus Stock Plan. No
options have been issued under the Omnibus Stock Plan as of
January 31, 2006.
8
BPI Energy Holdings, Inc.
Notes to Consolidated Financial
Statements (Continued)
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment. This Statement revises
SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees.
SFAS No. 123(R) focuses primarily on the accounting
for transactions in which an entity obtains employee services in
share-based payment transactions. The key provision of
SFAS No. 123(R) requires companies to record
share-based payment transactions as compensation expense at fair
market value based on the grant-date fair value of those awards.
Previously under SFAS 123, companies had the option of
either recording expense based on the fair value of stock
options granted or continuing to account for stock-based
compensation using the intrinsic value method prescribed by APB
No. 25.
The Company adopted SFAS No. 123(R), using the
modified-prospective method, effective August 1, 2005.
Since August 1, 2001, the Company followed the fair value
provisions of SFAS 123 and recorded all share-based payment
transactions as compensation expense at fair market value based
on the grant-date fair value of those awards. In addition, all
stock options previously granted by the Company vested
immediately on the date of grant, and thus there was no unvested
portion of previous stock option grants which vested during the
quarter or six months ended January 31, 2006. Therefore,
SFAS 123(R) had no impact on the Companys
consolidated financial position or results of operations for the
quarter and six months ended January 31, 2006. The Company
continues to use the Black-Scholes formula to estimate the fair
value of stock options previously granted under the Incentive
Stock Option Plan.
|
|
2. |
STOCK-BASED COMPENSATION |
The tables below summarize stock options activity for the six
months ended January 31, 2006 and 2005, respectively. All
stock options were granted with exercise prices denominated in
Canadian Dollars. U.S. Dollar amounts shown in the tables
below were derived using published exchange rates on the date of
the transaction for grants, cancellations, exercises and
expirations and at period-end exchange rates for options
outstanding as of July 31, 2005 and 2004 and
January 31, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average | |
|
|
|
|
Exercise Price | |
|
|
|
|
| |
Six Months Ended January 31, 2006: |
|
Number of options | |
|
CAD$ | |
|
USD$ | |
|
|
| |
|
| |
|
| |
Outstanding at July 31, 2005
|
|
|
4,227,279 |
|
|
$ |
1.82 |
|
|
$ |
1.49 |
|
Granted exercise price equal to market price of
stock on date of grant
|
|
|
495,000 |
|
|
|
2.05 |
|
|
|
1.75 |
|
Exercised
|
|
|
(341,667 |
) |
|
|
1.19 |
|
|
|
1.00 |
|
Cancelled
|
|
|
(300,000 |
) |
|
|
1.82 |
|
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2005
|
|
|
4,080,612 |
|
|
$ |
1.88 |
|
|
$ |
1.60 |
|
Exercised
|
|
|
(50,000 |
) |
|
|
1.43 |
|
|
|
1.22 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2006
|
|
|
4,030,612 |
|
|
$ |
1.88 |
|
|
$ |
1.64 |
|
|
|
|
|
|
|
|
|
|
|
9
BPI Energy Holdings, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average | |
|
|
|
|
Exercise Price | |
|
|
|
|
| |
Six Months Ended January 31, 2005: |
|
Number of options | |
|
CAD$ | |
|
USD$ | |
|
|
| |
|
| |
|
| |
Outstanding at July 31, 2004
|
|
|
2,230,556 |
|
|
$ |
.78 |
|
|
$ |
0.59 |
|
Cancelled
|
|
|
(13,889 |
) |
|
|
1.20 |
|
|
|
0.98 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2004
|
|
|
2,216,667 |
|
|
$ |
0.77 |
|
|
$ |
0.63 |
|
Granted exercise price equal to market price of
stock on date of grant
|
|
|
2,097,278 |
|
|
|
1.93 |
|
|
|
1.55 |
|
Granted exercise price less than market price of
stock on date of grant
|
|
|
852,778 |
|
|
|
1.19 |
|
|
|
.96 |
|
Exercised
|
|
|
(1,040,000 |
) |
|
|
0.69 |
|
|
|
0.57 |
|
Cancelled
|
|
|
(11,111 |
) |
|
|
1.20 |
|
|
|
0.98 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2005
|
|
|
4,115,612 |
|
|
$ |
1.47 |
|
|
$ |
1.19 |
|
|
|
|
|
|
|
|
|
|
|
The Company recorded stock-based compensation expense of
$397,586 and $2,200,777 in the six months ended January 31,
2006 and 2005, respectively. The fair value of stock options
granted was estimated using the Black-Scholes Option Pricing
Model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
January 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Risk-free interest rate
|
|
|
3.3 |
% |
|
|
3.0 3.5 |
% |
Expected dividend yield
|
|
|
Nil |
|
|
|
Nil |
|
Expected stock price volatility
|
|
|
66 |
% |
|
|
74 81 |
% |
Expected option life
|
|
|
3 years |
|
|
|
3 years |
|
Option pricing models require the input of highly subjective
assumptions, particularly as to the expected price volatility of
the stock. Changes in these assumptions can materially affect
the fair value estimate, and therefore it is managements
view that the existing models do not necessarily provide a
single reliable measure of the fair value of the Companys
stock option grants.
