BPI Energy Holdings, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 2007
Commission File No. 001-32695
BPI Energy Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
|
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|
British Columbia, Canada
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|
75-3183021 |
(State or Other Jurisdiction of
Incorporation or Organization)
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|
(I.R.S. Employer Identification No.) |
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30775 Bainbridge Road, Suite 280, Solon, Ohio
|
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44139 |
(Address of Principal Executive Offices)
|
|
(Zip Code) |
Registrants telephone number, including area code: (440) 248-4200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: Common Shares, without par value, as of June 8, 2007: 72,524,493.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BPI Energy Holdings, Inc.
Consolidated Balance Sheets
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|
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|
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|
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|
April 30, 2007 |
|
|
July 31, 2006 |
|
|
|
(Unaudited) |
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|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7,070,656 |
|
|
$ |
19,279,015 |
|
Accounts receivable |
|
|
130,426 |
|
|
|
105,711 |
|
Other current assets |
|
|
618,937 |
|
|
|
164,764 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
7,820,019 |
|
|
|
19,549,490 |
|
Property and equipment, at cost: |
|
|
|
|
|
|
|
|
Gas properties, full cost method of accounting: |
|
|
|
|
|
|
|
|
Proved, net of accumulated depreciation,
depletion and amortization of $734,814 and $375,000 |
|
|
26,326,432 |
|
|
|
25,065,448 |
|
Unproved |
|
|
7,115,629 |
|
|
|
3,368,231 |
|
|
|
|
|
|
|
|
Net gas properties |
|
|
33,442,061 |
|
|
|
28,433,679 |
|
Other property and equipment, net of accumulated
depreciation and amortization of $818,626 and $587,165 |
|
|
1,683,231 |
|
|
|
807,686 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
35,125,292 |
|
|
|
29,241,365 |
|
Restricted cash |
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|
100,000 |
|
|
|
100,000 |
|
Other non-current assets |
|
|
294,447 |
|
|
|
161,125 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
43,339,758 |
|
|
$ |
49,051,980 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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|
|
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Accounts payable |
|
$ |
984,802 |
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|
$ |
1,492,239 |
|
Current maturity of long-term notes payable |
|
|
29,135 |
|
|
|
140,866 |
|
Accrued liabilities and other |
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|
856,696 |
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|
649,237 |
|
|
|
|
|
|
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|
Total current liabilities |
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|
1,870,633 |
|
|
|
2,282,342 |
|
Long-term notes payable, less current portion |
|
|
54,325 |
|
|
|
75,149 |
|
Asset retirement obligation |
|
|
111,020 |
|
|
|
70,754 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,035,978 |
|
|
|
2,428,245 |
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common shares, no par value, authorized 200,000,000
shares, 72,524,493 and 70,812,540 outstanding |
|
|
67,946,143 |
|
|
|
67,946,143 |
|
Additional paid-in capital |
|
|
7,145,431 |
|
|
|
5,871,120 |
|
Accumulated deficit |
|
|
(33,787,794 |
) |
|
|
(27,193,528 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
41,303,780 |
|
|
|
46,623,735 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
43,339,758 |
|
|
$ |
49,051,980 |
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
1
BPI Energy Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
Nine Months Ended April 30, |
|
|
|
2007 |
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|
2006 |
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|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sales |
|
$ |
334,706 |
|
|
$ |
262,860 |
|
|
$ |
875,615 |
|
|
$ |
800,365 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense |
|
|
411,938 |
|
|
|
290,844 |
|
|
|
1,275,685 |
|
|
|
752,454 |
|
General and administrative expenses |
|
|
1,885,061 |
|
|
|
2,054,434 |
|
|
|
6,089,287 |
|
|
|
4,491,676 |
|
Depreciation, depletion and amortization |
|
|
215,280 |
|
|
|
189,988 |
|
|
|
591,275 |
|
|
|
402,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,512,279 |
|
|
|
2,535,266 |
|
|
|
7,956,247 |
|
|
|
5,646,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(2,177,573 |
) |
|
|
(2,272,406 |
) |
|
|
(7,080,632 |
) |
|
|
(4,846,445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
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|
|
|
|
|
|
|
|
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Interest income |
|
|
108,660 |
|
|
|
229,888 |
|
|
|
493,982 |
|
|
|
632,693 |
|
Interest expense |
|
|
(1,437 |
) |
|
|
(4,276 |
) |
|
|
(7,616 |
) |
|
|
(18,054 |
) |
Other income (expense) |
|
|
|
|
|
|
(2,894,794 |
) |
|
|
|
|
|
|
(2,757,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,223 |
|
|
|
(2,669,182 |
) |
|
|
486,366 |
|
|
|
(2,142,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,070,350 |
) |
|
$ |
(4,941,588 |
) |
|
$ |
(6,594,266 |
) |
|
$ |
(6,989,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(0.03 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.12 |
) |
Weighted average common shares outstanding |
|
|
70,036,326 |
|
|
|
66,395,782 |
|
|
|
69,642,804 |
|
|
|
60,686,413 |
|
See Notes to Unaudited Consolidated Financial Statements.
2
BPI Energy Holdings, Inc.
Consolidated Statements of Shareholders Equity
(Unaudited)
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|
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Additional |
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Total |
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|
Common Shares |
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|
Paid-in |
|
|
Accumulated |
|
|
Shareholders |
|
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|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
Balance at July 31, 2006 |
|
|
70,812,540 |
|
|
$ |
67,946,143 |
|
|
$ |
5,871,120 |
|
|
$ |
(27,193,528 |
) |
|
$ |
46,623,735 |
|
Share-based payments
common shares, including
vesting of restricted shares |
|
|
1,795,883 |
|
|
|
|
|
|
|
1,317,115 |
|
|
|
|
|
|
|
1,317,115 |
|
Surrender of shares |
|
|
(83,930 |
) |
|
|
|
|
|
|
(42,804 |
) |
|
|
|
|
|
|
(42,804 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,594,266 |
) |
|
|
(6,594,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007 |
|
|
72,524,493 |
|
|
$ |
67,946,143 |
|
|
$ |
7,145,431 |
|
|
$ |
(33,787,794 |
) |
|
$ |
41,303,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
3
BPI Energy Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended April 30, |
|
|
|
2007 |
|
|
2006 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,594,266 |
) |
|
$ |
(6,989,077 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
591,275 |
|
|
|
402,680 |
|
Share-based payments |
|
|
1,045,879 |
|
|
|
1,044,847 |
|
Gain on sale of investment |
|
|
|
|
|
|
(127,416 |
) |
Accretion of asset retirement obligation |
|
|
5,197 |
|
|
|
2,464 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(24,715 |
) |
|
|
(91,431 |
) |
Other current assets |
|
|
(159,063 |
) |
|
|
(201,490 |
) |
Accounts payable |
|
|
(152,231 |
) |
|
|
(374,117 |
) |
Accrued liabilities and other |
|
|
7,459 |
|
|
|
3,038,378 |
|
Other assets and liabilities |
|
|
|
|
|
|
49,214 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(5,280,465 |
) |
|
|
(3,245,948 |
) |
Investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of investment |
|
|
|
|
|
|
551,000 |
|
Additions to property and equipment |
|
|
(6,795,339 |
) |
|
|
(12,902,470 |
) |
Increase in restricted cash |
|
|
|
|
|
|
(34,173 |
) |
|
|
|
|
|
|
|
Net cash used in investment activities |
|
|
(6,795,339 |
) |
|
|
(12,385,643 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
Payments on long-term notes payable |
|
|
(132,555 |
) |
|
|
(106,306 |
) |
Net proceeds from issuance of common shares |
|
|
|
|
|
|
33,280,121 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(132,555 |
) |
|
|
33,173,815 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(12,208,359 |
) |
|
|
17,542,224 |
|
Cash and cash equivalents at the beginning of the period |
|
|
19,279,015 |
|
|
|
7,251,503 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period |
|
$ |
7,070,656 |
|
|
$ |
24,793,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Supplementary disclosure of cash flow information: |
|
|
|
|
|
|
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|
Cash payments: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
6,616 |
|
|
$ |
14,132 |
|
Non-cash investing activities acquisition of equipment by issuance of notes payable |
|
|
|
|
|
|
233,475 |
|
See Notes to Unaudited Consolidated Financial Statements.
