| The prospectus dated May 11, 2006 that is contained in the Post-Effective Amendment No. 1 to Form S-1 registration statement filed by BPI with the SEC on May 11, 2006 and declared effective by the SEC on May 22, 2006 (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 125483 Prospectus); and | ||
| The prospectus dated May 11, 2006 contained in the Post-Effective Amendment No. 1 to Form S-1 registration statement filed by BPI with the SEC on May 11, 2006 and declared effective by the SEC on May 22, 2006 (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 130122 Prospectus). |
ii | ||||
1 | ||||
15 | ||||
24 |
April 30, 2006 | July 31, 2005 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 24,793,727 | $ | 7,251,503 | ||||
Accounts receivable |
126,102 | 34,671 | ||||||
Other current assets |
225,024 | 23,534 | ||||||
Total current assets |
25,144,853 | 7,309,708 | ||||||
Property and equipment, at cost: |
||||||||
Oil and gas properties, full cost method of accounting: |
||||||||
Proved, net of accumulated depreciation,
depletion and amortization of $226,927
and $58,523 |
20,973,084 | 10,190,929 | ||||||
Unproved |
1,274,205 | 3,149,372 | ||||||
Net oil and gas properties |
22,247,289 | 13,340,301 | ||||||
Other property and equipment, net of accumulated
depreciation and amortization of $567,614 and $398,988 |
4,723,150 | 1,769,812 | ||||||
Net property and equipment |
26,970,439 | 15,110,113 | ||||||
Investment in Hite Coalbed Methane, L.L.C. |
| 846,766 | ||||||
Restricted cash |
134,173 | 100,000 | ||||||
Other non-current assets |
161,125 | 161,125 | ||||||
52,410,590 | 23,527,712 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
897,010 | 2,144,066 | ||||||
Current maturity of long-term notes payable |
201,533 | 42,227 | ||||||
Accrued liabilities and other |
3,038,601 | 31,405 | ||||||
Total current liabilities |
4,137,144 | 2,217,698 | ||||||
Long-term notes payable, less current portion |
83,458 | 507,595 | ||||||
Other non-current liabilities |
51,678 | | ||||||
Total liabilities |
4,272,280 | 2,725,293 | ||||||
Shareholders equity: |
||||||||
Common shares, no par value, authorized 200,000,000
shares, 70,812,540 and 43,912,961 outstanding |
68,593,404 | 34,666,022 | ||||||
Additional paid-in capital |
4,891,266 | 4,493,680 | ||||||
Accumulated deficit |
(25,346,360 | ) | (18,357,283 | ) | ||||
Total shareholders equity |
48,138,310 | 20,802,419 | ||||||
$ | 52,410,590 | $ | 23,527,712 | |||||
1
Three Months Ended April 30 | Nine Months Ended April 30 | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenues: |
||||||||||||||||
Gas sales |
$ | 262,860 | $ | 46,925 | $ | 800,365 | $ | 53,266 | ||||||||
Expenses: |
||||||||||||||||
Lease operating expense |
290,844 | 203,289 | 752,454 | 203,289 | ||||||||||||
General and administrative
expenses |
2,054,434 | 1,847,554 | 4,491,676 | 5,012,641 | ||||||||||||
Depreciation, depletion and
amortization |
189,988 | 83,129 | 402,680 | 140,801 | ||||||||||||
2,535,266 | 2,133,972 | 5,646,810 | 5,356,731 | |||||||||||||
Other income (expenses): |
||||||||||||||||
Interest income |
229,888 | 62,012 | 632,693 | 66,859 | ||||||||||||
Interest expense |
(4,276 | ) | (3,804 | ) | (18,054 | ) | (14,386 | ) | ||||||||
Other income (expense), net |
(2,894,794 | ) | 24,053 | (2,757,271 | ) | 27,299 | ||||||||||
(2,669,182 | ) | 82,261 | (2,142,632 | ) | 79,772 | |||||||||||
Loss before income taxes |
(4,941,588 | ) | (2,004,786 | ) | (6,989,077 | ) | (5,223,693 | ) | ||||||||
Deferred income tax benefit |
| 270,587 | | 615,304 | ||||||||||||
Net loss |
$ | (4,941,588 | ) | $ | (1,734,199 | ) | $ | (6,989,077 | ) | $ | (4,608,389 | ) | ||||
Basic and diluted loss per share |
($ | 0.07 | ) | ($ | 0.04 | ) | ($ | 0.12 | ) | ($ | 0.13 | ) | ||||
Weighted average common shares
outstanding |
66,395,782 | 43,128,791 | 60,686,413 | 35,640,418 |
2
Additional | Total | |||||||||||||||||||