The following table summarizes information about options
outstanding as of January 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise | |
|
|
|
|
|
|
Price | |
|
Number | |
|
Remaining | |
|
|
CAD$ | |
|
Outstanding | |
|
Life (Years) | |
|
Expiry Date |
| |
|
| |
|
| |
|
|
$ |
0.65 |
|
|
|
350,000 |
|
|
|
2.8 |
|
|
November 3, 2008 |
|
0.90 |
|
|
|
143,334 |
|
|
|
0.9 |
|
|
January 10, 2007 |
|
0.90 |
|
|
|
100,000 |
|
|
|
1.2 |
|
|
April 10, 2007 |
|
0.90 |
|
|
|
15,000 |
|
|
|
3.6 |
|
|
September 22, 2009 |
|
1.20 |
|
|
|
50,000 |
|
|
|
0.9 |
|
|
January 10, 2007 |
|
1.49 |
|
|
|
710,666 |
|
|
|
3.8 |
|
|
November 29, 2009 |
|
2.05 |
|
|
|
495,000 |
|
|
|
4.6 |
|
|
September 22, 2010 |
|
2.19 |
|
|
|
911,000 |
|
|
|
4.2 |
|
|
March 27, 2010 |
|
2.36 |
|
|
|
115,000 |
|
|
|
4.3 |
|
|
May 23, 2010 |
|
2.40 |
|
|
|
1,140,612 |
|
|
|
4.0 |
|
|
January 20, 2010 |
|
|
|
|
|
|
|
|
|
|
$ |
1.88 |
|
|
|
4,030,612 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
We operate in two tax jurisdictions, the United States and
Canada. Primarily as a result of the net operating losses that
we have generated (NOL Carryforwards) in both Canada
and the United States, we
10
BPI Energy Holdings, Inc.
Notes to Consolidated Financial
Statements (Continued)
have generated deferred tax benefits available for tax purposes
to offset net income in future periods. SFAS No. 109,
Accounting for Income Taxes, requires that we record a
valuation allowance when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of sufficient future taxable income before
the expiration of the NOL Carryforwards. Because of the
Companys limited operating history, limited financial
performance and cumulative tax loss from inception, it is
managements judgment that SFAS No. 109 requires
the recording of a full valuation allowance for net deferred tax
assets in both Canada and the United States as of
January 31, 2006.
We recorded a tax benefit in the United States for the six
months ended January 31, 2005 to partially offset a net
deferred tax liability at January 31, 2005; however, no tax
benefit was recognized for the six months ended
January 31, 2006 as the Company had no net deferred tax
liability to offset.
|
|
4. |
LONG-TERM NOTES PAYABLE |
The Company has outstanding notes payable as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31, | |
|
July 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Case Credit term note due in fiscal year 2006, 6.50%
|
|
$ |
28,582 |
|
|
$ |
32,833 |
|
GMAC term notes due in fiscal year 2009, 6.50%
|
|
|
25,163 |
|
|
|
26,633 |
|
GMAC term notes due in fiscal year 2010, 6.1% to 6.50%
|
|
|
94,979 |
|
|
|
98,356 |
|
Convertible note due in fiscal year 2008, 3.25%
|
|
|
|
|
|
|
392,000 |
|
Caterpillar Financial Services Corp
|
|
|
195,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333,839 |
|
|
|
549,822 |
|
Less current maturities
|
|
|
(239,071 |
) |
|
|
(42,227 |
) |
|
|
|
|
|
|
|
Long-term notes payable
|
|
$ |
94,768 |
|
|
$ |
507,595 |
|
|
|
|
|
|
|
|
The notes are collateralized by the related vehicles and
equipment. The convertible note payable outstanding at
July 31, 2005 was issued in June 2003 with a face value of
$392,000 and maturing on June 10, 2008, bearing interest at
3.25%, convertible at the option of the holder, prior to
June 10, 2008, into 390,537 common shares of the Company.
The convertible note payable was cancelled on January 4,
2005 pursuant to the sale of the Companys interest in Hite
Coalbed Methane, L.L.C. see Note 7.
The annual maturities of all notes for the remaining six months
of fiscal year 2006 and the four fiscal years thereafter are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal | |
|
Interest | |
|
Total | |
|
|
| |
|
| |
|
| |
2006
|
|
$ |
137,451 |
|
|
$ |
9,201 |
|
|
$ |
146,652 |
|
2007
|
|
|
121,239 |
|
|
|
7,160 |
|
|
|
128,399 |
|
2008
|
|
|
27,982 |
|
|
|
3,855 |
|
|
|
31,837 |
|
2009
|
|
|
29,767 |
|
|
|
2,070 |
|
|
|
31,837 |
|
2010
|
|
|
17,400 |
|
|
|
440 |
|
|
|
17,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
333,839 |
|
|
$ |
22,726 |
|
|
$ |
356,565 |
|
|
|
|
|
|
|
|
|
|
|
11
BPI Energy Holdings, Inc.
Notes to Consolidated Financial
Statements (Continued)
In September 2005, the Company sold 18,000,000 common shares in
a private placement. The proceeds from this private placement of
$27,883,954 net of $2,619,953 of share issuance costs, will
be used to fund the Companys plan of operations and for
working capital and general corporate purposes.