4
BPI Energy Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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 exploration, production and
commercial sale of coalbed methane in the Illinois Basin. The Company conducts its operations in
one reportable segment, which is gas exploration and production. The Companys common shares
trade on the American Stock Exchange under the symbol BPG. 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 three and nine months ended April 30, 2007 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 Annual
Report on Form 10-K for the fiscal year ended July 31, 2006. Certain prior period amounts have
been reclassified to conform to the current periods presentation.
The Company has financed its activities primarily from the proceeds of various share issuances.
As a result of the Company being in the early stages of operations, the recoverability of assets
on the balance sheet will be dependent on the Companys ability to obtain additional financing
and to attain a level of profitable operations.
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 gas
properties and the impairment of gas properties are determined using estimates of 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 the timing and costs
associated with asset retirement obligations. Gas reserve engineering must be recognized as a
subjective process of estimating underground accumulations of gas that cannot be measured in an
exact way. Proved reserves of 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.
Gas Properties
The Company follows the full cost method of accounting for gas properties. Under this method, all
costs associated with the acquisition of, exploration for and development of 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 gas activities that are not directly attributable to acquisition,
exploration or development activities are expensed as incurred.
Unproved 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.
Unproved properties are assessed at least annually to ascertain whether 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.
5
Capitalized costs of proved 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 the end of each reporting period.
In general, the Company determines if an unproved 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. |
No impairment existed as of April 30, 2007 or July 31, 2006.
Other Property and Equipment
Other property and equipment is stated at cost and includes support equipment used in gas
operations and other fixed assets such as office equipment, computer hardware and software, and
furniture and fixtures. Other property and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets, ranging from three to 10 years. Major
classes of other property and equipment consisted of the following at April 30, 2007 and July 31,
2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2007 |
|
|
2006 |
|
Other property and equipment: |
|
|
|
|
|
|
|
|
Support equipment |
|
$ |
1,832,445 |
|
|
$ |
1,046,989 |
|
Other |
|
|
669,412 |
|
|
|
347,862 |
|
Less: Accumulated depreciation and amortization |
|
|
(818,626 |
) |
|
|
(587,165 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,683,231 |
|
|
$ |
807,686 |
|
|
|
|
|
|
|
|
Loss Per Share
Basic 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 shares were exercised or converted into common
shares. Restricted common shares granted are included in the computation only after the shares
become fully vested. Diluted loss per share is not disclosed as it is anti-dilutive. The
following items were excluded from the computation of diluted loss per share at April 30, 2007
and 2006, respectively, as the effect of their assumed exercises would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
Outstanding warrants |
|
|
5,311,600 |
|
|
|
5,311,600 |
|
Outstanding stock options |
|
|
1,529,931 |
|
|
|
1,872,812 |
|
Nonvested portion of restricted shares issued |
|
|
2,437,338 |
|
|
|
2,184,498 |
|
|
|
|
|
|
|
|
|
|
|
9,278,869 |
|
|
|
9,368,910 |
|
|
|
|
|
|
|
|
6
2. STOCK-BASED COMPENSATION
SFAS No. 123 (R)
In December 2004, the FASB issued Statement of Financial Accounting Standards (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 nonvested portion
of previous stock option grants that vested during the fiscal year ended July 31, 2006 or
thereafter. Therefore, the adoption of SFAS 123(R) had no impact on the Companys consolidated
financial position or results of operations for the periods presented. The Company uses the
Black-Scholes formula to estimate the fair value of stock options granted.
Incentive Stock Option Plan
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 shares 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 shares 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 following table
summarizes information about options outstanding under the Incentive Stock Option Plan at April
30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
|
|
|
Price |
|
|
Number |
|
|
Remaining |
|
|
Expiry |
(CAD$) |
|
|
Outstanding |
|
|
Life (Years) |
|
|
Date |
$ |
0.65 |
|
|
|
345,000 |
|
|
1.8 |
|
|
November 3, 2008 |
|
0.90 |
|
|
|
10,000 |
|
|
2.6 |
|
|
September 22, 2009 |
|
1.49 |
|
|
|
695,666 |
|
|
2.8 |
|
|
November 29, 2009 |
|
2.05 |
|
|
|
10,000 |
|
|
3.6 |
|
|
September 22, 2010 |
|
2.19 |
|
|
|
136,000 |
|
|
3.2 |
|
|
March 27, 2010 |
|
2.40 |
|
|
|
333,265 |
|
|
3.0 |
|
|
January 20, 2010 |
|
|
|
|
|
|
|
|
|
|
$ |
1.56 |
|
|
|
1,529,931 |
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Omnibus Stock Plan
On December 13, 2005, the shareholders of the Company approved the Companys 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 is administered by the Compensation Committee of the Board of Directors (the
Committee) and will remain in effect until December 13, 2010. 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.
The Omnibus Stock Plan provides that in any fiscal year of the plan the Company may grant awards
with respect to up to 5% of the number of common shares outstanding as of the first day of that
fiscal year plus the number of common shares that were available for the grant of awards, but not
granted, in prior years under the plan. In no event, however, may the number of common
7
shares available for the grant of awards in any fiscal year exceed 6% of the common shares
outstanding as of the first day of that fiscal year. In addition, the aggregate number of common
shares that could be issued under the Omnibus Stock Plan is capped at 7,000,000. As of April 30,
2007, the Company has issued 2,532,338 restricted common shares and 388,662 unrestricted common
shares (but no options) under the Omnibus Stock Plan and has 4,079,000 common shares available
for future issuance under the Plan.
Share-Based Transactions
The following table summarizes the Companys restricted share activity during the three and nine
months ended April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested at July 31, 2006 |
|
|
2,325,000 |
|
|
$ |
0.61 |
|
Granted |
|
|
1,207,338 |
|
|
|
0.78 |
|
Vested |
|
|
(475,000 |
) |
|
|
0.49 |
|
|
|
|
|
|
|
|
Nonvested at October 31, 2006 |
|
|
3,057,338 |
|
|
|
0.70 |
|
Vested |
|
|
(520,000 |
) |
|
|
1.42 |
|
|
|
|
|
|
|
|
Nonvested at January 31, 2007 |
|
|
2,537,338 |
|
|
|
0.74 |
|
Vested |
|
|
(100,000 |
) |
|
|
1.42 |
|
|
|
|
|
|
|
|
Nonvested at April 30, 2007 |
|
|
2,437,338 |
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
All restricted share awards are subject to continuous employment. However, in the event
employment is terminated before the restrictions lapse by reason of death, total disability or
retirement, the restrictions will lapse on the date of termination as to a pro-rata portion of
the number of restricted shares scheduled to vest on the next vesting date, based on the number of
days continuously employed during the applicable vesting period. The Company includes all
restricted shares in common shares outstanding when issued, but only includes the vested portion
of such shares in the computation of basic earnings per share.
The Companys policy is to issue new shares to satisfy stock option exercises and restricted
share grants upon receiving approval from the American Stock Exchange, when required, for the
issuance of such shares.
As of April 30, 2007, there was $1,361,087 of unrecognized compensation cost related to
restricted shares. The cost is expected to be amortized over a weighted average period of 1.1
years. The amount charged to expense related to restricted shares was $211,381 and $718,059
during the three and nine months ended April 30, 2007, respectively, and $22,461 during both the
three and nine months ended April 30, 2006.
3. OTHER ASSETS
Other Current Assets
Other current assets consisted of the following at April 30, 2007 and July 31, 2006,
respectively:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2007 |
|
|
2006 |
|
Separation agreement |
|
$ |
337,949 |
|
|
$ |
|
|
Prepaid expenses and other |
|
|
280,988 |
|
|
|
164,764 |
|
|
|
|
|
|
|
|
|
|
$ |
618,937 |
|
|
$ |
164,764 |
|
|
|
|
|
|
|
|
Other Non-current Assets
Other non-current assets consisted of the following at April 30, 2007 and July 31, 2006,
respectively:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2007 |
|
|
2006 |
|
Separation agreement |
|
$ |
133,322 |
|
|
$ |
|
|
Advance royalties |
|
|
161,125 |
|
|
|
161,125 |
|
|
|
|
|
|
|
|
|
|
$ |
294,447 |
|
|
$ |
161,125 |
|
|
|
|
|
|
|
|
8
Prepaid expenses primarily represent amounts paid one year in advance for commercial insurance
premiums and monthly prepayments of rent, health benefits and other expenses. The separation
agreement represents amounts capitalized related to non-compete/non-solicitation and continuing
services clauses contained in a separation agreement entered into with a former officer of the
Company on October 12, 2006. See note 10 for further explanation of this agreement.
4. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consisted of the following at April 30, 2007 and July 31, 2006,
respectively:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2007 |
|
|
2006 |
|
Employee compensation |
|
$ |
565,000 |
|
|
$ |
467,869 |
|
Separation agreement |
|
|
200,000 |
|
|
|
|
|
Professional and regulatory |
|
|
40,696 |
|
|
|
111,805 |
|
Directors fees |
|
|
40,000 |
|
|
|
31,000 |
|
Other |
|
|
11,000 |
|
|
|
38,563 |
|
|
|
|
|
|
|
|
|
|
$ |
856,696 |
|
|
$ |
649,237 |
|
|
|
|
|
|
|
|
The separation agreement represents amounts due related to non-compete/non-solicitation and
continuing services clauses contained in a separation agreement entered into with a former
officer of the Company on October 12, 2006. See note 10 for further explanation of this
agreement.
5. LONG-TERM NOTES PAYABLE
Long-term notes payable consisted of the following at April 30, 2007 and July 31, 2006,
respectively:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2007 |
|
|
2006 |
|
Case Credit term note due in fiscal year 2006, 6.50% |
|
$ |
1,579 |
|
|
$ |
15,410 |
|
GMAC term note due in fiscal year 2009, 6.50% |
|
|
15,827 |
|
|
|
20,608 |
|
GMAC term notes due in fiscal year 2010, 6.1% to 6.50% |
|
|
66,054 |
|
|
|
80,849 |
|
Caterpillar Financial Services term note due in fiscal year 2007, 7.0% |
|
|
|
|
|
|
99,148 |
|
|
|
|
|
|
|
|
|
|
|
83,460 |
|
|
|
216,015 |
|
Less current maturities |
|
|
(29,135 |
) |
|
|
(140,866 |
) |
|
|
|
|
|
|
|
Long-term notes payable |
|
$ |
54,325 |
|
|
$ |
75,149 |
|
|
|
|
|
|
|
|
The notes are collateralized by the related vehicles and equipment.
6. ASSET RETIREMENT OBLIGATIONS
The Company follows 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 computed 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 following table summarizes the activity for the Companys asset retirement obligation for the
nine months ended April 30, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
Beginning asset retirement obligation |
|
$ |
70,753 |
|
|
$ |
19,778 |
|
Additional liability incurred |
|
|
18,893 |
|
|
|
29,436 |
|
Accretion expense |
|
|
5,197 |
|
|
|
2,464 |
|
Change in estimate |
|
|
35,377 |
|
|
|
|
|
Asset retirement costs incurred |
|
|
(36,239 |
) |
|
|
|
|
Loss on settlement of liability |
|
|
17,039 |
|
|
|
|
|
|
|
|
|
|
|
|
Ending asset retirement obligation |
|
$ |
111,020 |
|
|
$ |
51,678 |
|
|
|
|
|
|
|
|
9
During the nine months ended April 30, 2007, the Company incurred $36,239 related to plugging
wells in conjunction with the legal settlement reached with Colt LLC in fiscal year 2006. The
actual cost of plugging the wells exceeded the Companys estimate, resulting in a loss on
settlement of the liability of $17,039. The Company changed its estimate of future costs
associated with plugging wells, resulting in an increase to the asset retirement obligation of
$35,377, which was recorded in the second quarter of fiscal year 2007.
7. CONCENTRATIONS
Financial instruments that potentially subject the Company to concentrations of credit risk
consist of cash and cash equivalents, which are held at one large high quality financial
institution. The Company periodically evaluates the credit worthiness of the financial
institution. The Company has not incurred any credit risk losses related to its cash and cash
equivalents.
The Company utilizes a limited number of drilling contractors to perform all of the drilling on
its projects. The Company maintains a limited number of supervisory and field personnel to
oversee drilling and production operations. The Companys plans to drill additional wells are
determined in large part by the anticipated availability of acceptable drilling equipment and
crews. The Company does not currently have any contractual commitments that ensure it will have
adequate drilling equipment or crews to achieve its drilling plans. The Company believes that it
can secure the necessary commitments from drilling companies as required. However, it can provide
no assurance that its expectations regarding the availability of drilling equipment and crews
from these companies will be met. A significant delay in securing the necessary drilling
equipment and crews could cause a delay in production and sales, which would affect operating
results adversely.
8. INCOME TAXES
The Company operates in two tax jurisdictions, the United States and Canada. Primarily as a
result of the net operating losses that the Company has generated (NOL Carryforwards) in both
Canada and the United States, the Company has generated deferred tax benefits available for tax
purposes to offset net income in future periods. SFAS No. 109, Accounting for Income Taxes
requires that the Company 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, 2007.
9. SHAREHOLDERS EQUITY
Common shares The Company has authorized 200,000,000 shares without par value of which
72,524,493 and 70,812,540 were issued and outstanding as of April 30, 2007 and July 31, 2006,
respectively. Shares issued and outstanding at April 30, 2007 include 2,437,338 of restricted
shares expected to vest in future periods.
Additional paid-in capital Amounts recorded of $7,145,431 and $5,871,120 at April 30, 2007
and July 31, 2006, respectively, represent the cumulative value of share-based payments made as
of each date.
Share purchase warrants outstanding at April 30, 2007 are as follows:
|
|
|
|
|
|
|
|
Number |
|
Exercise |
|
|
Outstanding |
|
Price |
|
Expiry Date |
|
4,274,400 |
|
|
$ |
1.50 |
|
December 13, 2007 |
|
643,200 |
|
|
|
1.25 |
|
December 31, 2009 |
|
394,000 |
|
|
|
1.25 |
|
January 12, 2010 |
|
|
|
|
|
|
|
|
|
5,311,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. SEPARATION AGREEMENT
On October 12, 2006, the Company entered into a Separation Agreement and Waiver and Release
(Separation Agreement) with a former officer and director of the Company. Under the terms of
the Separation Agreement, the Company agreed to provide consideration to the former officer and
director upon his resignation as follows:
10
|
|
|
Severance cash payment of $250,000 and medical and dental insurance coverage for
two years from the date of the agreement. The cash payment of $250,000 was expensed
during the first quarter of fiscal year 2007 and the cost of medical and dental coverage
is being expensed as incurred. |
|
|
|
|
Consulting issuance of 40,000 unrestricted common shares and cash payments
totaling $50,000 in periodic installments from October 15, 2006 through December 31, 2006
in return for consulting services to be provided by the former officer and director as
may be reasonably requested by the Company from time to time through January 2, 2008. |
|
|
|
|
Non-compete/Non-solicitation cash payments of $100,000 on each of three dates
from January 2, 2007 through January 2, 2008 and immediate vesting of 475,000 restricted
shares held by the former officer and director in return for his agreeing not to compete
with the Company or to solicit any of its employees for a period of two years. |
The Company capitalized the value of the expected future benefit to be received from both the
consulting services and the non-compete/non-solicitation agreement and is amortizing the related
expense ratably over the future periods in which it expects to receive the related benefits. As
of April 30, 2007, $471,271 of amortized value related to the consulting services and the
non-compete/non-solicitation agreement are recorded as other assets on the balance sheet,
including $337,949 shown as current and representing the amount to be amortized over the next
year. As of April 30, 2007, $200,000 is recorded as a current liability reflecting payments due
under the non-compete/non-solicitation agreement within the next year. During the three and nine
months ended April 30, 2007, the Company expensed $87,125 and $195,786, respectively, in
connection with the consulting services and the non-compete/non-solicitation agreement.
11. 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. 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 $11,708 and $68,674 in expense
reimbursement related to this arrangement during the nine months ended April 30, 2007 and 2006,
respectively. Mr. Oestreichs brother owns Dependable Service Company, a company that previously
provided general labor services to the Company. The Company paid Dependable Services Company $0
and $227,626 during the nine months ended April 30, 2007 and 2006, respectively.
David Preng, a director of the Company, owns Preng & Associates, an executive search firm
specializing in the energy and natural resources industries. The Company paid Preng & Associates
$12,575 and $150,000 for executive placement services during the nine months ended April 30, 2007
and 2006, respectively.
12. LEGAL PROCEEDINGS
Drummond Coal Co. Litigation
BPI Energy, Inc. (BPI) is currently subject to litigation with respect to approximately 115,000
acres of its CBM rights that are located at the Northern Illinois Basin Project. To date, BPI has
drilled one well on this acreage, a test well that was drilled in September 2006. This well is
not currently at the production stage.
