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SECURITIES EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended October 31, 2011

 

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

For the transition period from             to            

Commission file number 000-09923

 

 

IMPERIAL PETROLEUM, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   95-3386019

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

identification No.)

101 NW 1sr Street, Suite 213   47708
Evansville, Indiana   (Zip Code)

Registrant’s telephone number, including area code (812) 867-1433

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-Accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

On October 31, 2011, there were 39,851,805 shares of the Registrant’s common stock issued and outstanding.

 

 

 


Cautionary Note Regarding Forward-Looking Statements

As used herein, unless we otherwise specify, the terms the “Company,” “we,” “us” and “our” means Imperial Petroleum, Inc.

This Report contains forward-looking statements concerning our financial condition, results of operations and business, including, without limitation, statements pertaining to:

 

   

The development of our existing oil and gas properties and leases;

 

   

Implementing aspects of our business plans;

 

   

Financing goals and plans;

 

   

Our existing cash and whether and how long these funds will be sufficient to fund our operations; and

 

   

Our raising of additional capital through future equity financings.

These and other forward-looking statements are primarily in the section entitled “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.” Generally, you can identify these statements because they include phrases such as “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” and similar terms. These statements are only predictions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy, and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those stated in this Report. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are unable to predict accurately or over which we have no control. Cautionary language in this Report provides examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.


IMPERIAL PETROLEUM, INC.

Index to Form 10-Q for the Quarterly Period

Ended October 31, 2011

 

     Page  

PART I – FINANCIAL INFORMATION

  
Item 1.    Financial Statements      4   
Condensed Consolidated Balance Sheets as of July 31, 2011 and October 31, 2011      5   
Condensed Consolidated Statements of Operations for the three months ended October 31, 2011 and 2010      7   
Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2011 and 2010      8   
Notes to Condensed Consolidated Financial Statements      9   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.      25   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      28   
Item 4.    Controls and Procedures      29   

PART II – OTHER INFORMATION

  
The information called for by Item 1. Legal Proceedings, Item 1A. Risk Factors,
Item  2. Unregistered Sales of Equity Securities and Use of Proceeds, Item 3. Defaults
Upon Senior Securities, Item 4. Submission of Matters to a Vote of Security Holders and
Item 5. Other Information are not applicable
     30-38   
Item 6.    Exhibits      38   

SIGNATURES

     39   


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

We have prepared the consolidated financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such SEC rules and regulations. In our opinion, the accompanying statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of our company as of October 31, 2011, and its results of operations for the three month period ended October 31, 2011 and 2010 and its cash flows for the three month period ended October 31, 2011 and 2010. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto filed as a part of our annual report on Form 10-K.

 

4


IMPERIAL PETROLEUM, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

 

     October 31, 2011     July 31, 2011  

ASSETS

    

Current Assets:

    

Cash

   $ 1,823,460      $ 900,883   

Accounts Receivable

     411,369        1,549,154   

Accounts Receivable (Government Incentives)

     578,796        3,344,919   

Inventory

     579,551        1,293,171   

Prepaid expenses (current portion)

     1,283,358        910,407   

Loan Receivable (related party)

     —          6,440   

Other Current Assets

     117,189        157,166   
  

 

 

   

 

 

 

Total current assets

     4,793,723        8,162,140   

Property, plant and equipment:

    

Mining claims, options, and development costs

     74,500        74,500   

Fixed Assets

     12,449,539        11,969,451   

Land

     515,900        515,900   

Oil and gas properties (full cost method)

     4,805,586        4,690,765   
  

 

 

   

 

 

 
     17,845,525        17,250,616   

Less: accumulated depreciation, depletion and amortization

     (3,311,268     (3,092,503
  

 

 

   

 

 

 

Net property, plant and equipment

     14,534,257        14,158,113   

Other assets:

    

License agreements, net of accumulated amortization .

     442,756        442,756   

Loan Receivable (related party)

     —          332,989   

Prepaid expenses

     872,898        1,438,722   
  

 

 

   

 

 

 

Total Other Assets

     1,315,654        2,214,467   
  

 

 

   

 

 

 

Total assets

   $ 20,643,634      $ 24,534,720   
  

 

 

   

 

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

5


     October 31, 2011     July 31, 2011  

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 2,139,034      $ 1,307,654   

Accrued expenses

     4,962,076        5,183,849   

Derivative liability

     498,544        —     

Customer Deposit Liability

     127,570        2,901,054   

Notes payable – current portion

     297,973        702,530   

Notes payable – related parties

     538,786        540,286   

Term Loans

     8,075,425        9,923,335   

Other Senior Debt

     535,211        536,614   
  

 

 

   

 

 

 

Total current liabilities

     17,174,619        21,095,322   

Long-term liabilities:

    

Mortgage Note

     1,509,044        1,525,641   

Notes Payable, Other

     869,670        1,009,602   

Asset retirement obligation

     472,855        472,855   
  

 

 

   

 

 

 

Total long-term liabilities

     2,851,569        3,008,098   

STOCKHOLDERS’ EQUITY:

    

Common stock of $.006 par value; authorized 150,000,000 shares; 39,851,805 and 34,905,136 issued and outstanding at October 31, 2011 and July 31, 2011, respectively

     239,111        209,431   

Common stock, owed but not issued - 0 and 100,000 shares at October 31, 2011 and July 31, 2011, respectively

     —          600   

Paid-in capital

     25,232,883        21,977,786   

Retained deficit

     (22,854,548     (21,756,517

Treasury Stock, 2,000,000 shares at October 31, 2011

     (2,000,000     —     
  

 

 

   

 

 

 

Total stockholders’ equity

     617,446        431,300   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

     20,643,634        24,534,720   
  

 

 

   

 

 

 

 

6


IMPERIAL PETROLEUM, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

     Three Months Ended  
     10/31/2011     10/31/2010  

Revenues and other income:

    

Biodiesel

   $ 36,025,399      $ 15,830,327   

Biodiesel Government Incentives

     391,500        0   

Oil and gas

     75,157        91,778   
  

 

 

   

 

 

 

Total operating income

   $ 36,492,056      $ 15,922,105   
  

 

 

   

 

 

 

Costs and expenses:

    

Biofuels Direct Costs

     33,504,175      $ 13,578,168   

Production costs and taxes

     320,622        113,965   

General and administrative

     2,908,099        1,305,846   

Depreciation, depletion and amortization

     218,765        213,173   
  

 

 

   

 

 

 

Total costs and expenses

     36,951,661        15,211,152   
  

 

 

   

 

 

 

Net Income (Loss) from operations

     (459,605     710,953   

Other income and (expense):

    

Interest expense

     (756,686     (331,580

Interest income

     2,826        0   

Other income (expense)

     25,862        310,000   

Gain (loss) on valuation of derivative liability

     89,572        0   
  

 

 

   

 

 

 

Total other income and (expense)

     (638,426     (21,580
  

 

 

   

 

 

 

Net income (loss) before income tax

     (1,098,031     689,372   

Provision for income taxes

     0        0   
  

 

 

   

 

 

 

Net Income (Loss)

   $ (1,098,031   $ 689,372   
  

 

 

   

 

 

 

NET INCOME/(LOSS) PER SHARE (basic)

   $ (0.030   $ 0.030   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING (basic)

     37,071,623        22,500,369   

NET INCOME/(LOSS) PER SHARE (diluted)

     N/A      $ 0.029   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING (diluted)

     N/A        23,965,823   

See Notes to Condensed Consolidated Financial Statements

 

7


IMPERIAL PETROLEUM, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     10/31/2011     10/312010  

Operating activities:

    

Net income (loss)

   $ (1,097,837   $ 689,372   

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation, depletion and amortization

     218,765        213,173   

(Gain) Loss on valuation of derivative liability

     (89,572     —     

Stock and warrants issued for services

     60,900        —     

Amortization of stock and options issued for services

     1,200,095        37,643   

Change in accounts receivable

     1,137,785        (960,785

Change in Accts. Rec – government incentives

     2,766,123        —     

Change in inventory

     713,620        17,495   

Change in prepaid expenses

     (117,404     —     

Change in accounts payable

     749,101        226,212   

Change in other assets

     39,677        (355,272

Change in customer deposits

     (2,773,484     —     

Change in accrued expenses

     (139,328     580,473   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     2,668,441        448,311   
  

 

 

   

 

 

 

Investing activities:

    

Purchase of fixed assets

     (594,911     (225,153

Loans made (payments received) to related parties, net

     339,429        0   

Proceeds of sale of assets

     —          —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (255,482     (225,153
  

 

 

   

 

 

 

Financing activities:

    

Advances on notes payable

     —          68,900   

Purchase of treasury stock

     (2,000,000     —     

Payments on notes payable

     (2,411,958     0   

Proceeds from notes payable-related party

     —          20,488   

Sale of common stock, net of expenses

     2,921,576        —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (1,490,382     89,388   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     922,577        312,546   

Cash and cash equivalents, beginning of year

     900,883        28,525   
  

 

 

   

 

 

 

Cash and cash equivalents, end of year

     1,823,460        341,071   
  

 

 

   

 

 

 

Supplemental disclosures for cash flow information:

    

Cash paid during the period for:

    

Interest

     818,658        145,939   

Income taxes

     —          —     

Supplemental schedule of non-cash investing and financing:

    

Stock and warrants issued for prepaid expenses

     838,135        0   

Stock and warrants issued for services

     60,900        —     

Note payable issued for fixed assets

     —          479,424   

See Notes to Condensed Consolidated Financial Statements

 

8


IMPERIAL PETROLEUM, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) GENERAL

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results, which may be expected for the year ending July 31, 2012. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended July 31, 2011.