The Company has share purchase warrants outstanding at
January 31, 2006 as follows:
|
|
|
|
|
|
|
Number | |
|
Exercise |
|
|
Outstanding | |
|
Price |
|
Expiry Date |
| |
|
|
|
|
|
3,177,016 |
|
|
CAD $1.00 |
|
April 29, 2006 |
|
4,906,000 |
|
|
USD $1.50 |
|
December 13, 2007 |
|
1,037,200 |
|
|
USD $1.25 |
|
January 15, 2010 |
|
|
|
|
|
|
|
9,120,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6. |
RELATED PARTY TRANSACTIONS |
The Company enters into various transactions with related
parties in the normal course of business operations. Randy
Oestreich, the Companys Vice President of Field
Operations, owns and operates A-Strike Consulting, a consulting
company that provides, among other things, laboratory testing
related to CBM. Beginning in the fiscal year ended July 31,
2005, the Company owns and maintains a lab testing facility and
allows A-Strike Consulting to operate the facility. The Company
pays all expenses related to the facility and, in return,
receives 80% of the revenue generated from the operations of the
facility as reimbursement of the Companys expenses. The
Company received approximately $38,451 and $0 in expense
reimbursement related to this arrangement during the six months
ended January 31, 2006 and 2005, respectively.
Mr. Oestreichs brother owns Dependable Service
Company, a company that provides general labor services to the
Company. The Company paid Dependable Services Company $160,679
and $54,929 during the six months ended January 31, 2006
and 2005, respectively.
|
|
7. |
SALE OF INVESTMENT IN HITE COALBED METHANE, L.L.C. |
On January 4, 2006, the Company sold its 49% interest in
Hite Coalbed Methane, L.L.C. (HCM) for $551,000 in
cash and cancellation of the Companys convertible note
payable in the amount of $392,000, plus accrued interest of
$31,182. The note was convertible into 390,537 of the
Companys common shares. The Company accounted for its
investment in HCM under the cost method of accounting. The total
consideration received of $974,182 resulted in a gain on the
sale of the investment of $127,416, which is included in other
income in the Companys statement of operations for the
quarter and six months ended January 31, 2006.
On April 3, 2001 the Company entered into an Oil, Gas and
Coalbed Methane Gas Lease (Lease) with American
Premier Underwriters, Inc. and AFC Coal Properties, Inc.
(collectively, the Lessors). The Lease has an
initial term of five years that expires on April 3, 2006;
however, the term is extended as to the 320 acre tract that
surrounds each well so long as CBM is produced from such tract
providing a royalty payment of at least $1.00 per acre per
month; provided, however, after the initial five year term, if
aggregate royalties do not exceed $42,000 in any month, the
Lease shall terminate.
In August 2005, the original Lessors transferred, subject to the
Lease, certain of their rights under the Lease, including
certain of their rights in and to the CBM to Colt, LLC and
Peabody Land Holdings, LLC (collectively, the
Transferees). The Company believes that at least one
of the Transferees, Colt, LLC, has taken steps that have
interfered with the Companys ability to carry out its
development plans and generate the
12
BPI Energy Holdings, Inc.
Notes to Consolidated Financial
Statements (Continued)
royalties necessary to extend the Lease (including the
establishment of additional wells prior to the April 3,
2006 deadline).
On March 15, 2006, the Company filed a complaint against
the Lessors and Transferees alleging (i) tortious
interference with business relations and (ii) breach of
contract. The Company is seeking a preliminary and permanent
injunction, declaratory judgment and unspecified monetary
damages. The complaint was filed in the United States District
Court for the Southern District of Ohio.
The Company believes that it should be successful in extending
the term of the lease as to existing wells and certain other
areas subject to the Lease where the Company believes the
Lessors and Transferees have interfered with its ability to
establish wells prior to the April 3, 2006 deadline.
However, there exists a reasonable possibility that the Company
will be unable to extend the Lease as to either or both of the
existing wells or additional areas where the Lessors and
Transferees have interfered with the Companys
establishment of wells. The effect of the loss of all of the
Companys acreage under the Lease may result in a
write-down of capitalized net oil and gas and other properties
in an amount up to approximately $22 million. The effect of
the loss of only the Companys non-producing acreage (those
areas in which wells had not yet been established) may result in
a write-down of capitalized net oil and gas and other properties
in an amount up to approximately $4 million.
On February 9, 2006, at a special meeting of the
Companys shareholders, the shareholders voted to approve
amendments to the Companys governing documents that:
|
|
|
|
1. |
changed the name of the Company to BPI Energy Holdings, Inc.; |
|
|
2. |
increased the number of shares of common stock that the Company
is authorized to issue from 100 million shares to
200 million shares; |
|
|
3. |
increased the quorum necessary to transact business at a meeting
of the Companys shareholders to the holders of
331/3%
of the Companys shares of common stock; and |
|
|
4. |
permit meetings of the Companys shareholders to be held
outside of British Columbia, Canada. |
Each of the amendments to the Companys governing documents
was previously approved by the unanimous vote of the
Companys Board of Directors.
13
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The discussion and analysis that follows should be read together
with the accompanying unaudited consolidated financial
statements and notes related thereto that are included above.
Overview and Outlook
We are an independent energy company incorporated in British
Columbia, Canada and primarily engaged, through our wholly owned
U.S. subsidiary, BPI Energy, Inc., in the exploration for
and development of coalbed methane (CBM). Our
exploration and development efforts are concentrated in the
Illinois Basin. Our Canadian activities are limited to
administrative reporting obligations to the province of British
Columbia and regulatory reporting to the British Columbia
Securities Commission. As of our second quarter ended
January 31, 2006, we owned or controlled CBM rights,
through mineral leases, options to acquire mineral leases, and
farm-out agreements, covering 418,435 total acres. A substantial
majority of the acreage under our control was undeveloped as of
January 31, 2006.