Common Shares | Paid-in | Accumulated | Shareholders | |||||||||||||||||
Shares | Amounts | Capital | Deficit | Equity | ||||||||||||||||
Balance, July 31, 2005 |
43,912,961 | $ | 34,666,022 | $ | 4,493,680 | $ | (18,357,283 | ) | $ | 20,802,419 | ||||||||||
Proceeds from stock
options exercised |
396,667 | 382,239 | | | 382,239 | |||||||||||||||
Proceeds from warrants
exercised |
5,822,075 | 5,013,928 | | | 5,013,928 | |||||||||||||||
Net proceeds from
shares issued in
private placement
September 23, 2005 (1) |
18,000,000 | 27,883,954 | | | 27,883,954 | |||||||||||||||
Stock-based
compensation stock
options |
| | 397,586 | | 397,586 | |||||||||||||||
Stock-based
compensation common
stock, including
vesting of restricted
stock |
496,339 | 647,261 | | | 647,261 | |||||||||||||||
Unvested portion of
restricted shares
issued |
2,184,498 | | | | | |||||||||||||||
Net loss |
| | | (6,989,077 | ) | (6,989,077 | ) | |||||||||||||
Balance, April 30, 2006 |
70,812,540 | $ | 68,593,404 | $ | 4,891,266 | $ | (25,346,360 | ) | $ | 48,138,310 | ||||||||||
(1) | Net of share issuance costs of $2,619,953. |
3
Nine Months Ended April 30 | ||||||||
2006 | 2005 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (6,989,077 | ) | $ | (4,608,389 | ) | ||
Adjustments to reconcile net loss to net cash used in
operating activities: |
||||||||
Depreciation, depletion and amortization |
402,680 | 140,801 | ||||||
Stock-based compensation expense |
1,044,847 | 3,240,183 | ||||||
Gain on sale of investment |
(127,416 | ) | (14,844 | ) | ||||
Deferred income tax benefit |
| (615,304 | ) | |||||
Other |
| 17,610 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(91,431 | ) | (23,910 | ) | ||||
Other current assets |
(201,490 | ) | (12,902 | ) | ||||
Accounts payable |
(1,247,056 | ) | 236,852 | |||||
Accrued liabilities and other |
3,038,378 | 8,277 | ||||||
Other non-current liabilities |
51,678 | | ||||||
Net cash used in operating activities |
(4,118,887 | ) | (1,631,626 | ) | ||||
Investing activities: |
||||||||
Proceeds from sale of investments |
551,000 | 62,160 | ||||||
Business acquisition, net of cash acquired |
| (857,638 | ) | |||||
Additions to oil and gas properties |
(9,075,392 | ) | (2,969,450 | ) | ||||
Additions to other property and equipment |
(2,954,139 | ) | (414,041 | ) | ||||
Acquisition of equity interest in joint venture |
| (78,112 | ) | |||||
Increase in restricted cash |
(34,173 | ) | (100,000 | ) | ||||
Net cash used in investment activities |
(11,512,704 | ) | (4,357,081 | ) | ||||
Financing activities: |
||||||||
Payments on long-term notes payable |
(106,306 | ) | (28,843 | ) | ||||
Net proceeds from issuance of common shares |
33,280,121 | 14,942,359 | ||||||
Net cash provided by financing activities |
33,173,815 | 14,913,516 | ||||||
Net increase in cash and cash equivalents |
17,542,224 | 8,924,809 | ||||||
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 |
$ | 24,793,727 | $ | 9,895,604 | ||||
Supplementary disclosure of cash flow information: |
||||||||
Non-cash investing and financing activity: |
||||||||
Acquisition of equipment by issuance of notes payable |
$ | 233,475 | $ | | ||||
Interest paid | $ | 14,132 | $ | 12,043 |
4
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Basis of Presentation | ||
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 for and production 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 nine months ended April 30, 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 Post-Effective Amendment No.1 to Form S-1 filed with the Securities and Exchange Commission on May 11, 2006. Certain prior period amounts have been reclassified to conform to the current period presentation. | ||
Use of Estimates | ||
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, 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. | ||
Oil and Gas Properties | ||