Organization

Imperial Petroleum, Inc. (the “Company”), a publicly held corporation, was organized under the laws of the state of Nevada.

The Company’s principal business consists of biodiesel production and oil and gas exploration and production in the United States. The Company, through its wholly-owned subsidiary, Arrakis Oil Recovery, LLC is developing and implementing a process for the recovery of heavy oil from mineable oil sands in the U.S. and internationally. At October 31, 2011, the Company has not fully implemented the oil recovery process. The Company, through its wholly owned subsidiary, Ridgepointe Mining Company is attempting to obtain capital, continue testing, defining and developing mineral reserves on mining claims it owns or operates in the southwestern and western United States. At October 31, 2011, the Company had not begun mining activities.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Ridgepointe Mining Company, Imperial Chemical Company (formerly The Rig Company), Hoosier Biodiesel Company (formerly Global-Imperial Joint Venture, Inc.), Arrakis Oil Recovery, LLC, and e-biofuels, LLC. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The presentation of financial statements in conformity with generally accepted U.S. accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable are carried on a gross basis, with no discounting, less the allowance for doubtful accounts. We estimate the allowance for doubtful accounts based on existing economic conditions, the financial conditions of the customers, and the amount and the age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted. There is no collateral held for accounts receivable. The allowance for doubtful accounts was $44,430 and $44,430 as of October 31, 2011 and July 31, 2011, respectively. Bad debt expense for the three months ended October 31, 2011 was $0. Bad debt expense for the year ended July 31, 2011, 2010, and 2009 was $44,430, $25,001, and $0, respectively.

Fair Value of Financial Instruments

Fair values of cash and cash equivalents, investments and short-term debt approximate their carrying values due to the short period of time to maturity. Fair values of long-term debt are based on quoted market prices or pricing models using current market rates, which approximate carrying values. See Note 12 for further details.

 

9


Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable.

The Company’s cash is deposited in three financial institutions. Cash and certificates of deposit at banks are insured by the FDIC up to $250,000. At times, the balances in these accounts may be in excess of federally insured limits. As of October 31, 2011, the Company had approximately $1,279,300 in excess of federally insured limits.

The Company currently operates in the oil and gas and biodiesel production industry. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. During the quarter ended October 31, 2011, the Company’s major purchasers of its biodiesel were 33.6% to Element Renewable Energy; 25.1% to Pilot and 19.6% to Fusion Renewable. As of October 31, 2011, these three customers made up 15%, 51%, and 0% of the Company’s accounts receivable, respectively. During the year ended July 31, 2011, the Company’s major purchasers of its biodiesel were 36.3% to Fusion, 24.5% to Element, and 17.1% to Pilot. During the quarter ended October 31, 2011, the Company’s major purchasers of its oil and gas were Plains Marketing and Regency Energy Services, accounting for 94.6% and 5.4% of oil and gas revenues respectively. As of October 31, 2011, Plains Marketing made up 98% of the Company’s accounts receivable. The Company’s major purchasers of its oil and gas during 2011 were Plains Marketing and Regency, accounting for 95% and 5.0% of oil and gas revenues, respectively.

Revenue Recognition

The Company derives revenue from sales of oil, gas, and biodiesel products. The Company recognizes revenue when a formal arrangement exists, the price is fixed or determinable, all obligations have been performed pursuant to the terms of the formal arrangement, and collectability is reasonably assured. The Company also derives revenues from government incentive programs relating to biodiesel production. These revenues are recognized when the amount of the incentive is reasonably determinable and collection is reasonably assured.

Oil and Gas Properties

The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.

In addition, the capitalized costs are subject to a “ceiling test,” which basically limits such costs to the aggregate of the “estimated present value,” discounted at a 10-percent interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income.

Other Property and Equipment

Property and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of assets. Expenditures that significantly increase values or extend useful lives are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation and depletion are eliminated from the respective accounts and the resulting gain or loss is included in current earnings.

Mining exploration costs are expensed as incurred. Development costs are capitalized. Depletion of capitalized mining costs will be calculated on the units of production method based upon current production and reserve estimates when placed in service.

Inventories

Inventories are stated at the lower of cost or market. The inventory as of October 31, 2011 and July 31, 2011 was $579,551 and $1,293,171, respectively. All inventory pertains to our operations at e-biofuels. The balance of the inventory as of October 31, 2011 is made up of $82,758 in raw materials and $496,793 in finished goods. The balance of the inventory as of July 31, 2011 was made up of $641,331 in raw materials and $651,840 in finished goods. There is no allowance for obsolete inventory as of October 31, 2011 or July 31, 2011.

 

10


Long-Lived Assets

Long-lived assets to be held and used or disposed of other than by sale are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When required, impairment losses on assets to be held and used or disposed of other than by sale are recognized based on the fair value of the asset. Long-lived assets to be disposed of by sale are reported at the lower of its carrying amount of fair value less cost to sell.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of change in tax rates is recognized in income in the period that includes the enactment date.

Earnings and Loss Per Common Share

Earnings (Loss) per common share-basic is computed by dividing reported net income (loss) by the weighted average common shares outstanding. Except where the result would be anti-dilutive, net income (loss) per common share-diluted has been computed assuming the exercise of stock warrants and stock options that are in-the-money as of year-end.

Reclassification

Certain reclassifications have been made to prior periods to conform to the current presentation.

Historical Background

The Company was incorporated on January 16, 1981 and is the surviving member of a merger between itself, Imperial Petroleum, Inc., a Utah corporation incorporated on June 4, 1979 (“Imperial-Utah”), and Calico Exploration Corp., a Utah corporation incorporated on September 27, 1979 (“Calico”). The Company was reorganized under a Reorganization Agreement and Plan and Article of Merger dated August 31, 1981 resulting in the Company being domiciled in Nevada. On August 11, 1982, Petro Minerals Technology, Inc. (“Petro”), a 94% -owned subsidiary of Commercial Technology Inc. (“Comtec”) acquired 58% of the Company’s common stock. Petro assigned to the Company its interests in two producing oil and gas properties in consideration for 5,000,000 shares of previously authorized but unissued shares of common stock of the Company and for a $500,000 line of credit to develop these properties. Petro has since undergone a corporate reorganization and is now known as Petro Imperial Corporation. On August 1, 1988 in an assumption of assets and liabilities agreement, the same 58% of the Company’s common stock was acquired from Petro by Glauber Management Co., a Texas corporation, (“Glauber Management”), a 100% owned subsidiary of Glauber Valve Co., Inc., a Nebraska corporation (“Glauber Valve”).

Change of Control

Pursuant to an Agreement to Exchange Stock and Plan of Reorganization dated August 27, 1993 (the “Stock Exchange Agreement”), as amended by that certain First Amendment to Agreement to Exchange Stock and Plan of Reorganization dated as of August 27, 1993, (the “First Amendment”), between the Company, Glauber Management, Glauber Valve, Jeffrey T. Wilson (“Wilson”), James G. Borem (“Borem”) and those persons listed on Exhibit A attached to the Stock Exchange Agreement and First Amendment (the “Ridgepointe Stockholders”). The Ridgepointe Stockholders agreed to exchange (the “Ridgepointe Exchange Transaction”) a total of 12,560,730 shares of the common stock of Ridgepointe, representing 100% of the issued and outstanding common stock of Ridgepointe, for a total of 12,560,730 newly issued shares of the Company’s common stock, representing 59.59% of the Company’s resulting issued and outstanding common stock. Under the terms of the Stock Exchange Agreement, (i) Wilson exchanged 5,200,000 shares of Ridgepointe common stock for 5,200,000 shares of the Company’s common stock representing 24.67% of the Company’s issued and outstanding common stock, (ii) Borem exchanged 1,500,000 shares of Ridgepointe common stock for 1,500,000 shares of the Company’s common stock representing 7.12% of the Company’s issued and outstanding common stock, and (iii) the remaining Ridgepointe Stockholders in the aggregate exchanged 5,860,730 shares of Ridgepointe common stock for 5,860,730 shares of the Company’s issued and outstanding common stock, representing, in the aggregate, 27.81% of the Company’s issued and outstanding common stock. The one-for-one ratio of the number of shares of the Company’s common stock exchanged for each share of Ridgepointe common stock was determined through arms length negotiations between the Company, Wilson and Borem.