In 2004, BPI and affiliates of the Drummond Coal Co. (Drummond), including IEC (Montgomery),
LLC (IEC), entered into a letter of intent to obtain coal and CBM gas rights for one another in
the Illinois Basin and to work together in a relationship in which BPI would extract CBM from
coal beds prior to the Drummond affiliates mining of coal from those beds. Pursuant to and in
reliance upon this letter of intent and its relationship with Drummond, BPI arranged for the
transfer of 163,109 acres of coal rights to the Drummond affiliates for a total purchase price of
$5,845,500, which BPI believes reflects a significant discount to current market prices. In light
of its obligations to Drummond, BPI charged no profit on its transfer of the coal rights to the
Drummond affiliates. Rather, in consideration for obtaining those coal rights, the Drummond
affiliates were to lease approximately 115,000 acres of CBM rights to BPI for a primary lease
term of 20 years and with favorable royalty rates. Although the Drummond affiliates entered into
two CBM leases with BPI on April 26, 2006, they have since sought in various ways to void or
terminate the leases.
11
Ignoring mandatory arbitration provisions in the CBM leases, Drummond affiliates IEC and
Christian Coal Holdings, LLC (Christian) filed suit against BPI on February 9, 2007 in the
United States District Court for the Northern District of Alabama, claiming that BPI has breached
the CBM leases in various ways. Specifically, although the CBM leases include no specific
drilling commitments, IEC and Christian allege that BPI has breached the CBM leases by failing to
use best efforts to commercially produce all economically recoverable gas. IEC and Christian also
allege that BPI has breached the CBM leases by failing to provide maps of existing and proposed
gas wells and facilities every six months and failing to maintain required insurance coverage.
BPI refutes each of these allegations and intends to vigorously defend the Drummond affiliates
claims of breach. In addition, BPI moved to dismiss the lawsuit for lack of standing, lack of
personal jurisdiction and improper venue, or in the alternative to transfer the case to either
Ohio or Illinois. BPI also moved the court to stay or dismiss the Alabama lawsuit and to compel
arbitration under the CBM leases. On May 14, 2007, the Court granted BPIs motion to dismiss on
the ground of improper venue. BPI anticipates that IEC and Christian may appeal the decision,
move the Court to reconsider it, or reinstitute litigation in a different venue.
On March 13, 2007, BPI filed suit against IEC, Christian and additional Drummond affiliates
Shelby Coal Holdings, LLC, Clinton Coal Holdings, LLC and Marion Coal Holdings, LLC in the United
States District Court for the Southern District of Illinois. At the courts direction, BPI filed
an amended complaint on April 13, 2007. In its lawsuit, BPI seeks to rescind its transfers of
coal rights to the Drummond affiliates for failure of consideration due to the Drummond
affiliates efforts to avoid the CBM leases, and has also asserted claims for money damages for
breach of contract, breach of fiduciary duty, unjust enrichment and promissory estoppel. The
defendants filed a motion to dismiss the amended complaint, to which BPI currently is preparing a
response.
The Company believes that Drummond and its affiliates, after having received favorable coal
rights in exchange for favorable CBM rights, now wish to obtain a significant windfall by seeking
to renege on the CBM rights that they were obligated to grant to BPI.
If the Drummond affiliates reinstitute their claims against BPI, the Company believes that it
will be successful in defending against their claims of breach. However, there can be no
assurance that the Company will be successful in maintaining these acreage rights. The loss of
these acreage rights would not have a material impact on the Companys financial position,
results of operations or cash flows.
ICG Litigation
In November 2004, BPI entered into a farmout agreement under which it acquired the right to
develop certain CBM in Macoupin and Perry counties in Illinois. The farmout agreement covers
41,253 acres of CBM rights in Macoupin County and 22,997 acres of CBM rights in Perry County.
The farmor was Addington Exploration, LLC, which leased the CBM rights from Meadowlark Farms,
Inc. and Ayrshire Land Company. Meadowlark and Ayrshire went into bankruptcy, and ICG Natural
Resources, LLC purchased their assets, including the CBM rights underlying the Addington leases.
On April 9, 2007, ICG filed suit against BPI in Perry County, Illinois, in an effort to avoid the
Addington leases, claiming that there was a lack of consideration at the time they were
originally entered into. BPI has filed a motion to dismiss the lawsuit under the doctrine of
estoppel by deed, arguing that ICG cannot challenge the leases because it acquired the CBM rights
subject to those leases, as set forth in the deed from Addington and Meadowlark to ICG, the
purchase agreement between those parties, and numerous bankruptcy court filings and orders
associated with the approval of the sale. Addington was subsequently acquired by Nytis
Exploration Company, LLC, which has intervened in the action and joined
in BPIs motion. To date, BPI
has drilled 10 pilot wells, one pressure observation well and one
water disposal well
on the acreage covered by
the farmout agreement.
The
Company believes that it will be successful in either having the case dismissed or in defending
against ICGs claims. However, there can be no assurance that
the Company will be successful in retaining the acreage rights under
this farmout agreement.
Item 2. 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 under Item 1.
Overview and Outlook
We are an independent energy company incorporated under the laws of British Columbia, Canada and
primarily engaged, through our wholly owned U.S. subsidiary, BPI Energy, Inc., in the
exploration, production and commercial sale of coalbed methane
12
(CBM). Our exploration and production efforts are concentrated in the Illinois Basin (the
Basin), which encompasses a total area of approximately 60,000 square miles covering the
southern two-thirds of Illinois, southwestern Indiana and northwestern Kentucky. 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 April 30, 2007, we owned or controlled CBM rights, through mineral leases, options to
acquire mineral leases, a farm-out agreement and ownership of a CBM estate, covering
approximately 500,000 total acres in the Basin (98% of this acreage is undeveloped as of April
30, 2007). Portions of our CBM rights are currently subject to litigation, as described in Item 1
of Part II below. We are focused on 12 Pennsylvanian coal seams that we regard as having
commercial CBM potential. The seams in the acreage covered by our CBM rights have an aggregate
thickness of 11-27 feet with a 19-foot median. We plan to complete several individual seams per
well that range from two to nine feet thick each. Gas desorption tests of these coals have
yielded 13-113 scf/ton with a 63 scf/ton median. Extensive permeability testing of individual
seams (before stimulation) indicates a range of 0.2-75 millidarcies and median of four
millidarcies.
The State of Illinois (which includes most of the Basin) is estimated to be the number two state
in the United States in terms of coal reserves; however, coal in the Basin is high in sulfur,
discouraging coal mining operations. Recent advances in technology that can utilize higher sulfur
coal and higher coal prices are combining to make coals in the Basin potentially attractive to
mining operations. Although coal mining activities take priority over CBM operations in most of
our acreage, we attempt to coordinate and plan our drilling and production activities in
conjunction with the owners of the coal in order to minimize any potential disruptions. In
addition, because of the long lead times involved in coal mining projects, our substantial
acreage position, and our ability to be flexible with the timing and siting of our wells, we
believe we can plan our work around coal mining operations in the vicinity of our projects.
We have been involved in the first two projects in the Basin that have commercially produced and
sold CBM. We are the only company currently commercially producing and selling CBM in the State
of Illinois and one of only two companies currently commercially producing and selling CBM in the
Basin. We believe our position as a first mover has enabled us to secure a substantial and
favorable acreage position at costs that we believe compare very favorably to other CBM basins
that are more mature in terms of production history.
We are an early stage CBM exploration and production company. We commenced CBM sales from our
first producing wells in January 2005. Net gas sales during the fiscal year ended July 31, 2005
were $117,835 on sales volume of 17,885 Mcf. Net gas sales were $1,126,477 on sales volume of
135,118 Mcf for the fiscal year ended July 31, 2006, an increase of 856% in net gas sales and
655% in sales volume over the prior year. Net gas sales for the current quarter were $330,748 on
sales volume of 48,558 Mcf, compared to net gas sales of $262,860 on sales volume of 35,868 Mcf
in the same prior year quarter, representing an increase of 26% in net gas sales and an increase
of 35% in sales volume. Net gas sales and sales volume for the quarter ended April 30, 2007 also
increased 30% and 34%, respectively, over the previous quarter. As previously disclosed, net gas
sales in the second quarter of fiscal year 2007 were adversely affected by a nitrogen-related
pipeline curtailment that began in October and necessitated six days of downtime followed by a
period of constrained sales volume. A nitrogen-rejection unit was installed during the current
quarter, with start-up occurring during March 2007.