The Company follows the full cost method of accounting for oil and gas properties. Under this |
5
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. 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: |
April 30 | July 31 | |||||||
2006 | 2005 | |||||||
Other Property and Equipment: |
||||||||
Gas collection equipment |
$ | 4,149,653 | $ | 1,332,012 | ||||
Support equipment |
1,046,989 | 760,467 | ||||||
Other |
94,122 | 76,321 | ||||||
Less: Accumulated depreciation and amortization |
(567,614 | ) | (398,988 | ) | ||||
$ | 4,723,150 | $ | 1,769,812 | |||||
6
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 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 nine months ended April 30, 2006 and 2005: |
Nine Months Ended April 30 | ||||||||
2006 | 2005 | |||||||
Asset retirement obligation at beginning of
period |
$ | 19,778 | $ | | ||||
Accretion expense |
2,464 | | ||||||
Liabilities incurred |
29,436 | | ||||||
Asset retirement obligation at end of period |
$ | 51,678 | $ | | ||||
Loss Per Share | ||
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 quarters and nine months ended April 30, 2006 and 2005. The following items were excluded from the computation of diluted loss per share at April 30, 2006 and 2005, respectively, as the effect of their assumed exercises would be anti-dilutive: |
2006 | 2005 | |||||||
Outstanding warrants |
5,311,600 | 11,306,175 | ||||||
Outstanding stock options |
1,872,812 | 4,245,612 | ||||||
Unvested portion of restricted shares issued |
2,184,498 | | ||||||
9,368,910 | 15,551,787 | |||||||
Share-Based Payment | ||
Prior to December 13, 2005 the Company administered 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 1,872,812 options outstanding under the Incentive Stock Option Plan at April 30, 2006. |
7
On December 13, 2005, the shareholders of the Company approved the 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. During the current quarter, the Committee granted stock awards under the Omnibus Stock Plan in the form of restricted and unrestricted stock to employees and directors of the Company. The transactions involving the granting of these stock awards are described more fully in Note 2. | ||
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 there was thus no unvested portion of previous stock option grants which vested during the quarter or nine months ended April 30, 2006. Therefore, SFAS 123(R) had no impact on the Companys consolidated financial position or results of operations for the quarter and nine months ended April 30, 2006. The Company continues to use the Black-Scholes formula to estimate the fair value of stock options granted under the Incentive Stock Option Plan. | ||
2. | STOCK-BASED COMPENSATION | |
Stock Options | ||
The tables below summarize stock options activity for the nine months ended April 30, 2006. All stock options were granted with exercise prices denominated in Canadian Dollars and equal to the quoted market price of the stock on the date of grant. 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 at April 30, 2006 and July 31, 2005. |
8
Weighted-Average | ||||||||||||
Exercise Price | ||||||||||||
Number of options | CAD$ | USD$ | ||||||||||
Outstanding at July 31, 2005 |
4,227,279 | $ | 1.82 | $ | 1.49 | |||||||
Granted |
495,000 | 2.05 | 1.79 | |||||||||
Exercised |
(396,667 | ) | 1.22 | 0.97 | ||||||||
Cancelled or surrendered |
(2,452,800 | ) | 2.23 | 1.81 | ||||||||
Outstanding at April 30, 2006 |
1,872,812 | $ | 1.48 | $ | 1.19 | |||||||
The Company recorded stock-based compensation expense for stock options granted to employees and directors in the amount of $397,586 and $2,200,777 during the nine months ended April 30, 2006 and 2005, respectively, which is included in general and administrative expenses in the Statements of Operations. The fair value of stock options granted was estimated using the Black-Scholes Option Pricing Model with the following assumptions: |