The Ridgepointe Exchange Transaction was closed on August 27, 1993. As a result, Ridgepointe is now a wholly, owned subsidiary of the Company. At the time of acquisition, Ridgepointe was engaged in the development of a copper ore mining operation in Yavapai County, Arizona and, through its wholly owned subsidiary, I.B. Energy, in the exploration for and production of oil and gas in the Mid-continent and Gulf Coast regions of the United States.

In connection with the closing of the Ridgepointe Exchange Transaction, each member of the Board of Directors of the Company resigned and Wilson, Borem and Dewitt C. Shreve (“Shreve”) were elected Directors of the Company. In addition, each officer of the Company resigned and the Company’s new Board of Directors elected Wilson as Chairman of the Board, President and Chief Executive Officer, Borem as Vice President and Cynthia A. Helms as Secretary of the Company.

Ms. Helms subsequently resigned and Kathryn H. Shepherd was elected Secretary. Mr. Borem, Mr. Shreve and Ms. Shepherd subsequently resigned and Mr. Malcolm W. Henley and Mrs. Stacey D. Smethers were elected to the Board. The Board of Directors further authorized the move of the Company’s principal executive offices from Dallas, Texas to its current offices in Evansville, Indiana. As a condition to closing the Ridgepointe Exchange Transaction, the Company received and canceled 7,232,500 shares of the Company’s common stock from the

 

11


Company’s former partner, Glauber Management, and 100,000 shares of the common stock of Tech-Electro Technologies, Inc from an affiliate of Glauber Management and Glauber Valve. In addition, pursuant to the terms of the First Amendment, Glauber Management or Glauber Valve, or their affiliates, were to transfer to the Company 75,000 shares of common stock of Wexford Technology, Inc. (formerly Chelsea Street Financial Holding Corp.) no later than October 31, 1993, which such transfer subsequently occurred.

The Company formed Arrakis Oil Recovery, LLC in February 2010 to acquire a non-exclusive license for the development of a revolutionary new, eco-friendly process to recover oil (bitumen) from tar (oil) sands outside of Canada. The process is a non-thermal, mechanical and chemical process using a closed loop system to eliminate emissions. The process technology works equally well on oil-wet (US) tar sands or water-wet (Canadian) tar sands. The Company acquired an exclusive license to use the technology in Canada from Proven Technology in exchange for 1.0 million shares of its restricted common stock in July 2010. The Company signed a Term Sheet on September 1, 2010 to access capital for the construction of a commercial scale demonstration facility and construction of the commercial unit was completed in November 2010 and the Company completed an agreement with an international partner, Clean Sands International, Inc., which included rights to Clean Sands to develop the technology in Canada, Russia, Venezuela, Mexico and Argentina in exchange for a fee paid to the Company of $500,000, an ongoing royalty interest of 2.5% of gross proceeds in the facilities developed by Clean Sands, including a royalty of 1.65% for a facility to be located in the southeastern United States and constructed by Clean Sands. The Company limited its rights to use the technology to the United States as a result of the agreement and consolidated its interest in Arrakis by purchasing its partners. The Company now owns 100% of Arrakis. (See Form 8-K filed February 3, 2011 and incorporated herein by reference.)

The Company acquired e-biofuels, LLC on May 24, 2010, a biodiesel producer located in Middletown, Indiana with a nameplate capacity of 15 million gallons per year. The Company issued 2.0 million shares of its restricted common stock; $3.75 million in four-year term Promissory Notes with an interest rate of 10% and assumed approximately $15 million in debt as a result of the acquisition. In May 2011 the principal noteholders converted their principal and accrued interest of approximately $4.0 million into 5,047,461 shares of the Company’s restricted common stock. (See Form 8-K filed May 16, 2011 and incorporated herein by reference.)

The Company signed consulting agreements with two parties in August 2010 and issued 1.4 million shares of its restricted common stock as compensation under the agreements. The consultants’ services are to assist the Company in the development of the Duke Gold Mine in Utah and to assist the Company in website development and maintenance and in the recovery of trade accounts receivable from oil and gas operations and the negotiation of accounts payable within our biofuels subsidiary.

Mr. Malcolm Henley resigned as a director of the Company effective August 16, 2010 due to personal reasons. There were no disputes between Mr. Henley and management of the Company or with its auditors. Mr. John Ryer was approved by the Board to replace Mr. Henley until the next regular shareholders meeting.

In December 2010 the Company agreed to acquire a 26% working interest in the Coquille Bay field and a 25% working interest in the Chrisjo Pipeline that services the Coquille Bay field for 250,000 shares of the Company’s restricted common stock. In addition, the Company agreed to acquire the balance of the pipeline partners’ interest for the issuance of up to 1.25 million additional shares of the Company’s restricted common stock. The purchase of the pipeline and additional interest in Coquille Bay is expected to save the Company approximately $3.00bbl and $1.00/mcf in transportation fees on its future production.

In June 2011, the Company acquired the exclusive rights to manufacture, sell and distribute SANDKLENE 950, the chemical surfactant used in the Arrakis tar sand recovery process in exchange for the payment of $150,000 in cash and 100,000 shares.

In July 2011, Annalee Wilson resigned as a Director of the Company due to personal reasons. There were no disputes between Mrs. Wilson and management of the Company or with its auditors. Mr. Ben Campbell was approved by the Board to replace Mrs. Wilson until the next regular shareholders meeting.

Recent Accounting Pronouncements

The FASB issued ASC subtopic 855-10 (formerly SFAS 165 “Subsequent Events”), incorporating guidance on subsequent events into authoritative accounting literature and clarifying the time following the balance sheet date which management reviewed for events and transactions that may require disclosure in the financial statements. The Company has adopted this standard. The standard increased our disclosure by requiring disclosure reviewing subsequent events. ASC 855-10 is included in the “Subsequent Events” accounting guidance.

In June 2011, the FASB issued ASU 2011-05 Comprehensive Income (Topic 220—Presentation of Comprehensive Income). Under this amendment, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We are evaluating the provisions of ASU 2011-05 and do not believe it will have a material impact on the Company’s consolidated financial statements.

 

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In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification™ (Codification) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. We are evaluating the provisions of ASU 2011-04 and do not believe it will have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU No. 2010-28-Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of ASU 2010-28 did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29-Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”). The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations , that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of ASU 2010-29 did not have a material impact on the Company’s consolidated financial statements.

International Financial Reporting Standards

In November 2008, the Securities and Exchange Commission (“SEC”) issued for comment a proposed roadmap regarding potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Under the proposed roadmap, the Company would be required to prepare financial statements in accordance with IFRS in fiscal year 2014, including comparative information also prepared under IFRS for fiscal 2013 and 2012. The Company is currently assessing the potential impact of IFRS on its financial statements and will continue to follow the proposed roadmap for future developments.

2. GOING CONCERN

Financial Condition

The Company’s financial statements for the quarter ended October 31, 2011 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company had a net loss for the quarter ended October 31, 2011 of $1,098,031 compared to net income for the year ended July 31, 2011 of $6,074,863 , a net loss for the year ended July 31, 2010 of $17,818,318, and net income of $10,785,443 for the year ended July 31, 2009. As of October 31, 2011, the Company has $1,823,460 of cash on hand and a working capital deficit of $12,380,896. The Company has approximately $8.1 million of debt maturing on January 31, 2012 as discussed in Note 4.

Management Plans to Continue as a Going Concern

With the acquisition of e-biofuels, LLC in May 2010 and the rapid increase in sales volumes achieved by the Company, the Company believes that its e-biofuels subsidiary will result in sufficient positive cash flow to maintain the Company’s operations and service its obligations. The Company is also examining new financing options and has sold some equity securities.

3. ACCOUNTING POLICIES

The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10Q and 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 only normal recurring items) considered necessary for a fair presentation have been included.

 

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4. NOTES PAYABLE

The Company in the course of funding its oil and gas and other activities, from time to time, enters into private notes primarily from its major shareholders.

 

     Oct 31, 2011      July 31, 2011  

John Ryer, secured promissory note, dated December 8, 2010, due July 25, 2011, interest at 10%

   $ —         $ 20,000   

William Stratton, secured by 10% of proceeds at Coquille Bay, dated June 6, 2011 due July 31, 2012, interest at 8%

     —           50,000   

Trinity Industries, secured promissory note, dated January 1, 2010, interest at 6%, collateralized by rail cars, due in monthly payments through March of 2014.