Although we capitalize exploration costs, we have historically
experienced significant losses. The primary costs that generated
these losses were compensation-related expenses and general and
administrative expenses. We commenced CBM sales from our first
producing wells in January 2005, generating $117,835 in gas
sales during the fiscal year ended July 31, 2005. During
the six months ended January 31, 2006, we generated gas
sales of $537,505. During the fiscal year ended July 31,
2004 and for the preceding fiscal year we had no revenues. Our
focus during those years was the acquisition of CBM rights and
exploration for CBM in the Illinois Basin. Future revenues are
primarily dependent on our ability to produce and sell CBM.
We are not currently generating net income or positive cash flow
from operations. Even if we achieve increased revenues and
positive cash flow from operations in the future, we anticipate
increased exploration, development and other capital
expenditures as we continue to explore and develop our mineral
rights.
We believe that our current cash balances are sufficient to
fully fund our capital expenditures and fund our anticipated net
cash used by operating activities through July 31, 2006.
However, our revenues and cash balances may not be sufficient to
fund our operations beyond that date. Therefore, in order to
fund our operations after July 31, 2006, we will likely
need to raise additional financing.
Several factors, over which we have little or no control, could
impact our future economic success. These factors include
natural gas prices, limitations imposed by the terms and
conditions of our lease agreements, the extent of our rights
under mineral leases as determined by further title
investigation, possible court rulings concerning our property
interests in CBM, availability of drilling rigs, operating
costs, and environmental and other regulatory matters. In our
planning process, we have attempted to address these issues by:
|
|
|
|
|
negotiating leases that grant us the broadest possible rights to
CBM for any given tract of land; |
|
|
|
conducting ongoing title reviews of existing mineral interests; |
|
|
|
where possible, negotiating and securing long-term service
company commitments to insure availability of equipment and
services; and |
|
|
|
attempting to create a low cost structure in order to reduce our
vulnerability to many of these factors. |
From early 2002 until 2005, our strategic focus was on building
our acreage footprint in the Illinois Basin. BPI was built
around the primary strategic objective of acquiring CBM rights
in the Basin. As we began accumulating CBM rights we began
testing our acreage to determine its CBM potential. Having
accumulated CBM rights to just over 418,000 acres and
conducting extensive testing at our Delta Project
(Delta), we embarked (in late 2004) on a pilot
production program at Delta. Encouraged by the results, we
expanded our drilling and production activities and began
installing the infrastructure necessary to enable us to begin
sales of CBM at Delta.
As our drilling and production operations have grown, we have
not abandoned our goal of adding additional acreage and mineral
rights; however, we have new additional goals and we realize
that we must
14
build and add to our organization in other critical areas as
well. These new goals require us to bring in additional capital,
resources and people with the technical and managerial expertise
to assist us in achieving these goals. These additional goals
include the following:
|
|
|
|
|
developing the in-house capabilities necessary to enable us to
meet our regulatory and reporting obligations to various
regulatory agencies, constituencies and our shareholders; |
|
|
|
raise the capital necessary to achieve our plans and
goals; and |
|
|
|
transition BPI from a company focused primarily on acquisition
of mineral rights to a company focused on producing CBM. |
We have registered our stock with the U.S. Securities and
Exchange Commission and our stock is now listed on the American
Stock Exchange. These developments brought with them new and
additional regulatory and reporting obligations, which meant we
needed the personnel and resources to meet these obligations. We
began addressing this aspect of our business when we moved our
corporate headquarters to the United States from Vancouver, B.C.
and brought in our CFO and General Counsel, George Zilich, and
our controller, Randy Elkins, early in 2005. We will continue to
add resources as necessary to meet our obligations in this area.
In September 2005 we sold 18,000,000 shares of our common
stock to a limited number of institutional investors and brought
in approximately $28 million of new capital. We are
conscious of the dilution caused to existing shareholders as a
result of selling stock. We raised the amount we felt was
required to fund our development plans until the time we are
able to raise capital on more favorable terms.
Our rate of drilling new wells at Delta has slowed due to a
dispute with one of the coal owners. We are eager to step up our
drilling program and get to our planned level of drilling
activity of 15 wells per month at our Delta Project. In
this regard, we will continue to attempt to negotiate a mutually
satisfactory development plan and lease amendment with our
lessor(s); however, we have initiated a lawsuit in federal court
in order to preserve our rights under the lease covering our
Delta Project (see Note 8 of our financial statements). As
of the end of the second quarter of fiscal year 2006, we had
73 wells that were in production and an additional
22 wells that were drilled, but not yet in production. All
of our productive wells are on our Delta Project. Most of these
wells are still in the early stages of dewatering and represent
only a small fraction of our total potential drilling locations.
We initiated production at Delta because this is where we began
our testing program and had the most data. We made the decision
at Delta to invest in a gathering system and the other
infrastructure necessary to begin CBM production and sales. Our
Delta Project covers approximately 50,000 acres in Southern
Illinois. The results from our production at the Delta Project
reinforce our belief that the Illinois Basin is not only
commercially viable, but also that the Basin will become a
meaningful contributor to the overall supply of natural gas to
the Midwest.