From early 2002 until 2005, our strategic focus was on building our acreage footprint in the
Basin. We were 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 approximately 500,000 acres in the Basin and conducting
extensive testing at our Southern Illinois Basin Project, we embarked (in late 2004) on a pilot
production program at our Southern Illinois Basin Project. 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 our Southern Illinois Basin Project.
As our drilling and production operations have grown, we have not abandoned our goal of adding
additional acreage and mineral rights. However, we have committed ourselves to transitioning BPI
from a company focused primarily on the acquisition of mineral rights to a company focused on
expanding our drilling and production operations and growing our reserves. To accomplish this
transition, we recognized that we needed to obtain additional capital, resources and technical
expertise. We believe that we have made substantial progress in achieving these goals. In
September 2005, we sold 18,000,000 common shares and raised approximately $28,000,000. In April
2006, we hired Jim Craddock, our Chief Operating Officer. Prior to joining us, Mr. Craddock was
with Burlington Resources for over 20 years, last serving as Chief Engineer. Mr. Craddock has
built a strong in-house technical team, all with extensive experience in successful CBM projects
in basins located in the United States and Canada. Our new technical team has over 130 years of
experience in CBM exploration and development that they bring to us.
13
In April 2006, we initiated our second development front when we began drilling 10 pilot
development wells in Shelby County at our Northern Illinois Basin Project. During the current
quarter we announced our decision to continue production activities at our Shelby CBM pilot in
the Northern Illinois Basin, while deferring additional development pending further production
and pressure information. We use pilot projects to cost-effectively high grade our extensive
acreage position before committing development capital in a particular area. In the case of the
Shelby pilot, the pressure and production results to date do not provide a sufficient likelihood
of commercial success to move into development at this early stage. Production history, as well
as our ongoing work to reduce development costs and improve well performance, may make
development at the Shelby pilot area viable in the future. The Shelby pilot represents only 400
acres of our 500,000-acre leasehold position.
During the current quarter ended April 30, 2007, we commenced the drilling of 11 new wells, which
included two development wells, four pilot wells, one pressure observation well, one water
disposal well and three test wells. Eight of these wells are in the Northern Illinois Basin
Project, two are in the Southern Basin Project, and one is in the Western Basin Project.
In April 2007, we initiated our third pilot project in Macoupin County. This 12-well pilot
program will consist of 10 pilot wells, one pressure observation well, and one water disposal
well. Including wells drilled after the end of the current quarter, all 12 wells have been
drilled and will be completed and pumping by July 2007.
We are not currently generating net income or positive cash flow from operations. Although we
capitalize exploration and development costs, we have historically experienced significant
losses. The primary costs that generated these losses were compensation-related expenses and
general and administrative expenses. 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.
Our current plan anticipates that for the remaining three months of fiscal year 2007, we will
incur approximately $7 million to drill 38 new wells, which includes 26 development wells, eight
pilot wells, two pressure observation wells and two test wells. In addition to our drilling
program, we expect to continue to pursue the acquisition of additional CBM rights during the
fiscal year. Our cash balance at April 30, 2007 of $7.1 million is insufficient to fully fund our
forecasted capital expenditures and net cash used by operating activities during our 2007 fiscal
year or our operations beyond that date. We expect that the capital expenditure requirements
related to our drilling program and our other cash requirements will be funded by our cash
balance and cash raised through borrowings, the issuance of debt securities and/or equity
securities and/or joint ventures, all of which we are actively pursuing. Although we are
currently evaluating the best methods of raising those funds, we can provide no assurance that we
will be able to raise the necessary funds.
Managements focus for the remainder of fiscal year 2007 will be to:
|
|
|
raise the capital needed to fund our fiscal 2008 drilling program; |
|
|
|
|
obtain test data and initiate pilot projects that demonstrate the commercial
potential of CBM at our various acreage blocks and projects in the Basin; |
|
|
|
|
continue to reduce well drilling and completion costs; |
|
|
|
|
increase total company reserves; and |
|
|
|
|
grow total production. |
Gathering test data and siting pilot projects based on this data should lead to proving project
viability in multiple areas in the Basin. These pilot projects may have the potential to grow
into development projects that will increase our total reserves and production. As we drill new
wells, our production should continue to increase, as the new wells come online and our existing
wells continue to dewater. As our production increases in the future, we should be positioned to
generate positive cash flow from our operations.
A thorough technical evaluation of the assets that we control should lead to more cost effective
drilling and completion techniques that can be implemented to improve capital efficiency,
increase resource recovery and total reserves and improve internal rates of return from
development projects.
14
We currently control approximately 500,000 acres of CBM rights and, assuming 80-acre vertical
well spacing and the development of all of our acreage, have the possibility for up to 6,000
drilling locations. With our potential for drilling locations, we expect that our drilling
activities will be taking place over many years. The type of test data we are interested in
developing across all of our projects includes measurements of permeability, gas content and net
pay (i.e., thickness of coal seams from which we believe CBM can be commercially produced). Our
focus is to increase our technical and operational knowledge of the Basin and our acreage rights
to assist us in (i) establishing the value of our CBM assets and (ii) optimizing the production
we can obtain from our wells after we bring them online. The technical team we have assembled has
extensive experience and expertise in all of these areas as well as implementation of large scale
development of CBM projects.
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, 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 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 with and utilizing multiple service companies in order
to increase competition and minimize the risk of disruptions caused by the loss of any
one service provider; and |
|
|
|
|
attempting to create a low cost structure in order to reduce our vulnerability to
many of these factors. |
Results of Operations
Three Months Ended April 30, 2007 Compared to Three Months Ended April 30, 2006
The following table presents our unaudited financial data for the third quarter of fiscal year 2007
compared to the third quarter of fiscal year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sales |
|
$ |
334,706 |
|
|
$ |
262,860 |
|
|
$ |
71,846 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense |
|
|
411,938 |
|
|
|
290,844 |
|
|
|
121,094 |
|
|
|
42 |
% |
General and administrative expense |
|
|
1,885,061 |
|
|
|
2,054,434 |
|
|
|
(169,373 |
) |
|
|
(8 |
%) |
Depreciation, depletion and amortization |
|
|
215,280 |
|
|
|
189,988 |
|
|
|
25,292 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,512,279 |
|
|
|
2,535,266 |
|
|
|
(22,987 |
) |
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(2,177,573 |
) |
|
|
(2,272,406 |
) |
|
|
94,833 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
108,660 |
|
|
|
229,888 |
|
|
|
(121,228 |
) |
|
|
(53 |
%) |
Interest expense |
|
|
(1,437 |
) |
|
|
(4,276 |
) |
|
|
2,839 |
|
|
|
66 |
% |
Other income (expense) |
|
|
|
|
|
|
(2,894,794 |
) |
|
|
2,894,794 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,223 |
|
|
|
(2,669,182 |
) |
|
|
2,776,405 |
|
|
|
104 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,070,350 |
) |
|
$ |
(4,941,588 |
) |
|
$ |
2,871,238 |
|
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue During the third quarter of fiscal year 2007, net gas sales increased $71,846 over the
third quarter of fiscal year 2006. Net sales of gas (net of royalties) were 48,558 Mcf for the
third quarter of fiscal year 2007, or 35% higher compared to 35,868 Mcf for the third quarter of
2006. Our average realized selling price per Mcf was $6.81 for the third quarter of fiscal year
2007, compared to $7.33 for the third quarter of fiscal year 2006. The increase in net sales would
have been greater except for a nitrogen-related pipeline
15
curtailment that began in October 2006 and resulted in constrained sales volume until we installed
a nitrogen-rejection unit during March 2007.
Lease operating expense During the third quarter of fiscal year 2007, lease operating expense
increased $121,094 over the third quarter of fiscal year 2006. Lease operating expense represents
production expenses, consisting primarily of repairs and maintenance, fuel and electricity,
equipment rental, workovers and labor and overhead expenses directly related to producing wells.
The increase is primarily due to an increase in the number of producing wells and the related costs
incurred as a result of the increase in gas production at the Southern Illinois Basin Project, new
lease operating expenses at our pilot project in the Northern Illinois Basin, and the hiring of
additional personnel.