Nine Months Ended April 30, | ||||||||
2006 | 2005 | |||||||
Risk-free interest rate |
3.3 | % | 3.0 3.5 | % | ||||
Expected dividend yield |
Nil | Nil | ||||||
Expected stock price volatility |
66 | % | 74 81 | % | ||||
Expected option life |
3 years | 3 years |
Option pricing models require the input of highly subjective assumptions, particularly as to the expected price volatility of the stock. Changes in these assumptions can materially affect the fair value estimate, and therefore it is managements view that the existing models do not necessarily provide a single reliable measure of the fair value of the Companys stock option grants. | ||
The following table summarizes information about options outstanding as of April 30, 2006: |
Exercise | |||||||||||||
Price | Number | Remaining | Expiry | ||||||||||
CAD$ | Outstanding | Life (Years) | Date | ||||||||||
$ | 0.65 | 345,000 | 2.5 | November 3, 2008 | |||||||||
0.90 | 293,334 | 0.7 | January 10, 2007 | ||||||||||
0.90 | 10,000 | 3.4 | September 22, 2009 | ||||||||||
1.49 | 695,666 | 3.6 | November 29, 2009 | ||||||||||
2.05 | 10,000 | 4.4 | September 22, 2010 | ||||||||||
2.19 | 136,000 | 3.9 | March 27, 2010 | ||||||||||
2.40 | 382,812 | 3.7 | January 20, 2010 | ||||||||||
$ | 1.48 | 1,872,812 | 3.0 | ||||||||||
Restricted Stock Awards and Grants of Common Shares | ||
On April 12, 2006, the Compensation Committee approved an exchange of common shares for outstanding stock options held by various key employees and directors of the Company (Option Exchange). The Option Exchange effectively cancelled stock option awards for 2,025,000 of the Companys common shares previously granted during fiscal years 2005 and 2006. The Option Exchange replaced the cancelled options with restricted stock awards of 2,025,000 of the Companys common shares. The shares of restricted stock are included in common shares outstanding when issued, but only the vested portion of such shares are included in the |
9
computation of basic earnings per share. The restrictions required the covered individuals to be continuously employed through certain vesting dates. Vesting of some or all of the restricted shares will be accelerated in the event an employee is no longer employed due to death, disability or discharge by the Company for any reason other than just cause or if a director stands for reelection to the board and does not receive enough votes to be reelected to the board. The restricted shares are scheduled to vest over the requisition service period as follows: |
January 1, 2007 |
680,000 shares | |||
January 1, 2008 |
680,000 shares | |||
January 1, 2009 |
665,000 shares |
The Company accounted for the Option Exchange as a modification of the original shared-based payment awards (stock options) in accordance with SFAS No. 123(R). Accordingly, the Company recorded compensation expense based on the excess of the fair value of the restricted stock award grants over the fair value of the original award (stock options) measured immediately before the transaction based on current circumstances. The fair value of the restricted stock awards was determined based on the number of shares granted and the quoted price of our common stock on the date of the grant of $1.42 per share. The value of the stock options surrendered was computed immediately before the modification using the Black Scholes valuation model with the following assumptions: |
Risk-free interest rate |
4.75 | % | ||
Expected dividend yield |
Nil | |||
Expected stock price volatility |
171% - 178 | % | ||
Expected option remaining life |
3.8 4.5 years |
In estimating expected volatility, the Company considered its historical volatility for the period that its stock began trading on the American Stock Exchange (approximately 120 days) and the historical volatility of a similar entity (guideline company) whose share price was publicly available for the necessary period in order to reflect the expected remaining life of the stock options. | ||