We are currently performing testing at our Montgomery Project.
Our CBM rights in the Montgomery Project cover
239,487 acres in Montgomery, Shelby and Macoupin counties
in Illinois, which are located in the north central part of the
Illinois Basin. The coal seams at our Montgomery Project are
some of the thickest found in the Illinois Basin, with some
seams as thick as 10 feet. We are currently testing nine
seams that could be commercially viable. We expect to initiate
our second development front at our Montgomery Project in Spring
2006.
Our plan for our Clinton/ Washington project for the current
fiscal year is to drill four test wells in each of the four
separate lease blocks constituting this project. We will gain
valuable test data that we believe will assist us in planning
our future development of this acreage.
As a company, we have limited in-house CBM operating and
engineering resources. As a result, in the initial stages of our
drilling and production activities, we have utilized outside
contractors to perform most of these activities. We have focused
on increasing our internal engineering and operating resources
as a primary goal of BPI over the coming years. In this regard,
we have begun the process of identifying and interviewing
candidates with the technical skills we believe are necessary to
help BPI become a world class CBM drilling
15
and production company. This will take considerable time, but we
believe it is necessary in order to realize the value of the CBM
assets we have assembled.
Results of Operations
|
|
|
Three Months Ended January 31, 2006 Compared to Three
Months Ended January 31, 2005 |
The following table presents our unaudited financial data for
the second quarter of fiscal year 2006 compared to the second
quarter of fiscal year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
|
|
January 31 | |
|
|
|
|
|
|
| |
|
Dollar | |
|
% | |
|
|
2006 | |
|
2005 | |
|
Variance | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sales
|
|
$ |
327,811 |
|
|
$ |
6,341 |
|
|
$ |
321,470 |
|
|
|
5,070 |
% |
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense
|
|
|
300,806 |
|
|
|
|
|
|
|
300,806 |
|
|
|
100 |
% |
|
General and administrative expense
|
|
|
1,165,483 |
|
|
|
2,752,852 |
|
|
|
(1,587,369 |
) |
|
|
(58 |
)% |
|
Depreciation, depletion and amortization
|
|
|
117,890 |
|
|
|
34,086 |
|
|
|
83,804 |
|
|
|
246 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,584,179 |
|
|
|
2,786,938 |
|
|
|
(1,202,759 |
) |
|
|
(43 |
)% |
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
270,186 |
|
|
|
4,353 |
|
|
|
265,833 |
|
|
|
6,107 |
% |
|
Interest expense
|
|
|
(6,234 |
) |
|
|
(5,407 |
) |
|
|
(827 |
) |
|
|
(15 |
)% |
|
Other income
|
|
|
138,191 |
|
|
|
3,246 |
|
|
|
134,945 |
|
|
|
4,157 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
402,143 |
|
|
|
2,192 |
|
|
|
399,951 |
|
|
|
18,246 |
% |
Loss before income taxes
|
|
|
(854,225 |
) |
|
|
(2,778,405 |
) |
|
|
1,924,180 |
|
|
|
69 |
% |
Deferred income tax benefit
|
|
|
|
|
|
|
292,562 |
|
|
|
(292,562 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(854,225 |
) |
|
$ |
(2,485,843 |
) |
|
$ |
1,631,618 |
|
|
|
66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue During the second quarter of fiscal
year 2006, revenue increased $321,470 over the second quarter of
fiscal year 2005. We realized our first revenues from the sale
of CBM in January 2005. Net sales of gas (net of royalties) were
27,556 Mcf and our average realized selling price per Mcf
was $11.90 for the second quarter of fiscal year 2006.
Lease operating expense During the second
quarter of fiscal year 2006, lease operating expense increased
$300,806 over the second quarter of fiscal year 2005. Lease
operating expenses represent production expenses, consisting
primarily of repairs and maintenance, fuel and electricity,
equipment rental and other overhead expenses related to
producing wells. We commenced production toward the end of
January 2005 and, thus, incurred no lease operating expense
during the second quarter of fiscal year 2005.
General and administrative expense General
and administrative expense consisted of the following for the
second quarters of fiscal year 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
|
|
January 31 | |
|
|
|
|
|
|
| |
|
Dollar | |
|
% | |
|
|
2006 | |
|
2005 | |
|
Variance | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
Salaries and benefits
|
|
$ |
503,368 |
|
|
$ |
275,956 |
|
|
$ |
227,412 |
|
|
|
82 |
% |
Stock-based compensation
|
|
|
|
|
|
|
2,200,777 |
|
|
|
(2,200,777 |
) |
|
|
(100 |
)% |
Professional fees
|
|
|
400,991 |
|
|
|
108,520 |
|
|
|
292,471 |
|
|
|
270 |
% |
Other
|
|
|
261,124 |
|
|
|
167,599 |
|
|
|
93,525 |
|
|
|
56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
$ |
1,165,483 |
|
|
$ |
2,752,852 |
|
|
$ |
(1,587,369 |
) |
|
|
(58 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
16
During the second quarter of fiscal year 2006, salaries and
benefits increased $227,412 over the second quarter of fiscal
year 2005. The increase was primarily the result of hiring
additional personnel to support our growth, including both a
chief financial officer and controller.