     519,608         597,484   

Various unsecured promissory notes of e-biofuels, dated July 1, 2006 through September 11, 2009, interest varying from 5.5% to 14%

     297,973         627,707   

Mortgage note due a Bank, dated July 1, 2006, secured by facility and real estate of e-biofuels, variable interest rate at 5.125% as of July 31, 2011. Due in monthly payments through December of 2031.

     1,550,376         1,560,589   

Various equipment capital leases due to Stark Equipment, principal due from August 2011 to May 2014 plus interest at a variable rates range from 9.3% to 18.2% as of 7/31/11. Collateralized by the equipment.

     327,860         384,662   

Equipment note due a SBA, dated October 8, 2007, principal matures on November 2017 plus interest at a variable rate, 6.5% as of 7/31/11. Collateralized by certain equipment.

     516,082         533,945   

Term Note Payable to a Bank, debt due 1/31/12, monthly. Interest due monthly at 8%. Collateralized by the assets of e-biofuels.

     1,692,017         2,079,944   

Term Note Payable to a Bank, debt due 1/31/12, monthly. Interest due monthly at 9%. Collateralized by the assets of e-biofuels.

     3,289,584         4,728,224   

Term Note Payable to a Bank, debt due 1/31/12, monthly. Interest due monthly at 12%. Collateralized by the assets of e-biofuels.

     3,093,824         3,115,167   
  

 

 

    

 

 

 

Total

     11,287,324         13,697,722   
  

 

 

    

 

 

 

Less: current portion

     8,908,610         11,162,479   
  

 

 

    

 

 

 

Long-term notes payable

     2,378,714         2,535,243   
  

 

 

    

 

 

 

Current maturities of notes payable are as follows:

 

7/31/12

     8,908,610   

7/31/13

     495,029   

7/31/14

     298,006   

7/31/15

     134,866   

7/31/16

     140,158   

Thereafter

     1,310,655   
  

 

 

 

Total

   $ 11,287,324   
  

 

 

 

 

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Notes Payable – Related Party

 

     Oct 31, 2011      July 31, 2011  

Officer—7.5% demand note

   $ 0       $ 0   

Officer—9.0% demand note

     538,786         540,286   

Employee—8% demand note

     0         0   
  

 

 

    

 

 

 

Total

     538,786         540,286   
  

 

 

    

 

 

 

Less Current

     538,786         540,286   
  

 

 

    

 

 

 

Long Term

     0         0   
  

 

 

    

 

 

 

DEBT

As of October 31, 2011, the Company currently has no debt facilities in place other than as noted in the tables above.

In addition to the Debt listed in the above tables that had balances due as of July 31, 2011, the Company also borrowed $545,000 during the year ended July 31, 2011. A $20,000 loan was borrowed in December of 2010 and was converted to common stock in April of 2011 at 85% of the average closing market price of the stock for the ten business days before the date of conversion. No balance remains on the loan as of July 31, 2011.

A $500,000 loan and a $25,000 loan were borrowed in June of 2011. Both of these loans were converted to common stock immediately. The loans converted at the average closing price of the Company’s common stock for the thirty business days immediately preceding the conversion date. The loans were converted at $0.98 per share. No beneficial conversion feature was recorded on the transactions because the loan was converted immediately and was effectively treated as a stock sale. There was no interest expense related to these notes. No balance remains on these loans as of July 31, 2011.

In May of 2011, $3,750,000 of notes payable – related parties were converted to common stock along with the related accrued interest. A total of $4,037,969 ($3,750,000 of principal and $287,969 of accrued interest) was converted into 5,047,461 shares of common stock at a negotiated price of $0.80 per share.

In addition to the above conversions, an additional $60,000 of debt along with accrued interest of $14,781 was converted to 219,943 shares of common stock during the year ended July 31, 2011.

In connection with the acquisition of e-biofuels, LLC as a wholly-owned subsidiary, the Company assumed senior debt under the following facilities: (1.) First Merchants Bank, N.A. Term Loans; (2.) Cienna Capital/Small Business Administration (“SBA”) Mortgage Note; (3.) SBA facilitated equipment loan and (4.) certain Capital Leases for vehicles. The following is a description of the terms and conditions of each facility as of October 31, 2011:

First Merchants Bank, N.A. Term Loans: The Company has three term loans with First Merchants Bank: Term Loan A has a balance due of $1,692,017 and an interest rate of 8%; Term Loan B has a balance due of $3,289,584 with an interest rate of 9%; and Term Loan C has a balance due of $3,093,824 with an interest rate of 12%. The Term loans expire on January 31, 2012 and are secured by all of the assets of e-biofuels; the personal guarantees of Craig Ducey and Chad Ducey and by a corporate guarantee of the Company. The Company is in compliance with the terms of these notes under the extension agreement. The amended loan agreements call for a continuation fee of $50,000 per month commencing as of October 31, 2011. The Company must pay the fee for each month they have not paid the loan in full on or before the last day of the month.

Cienna Capital/ Small Business Administration Mortgage Note: The Company has a mortgage secured by the real estate and facility located in Middletown, Indiana. The balance due is $1,550,376 with an interest rate of 5.125% . The note is further secured by the personal guarantees of Mr. Craig Ducey and Mr. Chad Ducey. The term of the note is 25.5 years from December 2007.

SBA Equipment Loan: The Company obtained a loan for the purchase of equipment through the issuance of a Debenture in December 2007 in the original amount of $772,000. The balance due is $516,082 with an interest rate of 6.5%. The note is secured by certain equipment located at the Middletown, Indiana plant and further secured by the personal guarantees of Mr. Craig Ducey and Mr. Chad Ducey. The term of the note is 120 months.

Capital Leases: The Company has capital leases related to vehicles used in the operation of the facility at Middletown, Indiana which total $327,860 and have varying market based interest rates and varying maturity dates. See the table above.

Other Debt: The Company has private notes and debt with various individuals, small companies and its former Chairman that totals $1,356,367 as of October 31, 2011. Generally this debt is unsecured and bear market interest rates and flexible terms.

Interest expense relating to the above notes was $ 756,686 and $331,580 for the quarters ended October 31, 2011 and 2010, respectively.

 

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5. RELATED PARTY TRANSACTIONS

The Company has entered into transactions with its former chief executive officer, Jeffrey T. Wilson and a Company owned and controlled by Mr. Wilson, H.N. Corporation. The amount outstanding as of October 31, 2011 owed to HN Corporation was $90,000 and such amounts are included in the totals due Mr. Wilson. There were no outstanding amounts due HN Corporation as of July 31, 2010. The Company had accrued salaries payable to Mr. Wilson of $377,667 as of October 31, 2011.

The Company owes its former Chairman and Chief Executive Officer, Jeffrey T. Wilson, as a result of loans to the Company, a total of $538,786 in principal as of October 31, 2011 (including $90,000 owed to HN Corporation as discussed above). Interest rates on the loans are fixed at 9% . All of the loans are secured by a first mortgage granted by the Company to Wilson on the oil and gas assets. Accrued interest as of October 31, 2011 relating to these loans is $111,039.

Mr. Thagard, a director of the Company and Chairman of the Board, has received compensation as a consultant to the Company and its subsidiaries in the fiscal year ending July 31, 2011 in the amounts of $84,000. In November of 2010, Mr. Thagard used $4,000 of notes payable and $56,000 of accounts payable due him to exercise options that he held. See note 9 for further details. Mr. Thagard settled his accounts payable due him in the amount of $154,500 in exchange for restricted common stock in an amount of 259,542 shares and $20,000 in cash on June 21, 2011.

Mr. Craig Ducey, former president of e-biofuels, is part owner along with Mr. Chad Ducey of Werks Management, a company that provides management services to e-biofuels. Werks Management receives a contracted amount per month in consulting fees for such services. The contracted amount was $70,000 per month through October of 2010, $60,000 per month from November of 2010 to April of 2011, and $62,833 per month from May of 2011 to October of 2011. Mr. Craig Ducey and Mr. Chad Ducey provided management services for e-biofuels through October 31, 2011. The Company recorded expenses to Werks Management in the total of $758,500 for the year ended July 31, 2011 and $188,500 for the quarter ended October 31, 2011. The Company owed Werks Management $0 and $90,238 as of October 31, 2011 and July 31, 2011, respectively.

During July of 2011, the Company entered into a loan agreement loaning Mr. Chad Ducey $340,000 at an interest rate of 5%. The loan had a term of 25 years, was unsecured, and matured in July of 2036. The loan was paid off in October 2011. The balance of the note was $0 as of October 31, 2011.