The Option Exchange resulted in incremental compensation expense of $230,900, which will be recognized over the requisite service period. The Company recorded $15,458 of compensation expense related to the Option Exchange in the quarter ended April 30, 2006. Future amortization of the unearned incremental compensation expense will result in additional compensation expense of $27,020 in the fourth quarter of fiscal year ended 2006 and $89,971, $70,806 and $27,645 in fiscal years ended July 31, 2007, 2008 and 2009, respectively. | ||
On April 12, 2006, the Company granted 300,000 shares of restricted stock and 300,000 shares of unrestricted common stock to its newly hired senior vice president of operations. On that same date, the Company granted 140,000 shares of unrestricted common stock to its newly appointed independent director. The fair value of the restricted stock was determined based on the number of shares granted and the quoted price of our common stock on the date of the grant of $1.42 per share. The restricted stock is scheduled to vest over the requisition service period in the amount of 100,000 shares each on January 1, 2007, 2008 and 2009. The Company recorded $7,003 of compensation expense related to this grant of restricted stock in the quarter ended April 30, 2006. Future amortization of the unearned compensation expense will result in additional compensation expense of $35,792 in the fourth quarter of fiscal year ended 2006 and $142,000, $142,000 and $99,205 in fiscal years ended July 31, 2007, 2008 and 2009, respectively. The Company recorded the fair value of the award of unrestricted common shares of $624,800 as compensation expense in the quarter ended April 30, 2006. |
10
3. | INCOME TAXES | |
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 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 April 30, 2006. | ||
We recorded a tax benefit in the United States for the nine months ended April 30, 2005 to partially offset a net deferred tax liability at April 30, 2005; however, no tax benefit was recognized for the nine months ended April 30, 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: |
April 30, | July 31, | |||||||
2006 | 2005 | |||||||
Case Credit term note due in fiscal year 2006, 6.50% |
$ | 19,872 | $ | 32,833 | ||||
GMAC term notes due in fiscal year 2009, 6.50% |
22,151 | 26,633 | ||||||
GMAC term notes due in fiscal year 2010, 6.1% to 6.50% |
85,632 | 98,356 | ||||||
Convertible note due in fiscal year 2008, 3.25% |
| 392,000 | ||||||
Caterpillar Financial Services Corp |
157,336 | | ||||||
284,991 | 549,822 | |||||||
Less current maturities |
(201,533 | ) | (42,227 | ) | ||||
Long-term notes payable |
$ | 83,458 | $ | 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. |
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The annual principal maturities of all notes for the remaining three months of fiscal year 2006 and the four fiscal years thereafter are as follows: |
2006 |
$ | 68,977 | ||||||||||
2007 |
140,862 | |||||||||||
2008 |
27,982 | |||||||||||
2009 |
29,767 | |||||||||||
2010 |
17,403 | |||||||||||
$ | 284,991 | |||||||||||
5. | SHAREHOLDERS EQUITY | |
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 April 30, 2006 as follows: |
Number | Exercise | Expiry | |||||||
Outstanding | Price | Date | |||||||
4,274,400 | USD $1.50 | January 12, 2009 | |||||||
1,037,200 | USD $1.25 | January 12, 2010 | |||||||
5,311,600 |
During the third quarter of fiscal year 2006, the shareholders voted to increase the number of shares of common stock the Company is authorized to issue from 100,000,000 shares to 200,000,000 shares. |