During the second quarter of fiscal year 2006, stock-based
compensation decreased $2,200,777 over the second quarter of
fiscal year 2005. No stock options were granted in the second
quarter of fiscal year 2006, whereas options to
purchase 2,950,056 shares of common stock were granted
to employees and directors in the second quarter of fiscal year
2005.
During the second quarter of fiscal year 2006, professional fees
increased $292,471 over the second quarter of fiscal year 2005.
The increase was primarily the result of increased professional
fees incurred in connection with SEC filings, American Stock
Exchange listing fees, higher audit related fees and additional
legal services.
During the second quarter of fiscal year 2006, other general and
administrative expenses increased $93,525 over the second
quarter of fiscal year 2005, primarily as a result of increased
insurance costs.
Depreciation, depletion and amortization
expense During the second quarter of fiscal year
2006, depreciation, depletion and amortization expense
(DD&A) increased $83,804 over the second quarter
of fiscal year 2005. We compute DD&A on capitalized
drillings costs and gas collection equipment using the
units-of-production
method based on estimates of proved reserves, and on all other
property and equipment using the straight-line method based on
estimated useful lives ranging from 3 to 10 years. The
increase is primarily due to the fact that there was very little
production in the second quarter of fiscal year 2005.
Additionally, depreciation expense increased due to additions to
other support equipment.
Interest income During the second quarter of
fiscal year 2006, interest income increased $265,833 over the
second quarter of fiscal year 2005 due to significantly higher
average cash balances during the second quarter of fiscal year
2006. The higher cash balances are the result of net proceeds of
$27,883,954 we received in September 2005 related to the private
placement of our common shares.
Other income During the second quarter of
fiscal year 2006, other income increased $134,945 over the
second quarter of fiscal year 2005 primarily due to us
recognizing a gain of $127,416 on the sale of our investment in
Hite Coalbed Methane, L.L.C. in January 2006.
Deferred income tax benefit During the second
quarter of fiscal year 2006, deferred income tax benefit
decreased $292,562 over the second quarter of fiscal year 2005.
We recorded a tax benefit in the United States in the second
quarter of fiscal year 2005 to partially offset a net recorded
deferred tax liability at January 31, 2005; however, no tax
benefit was recognized for the second quarter of fiscal year
2006, as the Company had no net deferred tax liability to offset.
17
|
|
|
Six Months Ended January 31, 2006 Compared to Six Months
Ended January 31, 2005 |
The following table presents our unaudited financial data for
the first six months of fiscal year 2006 compared to the first
six months of fiscal year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
|
|
|
January 31 | |
|
|
|
|
|
|
| |
|
Dollar | |
|
% | |
|
|
2006 | |
|
2005 | |
|
Variance | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sales
|
|
$ |
537,505 |
|
|
$ |
6,341 |
|
|
$ |
531,164 |
|
|
|
8,377 |
% |
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense
|
|
|
461,610 |
|
|
|
|
|
|
|
461,610 |
|
|
|
100 |
% |
|
General and administrative expense
|
|
|
2,437,239 |
|
|
|
3,165,087 |
|
|
|
(727,848 |
) |
|
|
(23 |
)% |
|
Depreciation, depletion and amortization
|
|
|
212,692 |
|
|
|
57,562 |
|
|
|
155,130 |
|
|
|
270 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,111,541 |
|
|
|
3,222,649 |
|
|
|
(111,108 |
) |
|
|
(3 |
)% |
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
402,804 |
|
|
|
4,847 |
|
|
|
397,957 |
|
|
|
8,210 |
% |
|
Interest expense
|
|
|
(13,778 |
) |
|
|
(10,582 |
) |
|
|
(3,196 |
) |
|
|
30 |
% |
|
Other income
|
|
|
137,523 |
|
|
|
3,246 |
|
|
|
134,277 |
|
|
|
4,137 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526,549 |
|
|
|
(2,489 |
) |
|
|
529,038 |
|
|
|
n/a |
|
Loss before income taxes
|
|
|
(2,047,487 |
) |
|
|
(3,218,797 |
) |
|
|
1,171,310 |
|
|
|
36 |
% |
Deferred income tax benefit
|
|
|
|
|
|
|
344,717 |
|
|
|
(344,717 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,047,487 |
) |
|
$ |
(2,874,080 |
) |
|
$ |
826,593 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue During the first six months of fiscal
year 2006, revenue increased $531,164 over the first six months
of fiscal year 2005. We realized our first revenues from the
sale of CBM in January 2005. Net sales of gas (net of royalties)
were 47,462 Mcf and our average realized selling price per
Mcf was $11.32 for the first six months of fiscal year 2006.
Lease operating expense During the first six
months of fiscal year 2006, lease operating expense increased
$461,610 over the first six months of 2005. Lease operating
expenses represent production expenses, consisting primarily of
repairs and maintenance, fuel and electricity, equipment rental
and other overhead expenses related to producing wells. We
commenced production toward the end of January 2005 and, thus,
incurred no lease operating expense during the first six months
of fiscal year 2005.