General and administrative expense General and administrative expense consisted of the following
for the third quarter of fiscal years 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Salaries and benefits |
|
$ |
1,056,604 |
|
|
$ |
422,436 |
|
|
$ |
634,168 |
|
|
|
150 |
% |
Share-based payments |
|
|
211,381 |
|
|
|
647,261 |
|
|
|
(435,880 |
) |
|
|
(67 |
%) |
Professional and regulatory |
|
|
466,373 |
|
|
|
890,591 |
|
|
|
(424,218 |
) |
|
|
(48 |
%) |
Other |
|
|
150,703 |
|
|
|
94,146 |
|
|
|
56,557 |
|
|
|
60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense |
|
$ |
1,885,061 |
|
|
$ |
2,054,434 |
|
|
$ |
(169,373 |
) |
|
|
(8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of fiscal year 2007, salaries and benefits increased $634,168 over the
third quarter of fiscal year 2006. Salaries and benefits associated with base salaries increased
approximately $170,000 primarily as a result of hiring additional personnel to support our growth,
including our Chief Operating Officer, three engineers and a geologist, and from annual salary
increases. In addition, accrued bonuses included in salaries and benefits were $565,000 (annual
deferred compensation) during the current quarter compared to $100,000 (signing bonus) during the
third quarter of fiscal 2006.
During the third quarter of fiscal year 2007, non-cash expense associated with share-based payments
decreased $435,880 over the third quarter of fiscal year 2006. Share-based payments for the third
quarter of fiscal year 2007 consist solely of expense recognized on a pro-rata basis for the
anticipated vesting of restricted shares outstanding. Share-based payments for the third quarter
of fiscal year 2006 represented approximately $625,000 of expense related to fully vested shares
granted to a new officer and a new director and approximately $22,000 of expense recognized on a
pro-rata basis for the anticipated vesting of restricted shares outstanding. We intend to continue
to rely on the granting of equity-based awards, primarily restricted shares, in order to attract
and retain qualified individuals and to conserve cash so that it may be utilized in executing our
drilling program.
During the third quarter of fiscal year 2007, professional and regulatory expenses decreased
$424,218 over the third quarter of fiscal year 2006. The net decrease is primarily due to decreased
legal fees as a result of the settlement with Colt LLC during fiscal year 2006.
During the third quarter of fiscal year 2007, other general and administrative expenses increased
$56,557 over the third quarter of fiscal year 2006, primarily due to additional rent and office
expenses related to the Edwardsville, Illinois office, which opened in May 2006, and higher
travel-related expenses associated with increased investor relations activities.
Depreciation, depletion and amortization expense During the third quarter of fiscal year 2007,
depreciation, depletion and amortization (DD&A) increased $25,292 over the third quarter of
fiscal year 2006. We compute DD&A on capitalized acquisition and development costs (including 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 three to 10 years. The increase is primarily due to the increase in capitalized
development costs and an increase in production over the third quarter of fiscal year 2006.
Additionally, depreciation expense increased due to additions to other support equipment.
Interest income During the third quarter of fiscal year 2007, interest income decreased $121,228
over the third quarter of fiscal year 2006 due to lower average cash balances during the third
quarter of fiscal year 2007.
Other income (expense) During the third quarter of fiscal year 2007, other expense decreased
$2,894,794 from the third quarter of fiscal year 2006 due solely to the loss that was recognized in
the third quarter of fiscal year 2006 related to the settlement with Colt LLC.
16
Nine Months Ended April 30, 2007 Compared to Nine Months Ended April 30, 2006
The following table presents our unaudited financial data for the first nine months of fiscal year
2007 compared to the first nine months of fiscal year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended April 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sales |
|
$ |
875,615 |
|
|
$ |
800,365 |
|
|
$ |
75,250 |
|
|
|
9 |
% |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense |
|
|
1,275,685 |
|
|
|
752,454 |
|
|
|
523,231 |
|
|
|
70 |
% |
General and administrative expense |
|
|
6,089,287 |
|
|
|
4,491,676 |
|
|
|
1,597,611 |
|
|
|
36 |
% |
Depreciation, depletion and amortization |
|
|
591,275 |
|
|
|
402,680 |
|
|
|
188,595 |
|
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
7,956,247 |
|
|
|
5,646,810 |
|
|
|
2,309,437 |
|
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(7,080,632 |
) |
|
|
(4,846,445 |
) |
|
|
(2,234,187 |
) |
|
|
(46 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
493,982 |
|
|
|
632,693 |
|
|
|
(138,711 |
) |
|
|
(22 |
%) |
Interest expense |
|
|
(7,616 |
) |
|
|
(18,054 |
) |
|
|
10,438 |
|
|
|
58 |
% |
Other income (expense) |
|
|
|
|
|
|
(2,757,271 |
) |
|
|
2,757,271 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486,366 |
|
|
|
(2,142,632 |
) |
|
|
2,628,998 |
|
|
|
123 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,594,266 |
) |
|
$ |
(6,989,077 |
) |
|
$ |
394,811 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue During the first nine months of fiscal year 2007, net gas sales increased $75,250 over
the first nine months of fiscal year 2006. Net sales of gas (net of royalties) were 137,400 Mcf for
the first nine months of fiscal year 2007, or 65% higher compared to 83,107 Mcf for the first nine
months of 2006. However, our average realized selling price per Mcf decreased to $6.34 for the
first nine months of fiscal year 2007 from $9.63 for the first nine months of fiscal year 2006. Net
sales were also negatively impacted by a nitrogen-related pipeline curtailment that began in
October and necessitated six days of downtime followed by a period of constrained sales volume
during the second quarter and a portion of the third quarter of fiscal year 2007. A
nitrogen-rejection unit was constructed and began operating during March 2007 and daily production
and sales have since reached new highs.
Lease operating expense During the first nine months of fiscal year 2007, lease operating expense
increased $523,231 over the first nine months of fiscal year 2006. Lease operating expense
represents production expenses, consisting primarily of repairs and maintenance, fuel and
electricity, equipment rental, workovers and labor and overhead expenses directly related to
producing wells. The increase is primarily due to expenses associated with non-recurring workover
projects incurred during the second quarter of fiscal year 2007 at the Southern Illinois Basin
Project designed to increase production of existing wells, as well as an increase in the number of
producing wells and the related costs incurred due to the increase in gas production at the
Southern Illinois Basin Project, new lease operating expenses at our pilot project in the Northern
Illinois Basin and the hiring of additional personnel.
General and administrative expense General and administrative expense consisted of the following
for the first nine months of fiscal years 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended April 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Salaries and benefits |
|
$ |
2,835,656 |
|
|
$ |
1,149,675 |
|
|
$ |
1,685,981 |
|
|
|
147 |
% |
Share-based payments |
|
|
1,088,684 |
|
|
|
1,044,847 |
|
|
|
43,837 |
|
|
|
4 |
% |
Professional and regulatory |
|
|
1,684,909 |
|
|
|
1,962,733 |
|
|
|
(277,824 |
) |
|
|
(14 |
%) |
Other |
|
|
480,038 |
|
|
|
334,421 |
|
|
|
145,617 |
|
|
|
44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense |
|
$ |
6,089,287 |
|
|
$ |
4,491,676 |
|
|
$ |
1,597,611 |
|
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first nine months of fiscal year 2007, salaries and benefits increased $1,685,981 over
the first nine months of fiscal year 2006. The net increase was primarily the result of annual
bonuses, increased base salaries associated with hiring additional personnel
17
to support our growth, including our Chief Operating Officer, three engineers and a geologist, and
cash signing bonuses totaling $350,000 paid to such personnel. In addition, expense for the first
nine months of fiscal year 2007 includes $250,000 severance paid to our former Chief Financial
Officer and General Counsel, who resigned in October 2006.
During the first nine months of fiscal year 2007, non-cash expense associated with share-based
payments increased $43,837 over the first nine months of fiscal year 2006. Share-based payments for
the first nine months of fiscal year 2007 represent approximately $620,000 of expense recognized
for the anticipated vesting of restricted shares outstanding, approximately $267,000 of expense
related to the grant of 350,000 unrestricted common shares to newly hired members of our technical
team and approximately $202,000 of expense related to the grant of 248,661 unrestricted common
shares to certain executive officers, employees and non-employee directors in connection with
bonuses and directors fees. Share-based payments for the first nine months of fiscal year 2006
represented approximately $398,000 of expense for options granted to employees and directors to
purchase 495,000 common shares valued at approximately $.80 per option using the Black-Scholes
valuation method, approximately $625,000 of expense related to fully vested shares granted to a new
officer and a new director and approximately $22,000 of expense recognized on a pro-rata basis for
the anticipated vesting of restricted shares outstanding. We intend to continue to rely on the
granting of equity-based awards, primarily restricted shares, in order to attract and retain
qualified individuals and to conserve cash so that it may be utilized in executing our drilling
program.