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 coalbed methane. Beginning in 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 $68,674 and $59,000 in expense reimbursement related to this arrangement during the nine months ended April 30, 2006 and 2005, respectively. Mr. Ostreichs brother owns Dependable Service Company, a company that provides general labor services to the Company. The Company paid Dependable Services Company $227,626 and $54,929 during the nine months ended April 30, 2006 and 2005, respectively. | ||
David Preng, a director of the Company, is a principal in the executive search firm Preng & Associates. The Company paid Preng & Associates approximately $150,000 and $0 for executive placement services during the nine months ended April 30, 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 |
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gain on the sale of the investment of $127,416, which is included in other income in the Companys statement of operations for the nine months ended April 30, 2006. The Company also received its final distribution of net income from HCM during the quarter ended April 30, 2006 in the amount of $51,452, which is included as part of other income (expense), net in the statement of operations for the quarter and nine months ended April 30, 2006. | ||
8. | OTHER INCOME (EXPENSE), NET | |
Other income (expense), net consisted of the following: |
Three Months Ended April 30 | ||||||||
2006 | 2005 | |||||||
Settlement of lawsuit |
$ | (2,949,907 | ) | $ | | |||
Distribution from HCM |
51,452 | | ||||||
Gain on sale of marketable securities |
| 11,598 | ||||||
Other |
3,661 | 12,455 | ||||||
$ | (2,894,794 | ) | $ | 24,053 | ||||
Nine Months Ended April 30 | ||||||||
2006 | 2005 | |||||||
Settlement of lawsuit |
$ | (2,949,907 | ) | $ | | |||
Gain on sale of investment in HCM |
127,416 | |||||||
Distribution from HCM |
51,452 | | ||||||
Gain on sale of marketable securities |
| 14,844 | ||||||
Other |
13,768 | 12,455 | ||||||
$ | (2,757,271 | ) | $ | 27,299 | ||||
9. | SUBSEQUENT EVENT LEGAL PROCEEDINGS | |
On March 15, 2006, the Company filed a complaint against Colt LLC and other defendants alleging tortious interference with business relations and breach of contract relating to the interruptions of our development plans at the Companys Southern Illinois Basin Project. The Company sought a preliminary injunction (which was denied by the court) against Colt LLC and related parties from terminating the lease agreement covering its CBM rights in 43,000 acres at the Southern Illinois Basin Project or taking any other action that interferes with the Companys right to mine CBM under the lease agreement, pending a final judgment on the merits of the complaint. | ||
On April 5, 2006, Colt filed an answer and counterclaim in response to the Companys complaint. In its counterclaim, Colt sought a declaratory judgment asking the court to declare, among other things, that: (a) BPI committed multiple breaches of the lease agreement; (b) the lease agreement automatically terminated due to BPIs failure to cure its alleged breaches; (c) the lease agreement automatically terminated by its own terms on April 3, 2006; and (d) to the extent the lease agreement already terminated, BPI is wrongfully holding over and/or trespassing and Colt is entitled to an award of damages as a result. | ||
In June 2006, the Company reached a settlement with the defendants in this lawsuit. The following list summarizes the key terms of the settlement: |
1. | All parties to the suit will release all of the other parties from any claims they may have had against each other; | ||
2. | BPI will pay Colt $3,000,000; | ||
3. | BPI will surrender any interest it had in the lease; | ||
4. | BPI acquired ownership of the CBM estate covering approximately 10,000 of the 43,000 acres previously covered by the lease (which acreage includes all of the currently producing CBM wells and proved reserves at our Southern Illinois Basin Project); | ||