In September of 2011, Mr. Brian Carmichael, a former owner of Werks Management and Sales Manager for e-Biofuels, signed a new consulting agreement with e-biofuels and will receive a commission of $0.015 per gallon of biodiesel sold through the Middletown, Indiana plant. The agreement was subsequently modified and the amount reduced as the Company began selling larger volumes of biodiesel to Mr. Carmichael’s company, Element Renewable Energy. The agreement has a term of one year and automatically renews in one year increments . Mr. Carmichael no longer owns an interest in Werks Management as a result of this agreement. The Company instituted sales controls during fiscal 2011 to provide additional management oversight of sales contracts to Element, wherein the CFO is required to approve any sales contracts by the Company to Element to insure the contracts are arms-length. The total paid to Mr. Carmichael and his company in relation to this agreement was $294,799 for the year ended July 31, 2011. The contract with Mr. Carmichael was subsequently terminated in October 2011 by mutual consent of both parties.

In each of December 2009 and in May 2010, the Company issued 2,400,000 warrants to purchase 2,400,000 shares of common stock to its directors (200,000 each) for compensation for their services for a total of 2,400,000 warrants. The warrants had a term of two and three years and a strike price of $0.10 and $0.20 per share respectively. The warrants were valued at $265,109 using the Black Scholes valuation method using the following factors; risk free interest rate of 5.00%, strike prices of $0.10 and $0.20, market price of $0.07 and $0.20, volatility of 178% and 185%, and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2010. See Note 8 for further information pertaining to the warrants.

In April 2011 the company issued 975,000 warrants to purchase 975,000 shares of common stock to its directors and key employees for their services. The warrants had a term of two years and a strike price of $0.50 per share. The warrants were valued at $363,328 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $0.50, market price of $0.495, volatility of 163% , and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2011. See Note 8 for further information pertaining to the warrants.

In June 2011 the company issued 100,000 warrants to purchase 100,000 shares of common stock to a director for his services. The warrants had a term of two years and a strike price of $0.50 per share. The warrants were valued at $115,865 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $0.50, market price of $1.35, volatility of 163% , and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2011.

In October 2011, the Company agreed to purchase 2,000,000 shares of Imperial common stock from Craig and Chad Ducey for a total purchase price of $2,000,000. The stock purchase was necessitated by tax liabilities incurred by the Ducey’s in the conversion of their notes receivable from the Company to restricted common stock in June 2011 and due to the fact that the Ducey’s personally guarantee the Company’s senior debt and were unable to obtain credit elsewhere to pay their tax liabilities. As part of the share purchase, the Company retired the note receivable from Mr. Chad Ducey in exchange for common stock. As of October 31, 2011, the 2,000,000 shares are being held as treasury stock.

 

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6. ASSET RETIREMENT OBLIGATION

Effective January 1, 2003, the Company implemented the requirements of SFAS 143. Among other things, SFAS 143 requires entities to record a liability and corresponding increase in long-lived assets for the present value of material obligations associated with the retirement of tangible long-lived assets. Over the passage of time, accretion of the liability is recognized as an operation expense and the capitalized cost is depleted over the estimated useful life of the related asset. Additionally, SFAS No. 143 requires that upon initial application of these standards, the Company must recognize a cumulative effect of a change in accounting principle corresponding to the accumulated accretion and depletion expense that would have been recognized had this standard been applied at the time the long-lived assets were acquired or constructed. The Company’s asset retirement obligations relate primarily to the plugging, dismantling and removal of wells drilled to date.

Using a credit-adjusted risk free rate of 8%, and estimated useful life of wells ranging from 30-40 years, and estimated plugging and abandonment cost ranging from $7,000 per well to $25,000 per well, the Company has recorded a non-cash fixed asset addition and associated liability related to its property acquisitions of $457,429. Oil and gas properties were increased by $457,429, which represents the present value of all future obligations to retire the wells at October 31, 2011. At October 31, 2011 the obligation was $472,855 as a result of increases in plugging costs and related services and accretion expenses. For the periods ended July 31, 2011 and 2010, respectively, the Company recorded accretion expenses of $35,126 and $32,525 associated with this liability.

7. LITIGATION, COMMITMENTS AND CONTINGENCIES

The Company is a named defendant in lawsuits, is a party in governmental proceedings, and is subject to claims of third parties from time to time arising in the ordinary course of business. While the outcome of lawsuits or other proceedings and claims against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial position of the Company.

The Company has accrued revenue payable, legal and petty suspense accounts in the amount of $173,907, $409,671 and $8,948, respectively, as of October 31, 2011. The Company has accrued revenue payable, legal and petty suspense accounts in the amount of $173,907, $409,671 and $8,948, respectively, as of July 31, 2011. The Company has continued to research owner account information in order to properly distribute legal suspense accounts in the normal course of business. Suspense accounts are cleared out annually and paid to the owners. The Company has a plugging liability for oil and gas operations in the various states in the amount of $472,855. The Company has plugging bonds posted with the state regulatory agencies in the amount of $1,208,500 to offset the cost of plugging wells in the future.

The Company has no amounts reserved as a contingent liability as of October 31, 2011 against future losses associated with the litigation listed below.

We are subject to a variety of laws and regulations in all jurisdictions in which we operate. We also are involved in legal proceedings, claims or investigations that are incidental to the conduct of our business and cannot be avoided. Some of these proceedings allege damages against us relating to property damage claims (including injuries due to product failure and other product liability related matters), employment matters, and commercial or contractual disputes. We vigorously defend ourselves against all claims which require such action. In future periods, we could be subjected to cash costs or non-cash charges to earnings if any of these matters is resolved on unfavorable terms.

Imperial Petroleum, Inc. versus Ravello Capital LLC

The Company filed suit in Federal District Court in Tulsa County, Oklahoma against Ravello Capital LLC (“Ravello”) on November 20, 2000. The suit alleged breach of contract and sought to have the contract declared partially performed in the amount of $74,800 and sought relief in the amount of $488,390 for the unpaid consideration and punitive damages and attorney’s fees. The Company received a judgment award against Ravello in the amount of $488,390 and subsequently collected and credited the judgment in the amount of $85,638.02 as a result of the re-issuance of certain of its shares in Warrior, held by Ravello in escrow and not released. The Company does not believe it will be successful in collecting the balance of the judgment against Ravello.

Gary Bolen, et al vs. Imperial Petroleum, Inc.: Wrongful Garnishment:

The case filed in Midland County, Texas No. CV 45671 on July 24, 2008 stems from a dispute in 2005 in which Pharoh Oil & Gas, a company owned by Mr. Bolen ceased accepting saltwater from the University BX lease despite a valid saltwater disposal agreement in place, owned by Imperial at the time, and resulted Imperial obtaining a monetary judgment against Pharoh and Bolen and executing garnishment procedures to allow the money to be escrowed pending final outcome of that trial. Imperial prevailed in that trial, through the Supreme Court of Texas, and received the judgment proceeds. Bolen contends that the procedures used by Imperial in garnishing the funds to be escrowed were improper and seeks unspecified damages. No activity occurred in the most recent fiscal year on this case. The Company reached a settlement of the lawsuit for the payment of a nominal amount of cash and the case has been dismissed.

Pearl River Navigation vs. Imperial Petroleum, Inc.

Pearl River conducted barge and crane operations after hurricane Katrina on the Coquille Bay field in Louisiana on behalf of the working interest owners. A dispute arose between the parties regarding the availability of Pearl River’s crane operator on weekends, despite the fact that Pearl River continued to bill for such operations. The Company refused to pay the disputed invoices and Pearl River filed a lien in the amount of approximately $789,000 despite approximately $225,000 in payments by the Company. Pearl River filed a lawsuit dated August 1, 2007 in the 25th Judicial District Court for the Parish of Plaquemines, State of Louisiana. the case was moved to the United States District Court for

 

17


the Eastern District of Louisiana, Civil Action No. 07-9619, Section “I”(4). The Company and Pearl River reached a settlement in the matter and Pearl River was granted a judgment in the amount of $100,000 and was assigned an overriding royalty interest in the Coquille Bay field. The Company is making payments against the judgment out of revenue generated at Coquille Bay. The balance due as of October 31, 2011 is $80,000.

8. STOCK WARRANTS AND OPTIONS

During the year ended July 31, 2010, the Company issued 2,400,000 warrants to purchase 2,400,000 shares of common stock to its directors (200,000 each) for compensation for their services. The warrants had a term of two and three years and a strike price of $0.10 and $0.20 per share respectively. The warrants were valued at $265,109 using the Black Scholes valuation method using the following factors; risk free interest rate of 5.00%, strike prices of $0.10 and $0.20, market price of $0.07 and $0.20, volatility of 178% and 185%, and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2010.

In April 2011 the company issued 975,000 warrants to purchase 975,000 shares of common stock to its directors and key employees for their services. The warrants had a term of two years and a strike price of $0.50 per share. The warrants were valued at $363,328 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $0.50, market price of $0.495, volatility of 163% , and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2011.