During the first nine months of fiscal year 2007, professional and regulatory expenses decreased
$277,824 over the first nine months of fiscal year 2006. The net decrease is primarily due to
decreased legal fees related to the Colt LLC litigation as a result of the settlement with Colt LLC
during fiscal year 2006 and lower professional and regulatory fees associated with filing initial
SEC registration statements and listing on the American Stock Exchange during the first nine months
of fiscal year 2006. These decreases were partially offset by higher investor relations fees,
higher I.T. consulting fees, and higher employee relocation fees related to the hiring of our new
technical team.
During the first nine months of fiscal year 2007, other general and administrative expenses
increased $145,617 over the first nine months of fiscal year 2006, primarily due to additional rent
and office expenses related to the Edwardsville, Illinois office, which opened in May 2006, and
higher travel-related expenses associated with increased investor relations activities.
Depreciation, depletion and amortization expense During the first nine months of fiscal year
2007, DD&A increased $188,595 over the first nine months of fiscal year 2006. We compute DD&A on
capitalized acquisition and development costs (including 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 three to 10
years. The increase is primarily due to the increase in capitalized development costs and an
increase in production over the first nine months of fiscal year 2006. Additionally, depreciation
expense increased due to additions to other support equipment.
Interest income During the first nine months of fiscal year 2007, interest income decreased
$138,711 over the first nine months of fiscal year 2006 due to lower average cash balances during
the first nine months of fiscal year 2007.
Other income (expense) During the first nine months of fiscal year 2007, other expense decreased
$2,757,271 from the third quarter of fiscal year 2006 due solely to the loss that was recognized in
the third quarter of fiscal year 2006 related to the settlement with Colt LLC.
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 are discussed in Item 7 of our Annual Report on
Form 10-K for the fiscal year ended July 31, 2006. There were no material changes in these policies
during the current quarter.
18
Financial Condition
Our primary source of liquidity historically has come from the sale of our common shares in private
placements and the proceeds from the exercise of warrants and options to acquire our common shares.
To date, we have not relied significantly on borrowing to finance our operations or provide cash.
As of April 30, 2007, we had only $83,460 in long-term notes payable. From July 31, 2003 until
April 30, 2007, we raised $43,198,616 from the sale of our common shares. Additionally, during that
same period, we collected $6,728,810 and $2,042,280 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 and payment of general and administrative
expenses required to support our operations.
We did not begin to generate revenues from CBM sales until January 2005. Revenues from CBM sales
were $875,615 and $800,365 for the first nine months of fiscal years 2007 and 2006, respectively,
and $334,706 and $262,860 for the quarters ended April 30, 2007 and 2006, respectively. Subject to
the various risks described in this report, we expect revenue from the sale of our CBM to increase
due to (i) increased production from existing wells as they continue to dewater 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
Basin, we can provide no assurance that we will achieve a trend of increased production and revenue
in the future.
In addition, CBM wells typically must go through a lengthy dewatering phase before making a
significant contribution to gas production. We estimate that a typical vertical well will require
about 24 months to reach peak production. The impact on our cash position is that there will be a
delay of up to 24 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 significant 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:
|
|
|
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. |
We had a cash balance of $7,070,656 as of April 30, 2007, compared to $19,279,015 at July 31, 2006.
The net decrease in our cash balance is primarily due to the net cash used in operating activities
of $5,280,465, consisting primarily of payments for salaries and benefits, professional fees and
lease operating expenses adjusted for changes in working capital, and net cash used in investing
activities of $6,795,339, consisting of capital expenditures related primarily to development
costs. We also made repayments of long-term notes in the amount of $132,555 during the current
fiscal year.
We have no significant contractual commitments for capital expenditures. However, our plan
anticipates that for the remaining three months of fiscal year 2007, we will incur approximately $7
million to drill 38 new wells, which includes 26 development wells, eight pilot wells, two pressure
observation wells, and two test wells. In addition to our drilling program, we expect to continue
to pursue the acquisition of additional CBM rights during the fiscal year. We expect that the
capital expenditure requirements related to our drilling program and our other cash requirements
will be funded by our cash balance and cash raised through borrowings, the issuance of debt
securities and/or equity securities and/or joint ventures, all of which we are actively pursuing.
Although we are currently evaluating the best methods of raising these funds, we can provide no
assurance that we will be able to raise the necessary funds.
19
Cautionary Statement Concerning Forward-Looking Statements
Some of the statements contained in this report 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 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
generate sufficient income or obtain sufficient financing to fund our operations or drilling plan
through July 31, 2007 or thereafter; (b) our inability to retain our acreage rights at our
projects, at the expiration of our lease agreements, due to insufficient CBM production or for
other reasons; (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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Risk
Our major risk exposure is the commodity pricing applicable to our CBM production. Realized
commodity prices received for our production are primarily driven by the spot prices attributable
to natural gas. The effects of price volatility are expected to continue.
Interest Rate Risk
All of our debt has fixed interest rates. Consequently, we are not exposed to cash flow or fair
value risk from market interest rate changes on this debt.
Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable and long-term
notes payable. The carrying amount of cash equivalents, accounts receivable and accounts payable
approximate fair market value due to the highly liquid nature of these short-term instruments.
Inflation and Changes in Prices
The general level of inflation affects our costs. Salaries and other general and administrative
expenses are impacted by inflationary trends and the supply and demand of qualified professionals
and professional services. Inflation and price fluctuations affect the costs associated with
exploring for and producing CBM, which has a material impact on our financial performance.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Controller (who is
currently responsible for performing certain functions of our principal financial officer), of the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this
evaluation, our Chief Executive Officer and Controller have concluded that our disclosure controls
and procedures are effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms.
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Drummond Coal Co. Litigation
BPI Energy, Inc. (BPI) is currently subject to litigation with respect to approximately 115,000
acres of its CBM rights that are located at the Northern Illinois Basin Project. To date, BPI has
drilled one well on this acreage, a test well that was drilled in September 2006. This well is
not currently at the production stage.
In 2004, BPI and affiliates of the Drummond Coal Co. (Drummond), including IEC (Montgomery),
LLC (IEC), entered into a letter of intent to obtain coal and CBM gas rights for one another in
the Illinois Basin and to work together in a relationship in which BPI would extract CBM from
coal beds prior to the Drummond affiliates mining of coal from those beds. Pursuant to and in
reliance upon this letter of intent and its relationship with Drummond, BPI arranged for the
transfer of 163,109 acres of coal rights to the Drummond affiliates for a total purchase price of
$5,845,500, which BPI believes reflects a significant discount to current market prices. In light
of its obligations to Drummond, BPI charged no profit on its transfer of the coal rights to the
Drummond affiliates. Rather, in consideration for obtaining those coal rights, the Drummond
affiliates were to lease approximately 115,000 acres of CBM rights to BPI for a primary lease
term of 20 years and with favorable royalty rates. Although the Drummond affiliates entered into
two CBM leases with BPI on April 26, 2006, they have since sought in various ways to void or
terminate the leases.
Ignoring mandatory arbitration provisions in the CBM leases, Drummond affiliates IEC and
Christian Coal Holdings, LLC (Christian) filed suit against BPI on February 9, 2007 in the
United States District Court for the Northern District of Alabama, claiming that BPI has breached
the CBM leases in various ways. Specifically, although the CBM leases include no specific
drilling commitments, IEC and Christian allege that BPI has breached the CBM leases by failing to
use best efforts to commercially produce all economically recoverable gas. IEC and Christian also
allege that BPI has breached the CBM leases by failing to provide maps of existing and proposed
gas wells and facilities every six months and failing to maintain required insurance coverage.
BPI refutes each of these allegations and intends to vigorously defend the Drummond affiliates
claims of breach. In addition, BPI moved to dismiss the lawsuit for lack of standing, lack of
personal jurisdiction and improper venue, or in the alternative to transfer the case to either
Ohio or Illinois. BPI also moved the court to stay or dismiss the Alabama lawsuit and to compel
arbitration under the CBM leases. On May 14, 2007, the Court granted BPIs motion to dismiss on
the ground of improper venue. BPI anticipates that IEC and Christian may appeal the decision,
move the Court to reconsider it, or reinstitute litigation in a different venue.