5. | BPI will be relieved of any future obligation to make royalty payments as was previously required under the terms of the lease (under the terms of the lease BPI was obligated to make royalty payments of 15% of gross sales and minimum royalties totaling at least $42,000 per month); and | ||
6. | The deed will provide that CBM operations take priority over coal mining operations for as long as CBM is being produced from the covered acreage; however, Colt has the right to acquire any CBM wells located in these 10,000 acres. If Colt exercises this option, they will be required to pay the fair market value (as established by a mutually agreed upon expert) of such well. |
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In conjunction with this proposed settlement, during the quarter ended April 30, 2006 the Company recorded $2,949,907 as other expense, approximately $50,000 as a deduction to sales for royalties due on production that Colt, LLC had previously rejected, and $3,000,000 as accrued liabilities for the pending payment. In addition, the Company reclassified approximately $2,226,000 from the cost of Unevaluated Properties to the cost of Proved Properties to recognize the impairment resulting from the loss of approximately 33,000 acres of mineral rights. |
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| negotiating to obtain 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 ensure availability of equipment and services; and |
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| attempting to create a low cost structure in order to reduce our vulnerability to many of these factors. |
| developing the in-house capabilities necessary to enable us to meet our regulatory and reporting obligations to various regulatory agencies, constituencies and our shareholders; | ||
| raising the capital necessary to achieve our plans and goals; | ||
| transitioning BPI from a company focused primarily on the acquisition of mineral rights to a company focused on producing CBM; and | ||
| developing and expanding our in-house technical team necessary for large scale development and production of CBM assets. |
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Wells Drilled | ||||||||||||||||||||
Productive | but not yet in | Shut-in | Test | Total | ||||||||||||||||
Project | Wells | Production | Wells | Wells | Wells | |||||||||||||||
Southern Illinois Basin Project |
77 | 8 | 17 | 0 | 102 | |||||||||||||||
Northern Illinois Basin Project |
0 | 2 | 0 | 3 | 5 | |||||||||||||||
Western Illinois Basin Project |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total |
77 | 10 | 17 | 3 | 107 |
Three Months Ended April 30 | ||||||||||||||||
Dollar | % | |||||||||||||||
2006 | 2005 | Variance | Change | |||||||||||||
Revenues: |
||||||||||||||||
Gas sales |
$ | 262,860 | $ | 46,925 | $ | 215,935 | 460 | % | ||||||||
Expenses: |
||||||||||||||||
Lease operating expense |
290,844 | 203,289 | 87,555 | 43 | % | |||||||||||
General and administrative expense |
2,054,434 | 1,847,554 | 206,880 | 11 | % | |||||||||||
Depreciation, depletion and amortization |
189,988 | 83,129 | 106,859 | 129 | % | |||||||||||
2,535,266 | 2,133,972 | 401,294 | 19 | % | ||||||||||||
Other income (expenses): |
||||||||||||||||
Interest income |
229,888 | 62,012 | 167,876 | 271 | % | |||||||||||
Interest expense |
(4,276 | ) | (3,804 | ) | (472 | ) | (12 | %) | ||||||||
Other income (expense), net |
(2,894,794 | ) | 24,053 | (2,918,847 | ) | (12,135 | %) | |||||||||
(2,669,182 | ) | 82,261 | (2,751,443 | ) | (3,345 | %) | ||||||||||
Loss before income taxes |
(4,941,588 | ) | (2,004,786 | ) | (2,936,802 | ) | (146 | %) | ||||||||
Deferred income tax benefit |
| 270,587 | (270,587 | ) | (100 | %) | ||||||||||
Net loss |
$ | (4,941,588 | ) | $ | (1,734,199 | ) | $ | (3,207,389 | ) | (185 | %) | |||||
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Three Months ended April 30 | ||||||||||||||||
Dollar | % | |||||||||||||||