In June 2011 the company issued 100,000 warrants to purchase 100,000 shares of common stock to a director for his services. The warrants had a term of two years and a strike price of $0.50 per share. The warrants were valued at $115,865 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $0.50, market price of $1.35, volatility of 163% , and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2011.

During the year ended July 31, 2011, the Company issued 1,300,000 warrants to purchase 1,300,000 shares of common stock for services. The warrants have terms ranging from 2 to 5 years and strike prices ranging from $0.25 to $1.35.

During the year ended July 31, 2011, a total of 1,225,000 warrants were exercised. 400,000 warrants (200,000 at $0.10 and 200,000 at $0.20) were exercised in return for the forgiveness of $56,000 of accounts payable and $4,000 of notes payable. 825,000 warrants were exercised in a cashless exercise for 609,744 shares of common stock.

During the quarter ended October 31, 2011, the Company issued 500,000 shares of common stock and 500,000 warrants with a term of two years and at an exercise price of $1.00/share to Caravan Trading LLC as part of the Feedstock Supply Agreement for e-biofuels, The common stock was valued at fair market value on the day of the agreement of $0.85 for a total of $425,000. The warrants were valued at $313,135 using the Black Scholes valuation method using the following factors; risk free interest rate of .30%, strike prices of $1.00, market price of $0.85, volatility of 164.86% , and no yield. The total of $738,135 was capitalized as prepaid expense and will be amortized over the two-year agreement. As of October 31, 2011, $7,078 has been expensed and $731,057 is in prepaid expenses.

During the quarter ended October 31, 2011, the Company issued 50,000 warrants with a term of five years and an exercise price of $1.05/share for consulting services, The warrants were valued at $51,682 using the Black Scholes valuation method using the following factors; risk free interest rate of .99%, strike prices of $1.05, market price of $1.10, volatility of 166.10% , and no yield. The $51,682 was capitalized as prepaid expense and will be amortized over the six-month period of the agreement. As of October 31, 2011, $8,614 has been expensed and $43,068 is in prepaid expenses.

During the quarter ended October 31, 2011, the Company issued 2,542,001 warrants in relation to the September stock financing. See note 9 for further details. The warrants have a term of five years and a strike price of $1.00.

The following schedule summarizes pertinent information with regard to the stock warrants for the periods ended October 31, 2011 and July 31, 2011:

 

     October 31, 2011      July 31, 2011  
     Weighted Average
Shares-Exercise
Outstanding-Price
     Weighted Average
Shares-Exercise
Outstanding-Price
 

Beginning of period

     3,325,000       $ 0.558         2,200,000       $ 0.154   

Granted

     3,092,001         1.00         2,350,000         0.74   

Exercised

     —           —           1,225,000         0.186   

Forfeited

     —           —           —           —     

Expired

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

End of period

     6,417,001       $ 0.769         3,325,000       $ 0.558   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable

     6,417,001         —           3,325,000         —     
  

 

 

       

 

 

    

 

18


9. SHAREHOLDER EQUITY TRANSACTIONS

As of July 31, 2010, the Company had 21,364,813 shares issued and outstanding. The Company also had 1,000,000 shares owed but not issued.

In August 2010, the Company issued 400,000 shares and 100,000 warrants for consulting services. The shares were valued at market price of $0.32 for $128,000. The warrants had a term of two years and a strike price of $0.25 per share. The warrants were valued at $22,572 using the Black Scholes valuation method using the following factors; risk free interest rate of .47%, strike prices of $0.25, market price of $0.32, volatility of 173% , and no yield. The total value of the stock and warrants, $150,572, was capitalized as a prepaid expense and amortized over the one year period of the consulting agreement. As of July 31, 2011 all $150,572 has been expensed and nothing remains in prepaid expenses.

In August of 2010, 1,000,000 shares that were owed but not issued as of July 31, 2010 were issued.

In November 2010 the Company issued 400,000 shares to Greg Thagard in connection with the exercise of 400,000 warrants. 200,000 warrants were exercised at $0.10 and 200,000 warrants were exercised at $0.20 for a total of $60,000. In exchange for the exercise, Mr. Thagard forgave $56,000 of accounts payable and $4,000 of notes payable due him from the Company.

In November 2010 the Company issued 310,581 shares to Malcolm Henley in connection with the cashless exercise of warrants. Mr. Henley exercised 200,000 warrants at $0.10 and 200,000 warrants at $0.20.

In December 2010 the Company issued 250,000 shares to Coquille Bay Production Company in connection with the purchase of its interest in the Coquille Bay field and pipeline. The shares were valued at market value of $0.51 per share for a total purchase price of $127,500.

In January 2011 the Company issued 200,000 shares to John Heskett in connection with the purchase of Heskett Holding II and its interest in Arrakis. The shares were valued at market value of $0.50 per share for a total value of $100,000.

In January 2011 the Company issued 1,500,000 shares to Metro Energy in connection with the purchase of certain oil and gas assets. The shares were valued at market value of $0.40 per share for a total purchase price of $600,000.

In January 2011 the Company issued 1,041,669 shares to Chrisjo Energy and others in connection with the purchase of their interest in the Coquille Bay pipeline. The shares were valued at market value of $0.40 per share for a total purchase price of $416,668.

In April 2011 the Company issued 400,000 shares to certain individuals for a consulting services agreement rendered to the Company. 200,000 of the shares are for services rendered and 200,000 are for services to be rendered over the six-month period of the agreement. The shares were valued at market value of $0.50 per share on the date of the agreement for a total amount of $200,000. $100,000 was expensed and $100,000 was capitalized as a prepaid expense to be amortized over the six-month life of the agreement. As of July 31, 2011, $66,668 has been expensed and $33,332 remains in prepaid expenses. As of October 31, 2011, the remaining $33,332 has been expensed and $0 remains in prepaid expenses.

In April 2011 the Company issued 219,943 shares to various individuals in connection with the conversion of certain notes payable and related accrued interest totaling $74,781 to common stock. The shares were converted at $0.34 per share.

In April 2011 the company issued 975,000 warrants to purchase 975,000 shares of common stock to its directors and key employees for their services. The warrants had a term of two years and a strike price of $0.50 per share. The warrants were valued at $363,328 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $0.50, market price of $0.495, volatility of 163% , and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2011.

In April 2011 the Company issued 40,000 shares to various individuals in connection with service rendered to the Company. The shares were valued at market value of $0.90 per share for a total expense of $36.000.

In May 2011 the Company issued 450,000 shares to Terry Louviere in connection with the settlement of certain outstanding accounts payable related to Coquille Bay. Accounts payable of $288,310 was converted to common stock at a conversion price of $0.64 per share.

In May of 2011, $3,750,000 of notes payable – related parties were converted to common stock along with the related accrued interest. A total of $4,037,969 ($3,750,000 of principal and $287,969 of accrued interest) was converted into 5,047,461 shares of common stock at a negotiated price of $0.80 per share.

In May 2011 the Company issued 250,000 shares to Vinmar in connection with the settlement of a lawsuit. The shares were valued at $0.87 per share which was the market value on the date of the settlement.

In June 2011 the Company issued 425,000 shares to Aventine in connection with the settlement of a lawsuit. The shares were valued at $0.90 per share which was the market value on the date of the settlement.

In June of 2011, the Company issued 50,000 warrants for services. The warrants had a term of two years and a strike price of $0.70 per share. The warrants were valued at $38,883 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $0.70, market price of $0.98, volatility of 163% , and no yield. The total value of the warrants has been expensed during the year ended July 31, 2011.

 

19


In June 2011 the company issued 100,000 warrants to purchase 100,000 shares of common stock to a director for his services. The warrants had a term of two years and a strike price of $0.50 per share. The warrants were valued at $115,865 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $0.50, market price of $1.35, volatility of 163% , and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2011.

In June of 2011, the Company issued 535,714 shares to Ron Frank and Barbara Lyons in connection with the conversion of notes payable. A $500,000 loan and a $25,000 loan were borrowed in June of 2011. Both of these loans were converted to common stock immediately. The loans converted at the average closing price of the Company’s common stock for the thirty business days immediately preceding the conversion date. The loans were converted at $0.98 per share. No beneficial conversion feature was recorded on the transactions because the loan was converted immediately and was effectively treated as a stock sale. There was no interest expense related to these notes. No balance remains on these loans as of July 31, 2011.

In June 2011 the Company issued 30,000 shares to various individuals in connection with services rendered. The shares were valued at market value of $0.90 per share for a total expense of $27,000.

In June 2011 the Company issued 259,542 shares to Greg Thagard in connection with the settlement of certain outstanding accounts payable. Accounts payable of $154,500 was converted at $0.60 per share.