On March 13, 2007, BPI filed suit against IEC, Christian and additional Drummond affiliates
Shelby Coal Holdings, LLC, Clinton Coal Holdings, LLC and Marion Coal Holdings, LLC in the United
States District Court for the Southern District of Illinois. At the courts direction, BPI filed
an amended complaint on April 13, 2007. In its lawsuit, BPI seeks to rescind its transfers of
coal rights to the Drummond affiliates for failure of consideration due to the Drummond
affiliates efforts to avoid the CBM leases, and has also asserted claims for money damages for
breach of contract, breach of fiduciary duty, unjust enrichment and promissory estoppel. The
defendants filed a motion to dismiss the amended complaint, to which BPI currently is preparing a
response.
We believe that Drummond and its affiliates, after having received favorable coal rights in
exchange for favorable CBM rights, now wish to obtain a significant windfall by seeking to renege
on the CBM rights that they were obligated to grant to BPI.
If the Drummond affiliates reinstitute their claims against BPI, we believe that we will be
successful in defending against their claims of breach. However, there can be no assurance that
we will be successful in maintaining these acreage rights. The loss of these acreage rights would
not have a material impact on our financial position, results of operations or cash flows.
ICG Litigation
In November 2004, BPI entered into a farmout agreement under which it acquired the right to
develop certain CBM in Macoupin and Perry counties in Illinois. The farmout agreement covers
41,253 acres of CBM rights in Macoupin County and 22,997 acres of CBM rights in Perry County.
The farmor was Addington Exploration, LLC, which leased the CBM rights from Meadowlark Farms,
Inc. and Ayrshire Land Company. Meadowlark and Ayrshire went into bankruptcy, and ICG Natural
Resources, LLC purchased their assets, including the CBM rights underlying the Addington leases.
On April 9, 2007, ICG filed suit against BPI in Perry County, Illinois, in an effort to avoid the
Addington leases, claiming that there was a lack of consideration at the time they
21
were originally entered into. BPI has filed a motion to dismiss the lawsuit under the doctrine
of estoppel by deed, arguing that ICG cannot challenge the leases because it acquired the CBM
rights subject to those leases, as set forth in the deed from Addington and Meadowlark to ICG,
the purchase agreement between those parties, and numerous bankruptcy court filings and orders
associated with the approval of the sale. Addington was subsequently acquired by Nytis
Exploration Company, LLC, which has intervened in the action and joined in BPIs motion.
To date, BPI has drilled 10 pilot wells, one pressure observation
well and one water disposal well on the acreage covered by
the farmout agreement.
We believe that we will be successful in either having the case dismissed or in defending against
ICGs claims. However, there can be no assurance that we will be
successful in retaining the acreage under this farmout agreement.
Item 1A. Risk Factors
There are no material changes to the risk factors previously reported in our Annual Report on Form
10-K for the fiscal year ended July 31, 2006. For more information regarding such risk factors,
please refer to Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On June 7, 2007,
the Compensation Committee (the Committee) of our Board of Directors approved
and adopted the BPI Energy Holdings, Inc. Senior Executive Severance Plan and the
BPI Energy Holdings, Inc. Key Employee Severance Plan, which provide severance
benefits to our employees designated by the Committee.
Senior
Executive Severance Plan
The Senior Executive Severance Plan currently
applies to James G. Azlein, our Chief Executive Officer,
and James E. Craddock, our Chief Operating Officer, and may later include other
executive officers designated by the Committee. The Senior
Executive Severance Plan provides that, in the event of an executive officers
death or disability, we will pay (i) any accrued base
salary through the termination date, (ii) any unpaid cash bonus from a
completed year, and (iii) a pro-rated current year bonus.
If we terminate an executive officer's employment without
cause before a change of control (as that term is defined in the
Senior Executive Severance Plan) or the executive officer resigns for
good reason (as that term is defined in the Senior Executive Severance Plan) before a change of
control, we will provide (i) any accrued base salary through the
termination date, (ii) any unpaid cash bonus from a completed year, (iii)
a pro-rated current year bonus, (iv) a lump sum cash payment equal to two
times the sum of the executive officers base salary and target annual
bonus, (v) reimbursement for the cost of continued group medical and dental
insurance coverage for the executive officer and his immediate family for two years
or until the executive officer becomes eligible for similar coverage through
subsequent employment, and (vi) reimbursement
of up to $20,000 for outplacement services utilized within a year of termination.
If we terminate an executive officers
employment without cause within two years after a change of control, or the executive
officer resigns (a) for good reason at any time within two years after a change of
control or (b) with or without good reason during the 60-day period
beginning exactly six months after a change of control, we will
provide the same benefits as upon termination before a change of control except that
the lump sum cash payment will equal three times the sum of the executive officers
base salary and maximum annual bonus. In addition, we will provide reimbursement for
the cost of continued medical and
dental insurance coverage for three, rather than two, years following the termination
date or until the executive officer becomes eligible for similar coverage through
subsequent employment.
Under the Senior Executive Severance Plan,
upon any termination following a change of control, (i)
all restrictions on restricted shares held by the executive
officer will lapse, (ii) all options that vest solely on the basis
of the expiration of time will become fully vested, and (iii) all options
that vest in whole or in part on the basis of company or individual
performance will vest proportionately as of the termination date.
The period for exercising stock options that vest on or before the
termination date will be extended until the earlier of (i) the third
anniversary of the termination date or (ii) the original expiration date of the option.
The Senior Executive Severance Plan provides for a
two-year confidentiality period and contains a one-year non-solicitation
provision. Additionally, if we terminate an executive officer before a change
of control with or without cause, or an executive officer resigns for good reason
before a change of control, the executive officer will be bound by a one-year non-competition
provision for the area encompassing a ten-mile radius of our currently owned and active
prospect acreage.
The foregoing summary description of the
Senior Executive Severance Plan is qualified in its
entirety by the full text of the Senior Executive Severance
Plan, which is filed with this Quarterly Report on Form 10-Q as Exhibit 10.1.
22
Key
Employee Severance Plan
The Key Employee Severance Plan applies to any regular full-time employee who is
designated by the Committee to participate in the Key Employee
Severance Plan and who is not covered under
the Senior Executive Severance Plan. Randy L. Elkins, our
Acting Chief Financial Officer, is currently our only executive officer covered under the Key Employee Severance Plan.
The Key Employee Severance Plan provides that,
in the event of an employees death or disability, we will pay (i)
any accrued base salary through the termination date, (ii) any unpaid
cash bonus from a completed year, and (iii) a pro-rated current year bonus.
If, at any time
within two years after a change of control, we terminate an employee without cause,
or the employee resigns for good reason we will provide (i)
any accrued base salary through the termination date, (ii) any unpaid cash bonus from a completed year, (iii) a pro-rated current year
bonus, (iv) a lump sum cash payment equal to one and one-half times the
sum of the employees base salary and maximum annual
bonus, (v) reimbursement for the cost of continued group
medical and dental insurance coverage for the employee
and his immediate family for two years or until the
employee becomes eligible for similar coverage through
subsequent employment, and (vi) reimbursement of up to
$5,000 for outplacement services utilized within a year of termination.
The Key Employee Severance Plan contains provisions on the vesting
of restricted shares and options, confidentiality, non-solicitation
and non-competition that are identical to those that are included in the Senior Executive Severance Plan.
The foregoing summary
description of the Key Employee Severance Plan is qualified
in its entirety by the full text of the Key Employee Severance Plan,
which is filed with this Quarterly Report on Form 10-Q as Exhibit 10.2.
Item 6. Exhibits
|
|
|
10.1
|
|
BPI Energy Holdings, Inc. Senior
Executive Severance Plan dated June 7, 2007. |
|
|
|
10.2
|
|
BPI Energy Holdings, Inc. Key
Employee Severance Plan dated June 7, 2007. |
|
|
|
31.1
|
|
Section 302 Certification of the Chief Executive Officer (Principal Executive Officer). |
|
|
|
31.2
|
|
Section 302 Certification of the Acting Chief Financial Officer (Principal Financial Officer). |
|
|
|
32.1
|
|
Section 906 Certification of the Principal Executive Officer and Principal Financial Officer. |
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
BPI ENERGY HOLDINGS, INC.
|
|
DATE: June 13, 2007 |
/s/ James G. Azlein
|
|
|
James G. Azlein, |
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
/s/ Randy L. Elkins
|
|
|
Randy L. Elkins, |
|
|
Controller and Acting Chief Financial Officer |
|
|
24