2006 | 2005 | Variance | Change | |||||||||||||
Salaries and benefits |
$ | 422,436 | $ | 257,778 | $ | 164,658 | 64 | % | ||||||||
Stock-based compensation |
647,261 | 1,039,406 | (392,145 | ) | (38 | %) | ||||||||||
Professional fees |
853,324 | 387,605 | 465,719 | 120 | % | |||||||||||
Other |
131,413 | 162,765 | (31,352 | ) | (19 | %) | ||||||||||
Total general and
administrative expense |
$ | 2,054,434 | $ | 1,847,554 | $ | 206,880 | 11 | % | ||||||||
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Nine Months Ended April 30 | ||||||||||||||||
Dollar | % | |||||||||||||||
2006 | 2005 | Variance | Change | |||||||||||||
Revenues: |
||||||||||||||||
Gas sales |
$ | 800,365 | $ | 53,266 | $ | 747,099 | 1,403 | % | ||||||||
Expenses: |
||||||||||||||||
Lease operating expense |
752,454 | 203,289 | 549,165 | 270 | % | |||||||||||
General and administrative expense |
4,491,676 | 5,012,641 | (520,965 | ) | (10 | %) | ||||||||||
Depreciation, depletion and
amortization |
402,680 | 140,801 | 261,879 | 186 | % | |||||||||||
5,646,810 | 5,356,731 | 290,079 | 5 | % | ||||||||||||
Other income (expenses): |
||||||||||||||||
Interest income |
632,693 | 66,859 | 565,834 | 846 | % | |||||||||||
Interest expense |
(18,054 | ) | (14,386 | ) | (3,668 | ) | (25 | %) | ||||||||
Other income (expense), net |
(2,757,271 | ) | 27,299 | (2,784,570 | ) | (10,200 | %) | |||||||||
(2,142,632 | ) | 79,772 | (2,222,404 | ) | (2,786 | %) | ||||||||||
Loss before income taxes |
(6,989,077 | ) | (5,223,693 | ) | (1,765,384 | ) | (34 | %) | ||||||||
Deferred income tax benefit |
| 615,304 | (615,304 | ) | (100 | %) | ||||||||||
Net loss |
$ | (6,989,077 | ) | $ | (4,608,389 | ) | $ | (2,380,688 | ) | (52 | %) | |||||
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Nine Months ended April 30 | ||||||||||||||||
Dollar | % | |||||||||||||||
2006 | 2005 | Variance | Change | |||||||||||||
Salaries and benefits |
$ | 1,149,675 | $ | 766,283 | $ | 383,392 | 50 | % | ||||||||
Stock-based compensation |
1,044,847 | 3,240,184 | (2,195,337 | ) | (68 | %) | ||||||||||
Professional fees |
1,871,393 | 555,785 | 1,315,608 | 237 | % | |||||||||||
Other |
425,761 | 450,389 | (24,628 | ) | (5 | %) | ||||||||||
Total general and
administrative expense |
$ | 4,491,676 | $ | 5,012,641 | $ | (520,965 | ) | (10 | %) | |||||||
20
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| the price of, and demand for, natural gas; | ||
| availability of drilling equipment; | ||
| lease terms; | ||
| availability of sufficient capital resources; and | ||
| the accuracy of production estimates for current and future wells. |
22
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1. | All parties to the suit will release all of the other parties from any claims they may have had against each other; | ||
2. | BPI will pay Colt $3,000,000; | ||
3. | BPI will surrender any interest it had in the lease; | ||
4. | BPI acquired ownership of the CBM estate covering approximately 10,000 of the 43,000 acres previously covered by the lease (which acreage includes all of the currently producing CBM wells and proved reserves at our Southern Illinois Basin Project); | ||
5. | BPI will be relieved of any future obligation to make royalty payments as was previously required under the terms of the lease (under the terms of the lease we were obligated to make royalty payments of 15% of gross sales and minimum royalties totaling at least $42,000 per month); and | ||
6. | The deed will provide that CBM operations take priority over coal mining operations for as long as CBM is being produced from the covered acreage; however, Colt has the right to acquire any CBM wells located in these 10,000 acres. If Colt exercises this option, they will be required to pay the fair market value (as established by a mutually agreed upon expert) of such well. |
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