General and administrative expense General
and administrative expense consisted of the following for the
first six months of fiscal year 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
|
|
|
January 31 | |
|
|
|
|
|
|
| |
|
Dollar | |
|
% | |
|
|
2006 | |
|
2005 | |
|
Variance | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
Salaries and benefits
|
|
$ |
727,240 |
|
|
$ |
410,249 |
|
|
$ |
316,991 |
|
|
|
77 |
% |
Stock-based compensation
|
|
|
397,586 |
|
|
|
2,200,777 |
|
|
|
(1,803,191 |
) |
|
|
(82 |
)% |
Professional fees
|
|
|
858,002 |
|
|
|
240,125 |
|
|
|
617,877 |
|
|
|
257 |
% |
Other
|
|
|
454,411 |
|
|
|
313,936 |
|
|
|
140,475 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
$ |
2,437,239 |
|
|
$ |
3,165,087 |
|
|
$ |
(727,848 |
) |
|
|
(23 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first six months of fiscal year 2006, salaries and
benefits increased $316,991 over the first six months of fiscal
year 2005. The increase was primarily the result of hiring
additional personnel to support our growth, including both a
chief financial officer and controller.
18
During the first six months of fiscal year 2006, stock-based
compensation decreased $1,803,191 over the first six months of
fiscal year 2005. During the first six months of fiscal year
2006, we granted options to purchase 495,000 shares of
our common stock that were valued at $.80 per option.
During the first six months of fiscal year 2005, we granted
options to purchase 2,950,056 shares of our common
stock that were valued at $.75 per option. The award of
these options was consistent with our belief that it is
necessary to provide this form of compensation for us to attract
and retain qualified individuals.
During the first six months of fiscal year 2006, professional
fees increased $617,877 over the first six months of fiscal year
2005. The increase was primarily the result of increased
professional fees incurred in connection with SEC filings,
American Stock Exchange listing fees, higher audit and audit
related fees and additional legal services.
During the first six months of fiscal year 2006, other general
and administrative expenses increased $140,475 over the first
six months of fiscal year 2005, primarily as a result of
increased insurance costs.
Depreciation, depletion and amortization
expense During the first six months of fiscal
year 2006, depreciation, depletion and amortization expense
(DD&A) increased $155,130 over the first six
months of fiscal year 2005. We compute DD&A on capitalized
drillings costs and gas collection equipment using the
units-of-production
method based on estimates of proved reserves, and on all other
property and equipment using the straight-line method based on
estimated useful lives ranging from 3 to 10 years. The
increase is primarily due to the fact that there was very little
production in the first six months of fiscal year 2005.
Additionally, depreciation expense increased due to additions to
other support equipment.
Interest income During the first six months
of fiscal year 2006, interest income increased $397,957 over the
first six months of fiscal year 2005 due to significantly higher
average cash balances during the first six months of fiscal year
2006. The higher cash balances are the result of net proceeds of
$27,883,954 we received in September 2005 related to the private
placement of our common shares.
Other income During the first six months of
fiscal year 2006, other income increased $134,277 over the first
six months of fiscal year 2005, primarily due to us recognizing
a gain of $127,416 on the sale of our investment in Hite Coalbed
Methane, L.L.C. in January 2006.
Deferred income tax benefit During the first
six months of fiscal year 2006, deferred income tax benefit
decreased $344,717 over the first six months of fiscal year
2005. We recorded a tax benefit in the United States in the
first six months of fiscal year 2005 to partially offset a net
recorded deferred tax liability at January 31, 2005;
however, no tax benefit was recognized for the first six months
of fiscal year 2006, as the Company had no net deferred tax
liability to offset.
Financial Condition
Our primary source of liquidity historically has come from the
sale of shares of our common stock in private placements and the
proceeds from the exercise of warrants and options to acquire
our common stock. To date, we have not relied significantly on
borrowing to finance our operations or provide cash. As of
January 31, 2006, we had only $333,839 in long-term notes
payable. From July 31, 2002 until January 31, 2006, we
raised $43,866,649 from the sale of our common stock.
Additionally, during that same period, we collected $3,730,470
and $2,118,320 as a result of the exercise of warrants and stock
options, respectively. Our primary use of these funds has been
the acquisition, exploration, testing and development of our CBM
properties and rights.
We did not begin to generate revenues from CBM sales until
January 2005. Revenues from CBM sales were $537,505 and $6,341
for the six months ended January 31, 2006 and 2005,
respectively. Subject to the various risks described in this
prospectus supplement, we expect revenue from the sale of our
CBM to increase due to (i) increased production from
existing wells as they proceed through the initial dewatering
phase and (ii) additional production generated as a result
of drilling and production from additional wells. However, in
view of the fact that we have very little historical experience
of dewatering and gas production in the Illinois Basin, we can
provide no assurance that we will achieve a trend of increased
production and revenue in the future.
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In addition, CBM wells typically must go through a lengthy
dewatering phase before making any meaningful contribution to
gas production. We estimate that a typical vertical well will
require an average of 18 months to reach peak production.
(Note that when we talk about average dewatering times, the
early wells at any of our projects are expected to take longer
to dewater than are later wells that are drilled and tied into
our gathering system after a field or area has been undergoing
dewatering by previously drilled wells). The impact on our cash
position is that there will be a delay of up to 18 months
between the time we initially invest in drilling and completing
a well and the time when a typical well will begin to make a
meaningful contribution to our cash from operations.