In June of 2011, the Company issued 300,000 shares and 500,000 warrants for consulting services. The shares were valued at market price of $1.49 for $447,000. The warrants had a term of five years and a strike price of $1.00 per share. The warrants were valued at $704,706 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $1.00, market price of $1.49, volatility of 163% , and no yield. The total value of the stock and warrants, $1,151,706, was capitalized as a prepaid expense and will be amortized over the five-year period of the consulting agreement. As of July 31, 2011, $28,793 has been expensed and $1,122,914 remains in prepaid expenses. During the quarter ended October 31, 2011, this consulting agreement was terminated and the remaining $1,122,914 was expensed. As of October 31, 2011, $0 remains in prepaid expenses related to this agreement.

In June of 2011, the Company issued 500,000 warrants for consulting services. The warrants had a term of five years and a strike price of $1.00 per share. The warrants were valued at $704,706 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $1.00, market price of $1.49, volatility of 163% , and no yield. The total value of the warrants, $704,706, was capitalized as a prepaid expense and will be amortized over the five-year period of the consulting agreement. As of July 31, 2011, $17,618 has been expensed and $687,088 remains in prepaid expenses. As of October 31, 2011 an additional $35,235 has been expensed and $651,853 remains in prepaid expenses.

In June 2011 the Company issued 100,000 shares and $150,000 to MDEChem Inc. in connection with the execution of a license agreement related to SANDKLENE 950. The cost of the licensing agreement was $250,000 so the shares were valued at $1.00 per share.

In June 2011 the Company issued 50,000 shares to Ben Campbell in connection with the purchase of certain mining claims in Utah. The shares were valued at market value of $1.49 per share for a total purchase price of $74,500.

In June of 2011, the Company issued 100,000 warrants to purchase 100,000 shares of common stock as a signing bonus to a new employee. The warrants had a term of two years and a strike price of $1.35 per share. The warrants were valued at $114,143 using the Black Scholes valuation method using the following factors; risk free interest rate of .85%, strike prices of $1.35, market price of $1.49, volatility of 163% , and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2011.

In July 2011 the Company issued 99,163 shares to certain individuals in connection with their cashless exercise of warrants. 100,000 warrants were exercised at $0.25 and 25,000 were exercised at $0.50.

In July of 2011, the Company issued 200,000 shares in connection with the exercise of 200,000 warrants at $0.10. A note payable in the amount of $20,000 was forgiven in exchange for the conversion. The Company also issued 31,250 shares for the accrued interest on the note of $3,125.

As of July 31, 2011, the Company has 34,905,136 shares of common stock issued and outstanding and 100,000 shares shown as owed but not issued.

In August of 2011, the Company issued 100,000 shares of common stock that were shown as owed but not issued as of July 31, 2011.

In September of 2011, the Company issued 10,000 shares for services. The shares were valued at the market price on the date of issuance for a total of $10,900.

In September of 2011, the Company issued 100,000 shares in connection with the extension of its senior bank debt to the parties that executed the personal guarantees of the debt. The shares were valued at the market price on the date of issuance for a total of $100,000. This amount has been capitalized in prepaid expenses and will be amortized over the six months of the loan extension. As of October 31, 2011, $50,000 has been expensed and $50,000 remains in prepaid expenses.

During the quarter ended October 31, 2011, the Company issued 500,000 shares of common stock and 500,000 warrants with a term of two years and at an exercise price of $1.00/share to Caravan Trading LLC as part of the Feedstock Supply Agreement for e-biofuels, The common stock was valued at fair market value on the day of the agreement of $0.85 for a total of $425,000. The warrants were valued at

 

20


$313,135 using the Black Scholes valuation method using the following factors; risk free interest rate of .30%, strike prices of $1.00, market price of $0.85, volatility of 164.86% , and no yield. The total of $738,135 was capitalized as prepaid expense and will be amortized over the two-year agreement. As of October 31, 2011, $7,078 has been expensed and $731,057 remains in prepaid expenses.

September 2011 Stock Financing and Derivative Liability

On June 9, 2011, Imperial Petroleum, Inc. (hereinafter referred to as the “Company”, “we,” “us” or “our”) entered into an engagement agreement (the “Engagement Agreement”) with Rodman & Renshaw, LLC to act as our exclusive placement agent (the “Placement Agent”) in connection with an offering of the Company’s securities (the “Offering”). On September 21, 2011 (the “Closing Date”), pursuant to a securities purchase agreement (the “Securities Purchase Agreement”), the Company completed the closing of the Offering for total subscription proceeds of $3,177,501.50 through the issuance of (i) 4,236,669 shares of our common stock at a price of $0.75 per share (the “Purchased Shares”) and (ii) five-year warrants (the “Warrants”) exercisable into 2,118,334 shares of common stock (the “Warrants Shares”) equal to 50% of the Purchased Shares at an exercise price of $1.00 per share to certain accredited investors (the “Investors”). The number of shares of common stock to be received upon the exercise of the Warrants and the exercise price of the Warrants are subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the common stock that occur after the Closing Date.

In connection with the Offering, we granted the Investors registration rights pursuant to a registration rights agreement dated as of the Closing Date (the “Registration Rights Agreement”), in which we agreed to register (1) 100% of the Purchased Shares; (2) all Warrant Shares then issuable upon exercise of the Warrants (assuming on such date the Warrants are exercised in full without regard to any exercise limitations therein) and (3) any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing (the “Registrable Securities”) on a registration statement or registration statements (the “Registration Statements”) to be initially filed with the Securities and Exchange Commission (the “SEC”) within seventy five (75) calendar days after the Closing Date (the “Filing Date”) and use our best efforts to have it declared effective within 120 calendar days after the Closing Date or within such other applicable Effectiveness Date as provided in the Registration Rights Agreement.

Subject to the terms of the Registration Rights Agreement, upon the occurrence of any event that shall incur liquidated damages, including, but not limited to, that the initial Registration Statement is not filed on or prior to the Filing Date, or we fail to file a pre-effective amendment and otherwise respond in writing to SEC comments on the Registration Statement within twenty (20) calendar days upon receipt of such comments, or the Registration Statement including the Registrable Securities is not declared effective by the applicable Effectiveness Date, we shall pay to each Investor an amount in cash, on monthly anniversary of each such Event Date as defined in the Registration Rights Agreement (the “Event Date”), equal to the product of (1) the product of (A) 1.0% multiplied by (B) the quotient of (I) the number of such Investor’s Registrable Securities that are not then covered by a Registration Statement that is then effective and available for use by such Investor divided by (II) the total number of such Investor’s Registrable Securities multiplied by (2) the aggregate purchase price paid by such Investor pursuant to the Securities Purchase Agreement; provided, however, that, in the event that none of such Investor’s Registrable Securities are then covered by a Registration Statement that is effective and available for use by such Investor, the quotient of (I) divided by (II) in clause (1)(B) herein shall be deemed to equal 1. Under the Registration Rights Agreement, the maximum aggregate liquidated damages payable to an Investor shall be 8% of the aggregate subscription amount paid by such Investor pursuant to the Securities Purchase Agreement.

Pursuant to the terms of the Engagement Agreement, for the Placement Agent’s service we paid a cash placement fee equal to 7% of the aggregate purchase price paid by Investors that were placed in the Offering, and we agreed to pay a cash fee equal to 7% of the aggregate cash exercise price to be received by the Company upon the exercise of the Warrants, payable only in the event of the receipt by the Company of any proceeds of such cash exercise. We also agreed to issue the placement agent 423,667 warrants in relation to the offering. The warrants have a term of 5 years and a strike price of $1.00.

Total cash received from the financing was $2,921,576 which is the total proceeds of $3,177,501 less $222,425 in broker fees and $33,500 in closing fees.

Pursuant to the terms of the stock purchase agreement, the purchasers have per share purchase price protection. Under this protection, until the three year anniversary of the closing date, if the Company, directly or indirectly, issues or sells any shares of common stock or common stock equivalents for a consideration per share that is less than $0.75, then immediately after such Dilutive Issuance, the Company shall issue to each purchaser, without the payment of additional consideration, a number of additional shares of common stock equal to the product of (i) the fraction obtained by dividing (A) the sum of the number of Initial Shares (as defined below) and Additional Shares (as defined below) then held by such Purchaser on the date of the Dilutive Issuance by (B) the sum of the number of Initial Shares issued to such Purchaser on the Closing Date and all Additional Shares issued to such Purchaser after the Closing Date, multiplied by (ii) the difference between (A) the aggregate number of shares of Common Stock that would have been issued to such Purchaser at the Closing if the applicable portion of the Subscription Amount was divided by the Discounted Per Share Purchase Price minus (B) the aggregate number of shares of Common Stock equal to the sum of the Initial Shares, plus, to the extent there has been a previous issuance of Additional Shares to such Purchaser, the number of Additional Shares previously issued to such Purchaser.