Additionally, net cash generated (used) by operating
activities is dependent on a number of factors over which we
have little or no control. These factors include, but are not
limited to:
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the price of, and demand for, natural gas; |
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availability of drilling equipment; |
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lease terms; |
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availability of sufficient capital resources; and |
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the accuracy of production estimates for current and future
wells. |
We had a cash balance of $26,623,707 at January 31, 2006
compared to $7,251,503 at July 31, 2005. The net increase
in our cash balance is primarily due to the $27,883,954 of net
proceeds we received from the sale of common stock in a private
placement that closed on September 26, 2005, and $1,644,039
and $379,379 received as a result of the exercise of warrants
and stock options, respectively, during the first six months of
fiscal year 2006. We raised an amount in the private placement
we felt was required to fund our development plans through April
2006. However, because our drilling progress at our Delta
Project has slowed due to a dispute with one of the coal owners,
we now believe our cash balance will be sufficient to fund the
forecasted net cash used by operating activities and capital
expenditures through July 31, 2006. Our revenues and cash
balances, however, may not be sufficient to fund our operations
beyond that date. Therefore, in order to fund our operations
after July 31, 2006, we will likely need to raise
additional financing. We currently do not have any specific
plans to raise financing in support of our future operations.
Critical Accounting Policies and Estimates
Our unaudited consolidated financial statements and accompanying
notes have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires our
management to make estimates, judgments and assumptions that
affect reported amounts of assets, liabilities, revenues and
expenses. On an ongoing basis, we evaluate the accounting
policies and estimates that we use to prepare financial
statements. We base our estimates on historical experience and
assumptions believed to be reasonable under current facts and
circumstances. Actual amounts and results could differ from
these estimates used by management. Certain accounting policies
that require significant management estimates and are deemed
critical to our results of operations or financial position were
discussed in our Annual Report distributed to our shareholders
in December 2005 and in our
Form S-1 filed
with the Securities and Exchange Commission on December 5,
2005.
Cautionary Statement Concerning Forward-Looking Statements
Some of the statements contained in this prospectus supplement
that are not historical facts, including statements containing
the words believes, anticipates,
expects, intends, plans,
should, may, might,
continue and estimate and similar words,
constitute forward-looking statements under the federal
securities laws. These forward-looking statements involve known
and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements, or the
conditions in our industry, on our properties or in the Illinois
Basin, to be materially different from any future results,
performance, achievements or conditions expressed or implied by
such forward-looking statements. Some of the factors that could
cause actual results or conditions to differ materially from our
expectations, include, but are not limited to, (a) our
inability to retain our acreage rights at our Delta Project or
other projects at the
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expiration of our lease agreements, due to insufficient CBM
production or other reasons, (b) our inability to generate
sufficient income or obtain sufficient financing to fund our
operations after July 31, 2006, (c) our failure to
accurately forecast CBM production, (d) displacement of our
CBM operations by coal mining operations, which have superior
rights in most of our acreage, (e) our failure to
accurately forecast the number of wells that we can drill,
(f) a decline in the prices that we receive for our CBM
production, (g) our failure to accurately forecast
operating and capital expenditures and capital needs due to
rising costs or different drilling or production conditions in
the field, (h) our inability to attract or retain qualified
personnel with the requisite CBM or other experience, and
(i) unexpected economic and market conditions, in the
general economy or the market for natural gas. We caution
readers not to place undue reliance on these forward-looking
statements.
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Business
The disclosure presented below replaces the disclosure presented
under the subsection entitled Legal Proceedings
under the Business section in the November 18,
2005 Prospectus and the December 5, 2005 Prospectus.
Legal Proceedings
On April 3, 2001 BPI entered into an Oil, Gas and Coalbed
Methane Gas Lease (Lease) with American Premier
Underwriters, Inc. and AFC Coal Properties, Inc. (collectively,
the Lessors).
The Lease has an initial term of five years that expires on
April 3, 2006; however, the term is extended as to the
320 acre tract that surrounds each well so long as CBM is
produced from such tract providing a royalty payment of at least
$1.00 per acre per month; provided, however, after the
initial five year term, if aggregate royalties do not exceed
$42,000 in any month, the Lease shall terminate.
In August 2005, the original Lessors transferred, subject to the
Lease, certain of their rights under the Lease, including
certain of their rights in and to the CBM to Colt, LLC and
Peabody Land Holdings, LLC (collectively, the
Transferees). We believe that at least one of the
Transferees, Colt, LLC, has taken steps that have interfered
with our ability to carry out our development plans and generate
the royalties necessary to extend the Lease (including the
establishment of additional wells prior to the April 3,
2006 deadline).
On March 15, 2006, we filed a complaint against the Lessors
and Transferees alleging (i) tortious interference with
business relations and (ii) breach of contract. We are
seeking a preliminary and permanent injunction, declaratory
judgment and unspecified monetary damages. The complaint was
filed in the United States District Court for the Southern
District of Ohio.
We believe that we should be successful in extending the term of
the lease as to existing wells and certain other areas subject
to the Lease where we believe the Lessors and Transferees have
interfered with our ability to establish wells prior to the
April 3, 2006 deadline. However, there exists a reasonable
possibility that we will be unable to extend the Lease as to
either or both of the existing wells or additional areas where
the Lessors and Transferees have interfered with our
establishment of wells. The effect of the loss of all of our
acreage under the Lease may result in a write-down of
capitalized net oil and gas and other properties in an amount up
to approximately $22 million. The effect of the loss of
only our non-producing acreage (those areas in which wells had
not yet been established) may result in a write-down of
capitalized net oil and gas and other properties in an amount up
to approximately $4 million.
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Prospectus Supplement
to Separate Prospectuses dated
November 18, 2005 and December 5, 2005