 

21


This purchase price protection creates a derivative liability. The Company initially valued and recorded this derivative liability at $588,116 upon the closing of the financing on September 21, 2011. The Company used historical trends to make an estimate of how many shares might have to be issued in the future under the price protection provision. That estimate was then valued using the Black-Scholes method. As of October 31, 2011, the value of the derivative was revalued, based on information at October 31, 2011, at $498,544 and a resulting gain on valuation of derivative liability of $89,572 was recorded.

10. LEASE OBLIGATIONS

The Company maintains office space at its headquarters at 101 NW 1st Street, Suite 213, Evansville, IN 47708. The Company maintains its current office space under a 3 year lease, ending March of 2014, at the rate of $2,583.33 per month.

Our wholly-owned subsidiary, Imperial Chemical Company’s principal executive offices are located at 4533 Brittmoore Road, Houston, TX under a 5 year lease, ending August of 2016, at the rate of $10,500 per month beginning in August 2011. The Company leases certain vehicles, equipment and railcars for its biodiesel operation in Middletown, IN under operating lease contracts with Stark Leasing, Trinity Industries and others. There are five vehicle leases, ending from September of 2011 to April of 2014, ranging from $525 to $713 per month. The equipment lease ends in November of 2011 and is $21,500 per month. The railcar lease ends in January of 2013 and is $9,800 per month.

Total future lease payments for the years ended July 31, under all of the above operating leases are:

 

     2012      2013      2014      2015      2016      Thereafter      Total  

Total operating lease obligations

   $ 379,094       $ 234,997       $ 155,675       $ 129,850       $ 130,200         10,850       $ 1,040,667   

11. ACCRUED EXPENSES

The Company has accrued expenses as follows:

 

     October 31, 2011      July 31, 2011  

Revenue in suspense

   $ 592,525       $ 592,525   

Accrued officer salary—CEO

     377,678         377,678   

Accrued interest on notes

     140,537         221,584   

Accrued Settlements

     21,173         250,574   

Accrued feedstock purchase liabilities

     2,690,135         2,945,135   

Accrued income taxes

     355,000         355,000   

Other

     785,028         441,353   
  

 

 

    

 

 

 
     4,962,076         5,183,849   
  

 

 

    

 

 

 

 

22


12. FAIR VALUE MEASUREMENTS

We adopted ASC Topic 820-10, “Fair Value Measurements” at the beginning of fiscal year 2010 to measure the fair value of certain of its financial assets required to be measured on a recurring basis. The adoption of ASC Topic 820-10 did not impact our combined financial position or results of operations. ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:

Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We have no level 3 assets or liabilities.

The tables below present reconciliation for all assets and liabilities measured at fair value on a recurring basis as of October 31, 2011 and July 31, 2011.

 

    October 31, 2011  
    Fair Value Measurements  
    Level 1
Quoted Prices
in Active
Markets
Identical
Assets
    Level 2
Significant
Other
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Assets/
Liabilities

At Fair
Value
 

Assets:

       

Cash

  $ 1,823,460        —          —        $ 1,823,460   

Accounts receivable

    —        $ 990,165        —        $ 990,165   

Liabilities

       

Accounts payable, accrued and other liabilities

    —        $ 7,228,680        —        $ 7,228,670   

Notes payable

    —        $ 11,826,110        —        $ 11,826,110   
    July 31, 2011  
    Fair Value Measurements  
    Level 1
Quoted Prices
in Active
Markets
Identical
Assets
    Level 2
Significant
Other
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Assets/
Liabilities

At Fair
Value
 

Assets:

       

Cash

  $ 900,883        —          —        $ 900,883   

Accounts receivable

    —        $ 4,894,073        —        $ 4,894,073   

Note receivable

    —        $ 339,429        —        $ 339,429   

Liabilities

       

Accounts payable, accrued and other liabilities

    —        $ 9,392,557        —        $ 9,392,557   

Notes payable

    —        $ 14,238,008        —        $ 14,238,008   

 

23


13. SUBSEQUENT EVENTS

The Company has evaluated events and transactions for potential recognition or disclosure through the date these financial statements were issued. There were no subsequent events requiring recognition or disclosure in these financial statements other then as noted below.

On November 8, 2011, the Company accepted the resignation of Jeffrey T. Wilson and Aaron M. Wilson from its Board of Directors. Mr. Jeffrey Wilson was the Chairman and President of the Company and resigned due to health issues, but will continue to assist the Company as a technical consultant on its tar sands business. Mr. Aaron Wilson resigned to allow for the appointment of Mr. Tim Jones, who was also promoted to Chief Financial Officer and President of the Company’s e-biofuels, LLC subsidiary, to the Board. Mr. Aaron Wilson retained his title as President of the Company’s Arrakis Oil Recovery, LLC subsidiary.

On November 8, 2011, the Board appointed Mr. John Ryer, a director of the Company, as its new Chief Executive Officer and President.

On December 2, 2011, the Company entered into a Non-Compete, Confidentiality and Nondisclosure Agreement (“ Agreement”) with a former consultant. On December 5, 2011, per the terms of the Agreement, the Company paid $1,237,500 to the former consultant and agreed to issue the consultant 300,000 shares of common stock.

On December 2, 2011, Mr. Ben Campbell resigned as a director of the Company.

 

24


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

The factors which most significantly affect the Company’s results of operations are (i) the sale prices of biodiesel, biodiesel feedstocks, crude oil and natural gas, (ii) the level of biodiesel, crude oil and natural gas sales, (iii) the level of direct and lease operating expenses, and (iv) the level of and interest rates on borrowings. The same factors listed above will apply to the sale of minerals and metals mined by the Company. As a result of the collapse of the world economies into recession, crude oil and natural gas prices decreased significantly during fiscal 2009 from 2008 and although rebounding somewhat in fiscal 2010 and 2011, appear again to be heading into a downward spiral. Commodity prices for crude oil based on West Texas Intermediate (“WTI”) prices quoted at approximately $90/Bbl for oil and $3.90 per Mmbtu for natural gas at October 31, 2011. Since that time crude oil prices rebounded slightly with crude oil prices currently around $97.00/bbl and while natural gas has continued to decline with natural gas at around $3.50/Mmbtu. Diesel prices are impacted by crude oil prices and determine biodiesel prices to a large degree. Biodiesel prices have steadily climbed during calendar 2011 until the September-October 2011 timeframe when prices declined slightly from previous highs of about $5.43/gal to around $5.00 per gal and were quoted at approximately $5.19 per gallon at October 31, 2011 based on the average spot price. Currently biodiesel is quoted at $4.89/gallon. The following graph shows the relation of biodiesel and diesel fuel prices compared to crude oil prices on a $/gallon basis.

 

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LOGO

The impact of the volatility of fuel prices has contributed to uncertainty in the energy markets. If pricing remains high, by demand or artificial methods employed by the oil producing countries, the impact will be positive on revenues and cash flow and the exploitation of existing properties owned by the Company, however, continued high prices will reduce the availability of quality acquisitions and could change the Company’s future growth strategy. At the present time the Company believes it has a substantial inventory of quality development opportunities to sustain its growth strategy without additional acquisitions. The Company expects oil and gas prices to continue to widely fluctuate and to be influenced by global economic turmoil, Asian economies and potential disruptions in supplies, in particular events in the Middle East and North Korea. Feedstock prices, and in particular waste grease prices, generally track biodiesel prices. Virgin oil feedstocks however are at times priced too high for use as a biodiesel feedstock. Since the highest value for most waste greases is obtained by selling these commodities to the biodiesel industry, we expect that despite volatility in biodiesel prices, these waste grease feedstocks will continue to track biodiesel prices, both upward and downward and therefore maintain an acceptable margin for biodiesel production.

LOGO

Because our biodiesel plant is a feedstock flexible facility, we can take advantage of variations in feedstock prices and utilize multiple feedstocks in our plant. For the quarter ended October 31, 2011, gross margins declined from last fiscal year’s average of $0.50/gallon to approximately 8-10% of the price of biodiesel or about $0.40/gallon due to uncertainty in the future of tax incentives and turmoil in the market resulting from enforcement issues related to RFS2. We expect our margins to remain at these levels until clarity is achieved in the marketplace sometime early in calendar 2012.

Three months ended October 31, 2011 compared to Quarter ended October 31, 2010.

Revenues for the three months ending October 31, 2011 were $36,492,056 compared to revenues of $15,922,105 for the comparable quarter ended October 31, 2010. The significant increase is the result of the expansion of operations at e-biofuels, LLC, which accounted for 99.8% of our total revenues for the quarter. Coquille Bay continues to suffer from a lack of available gas for gas lift and as a result the Company continues to conserve natural gas and limits sales. We have a letter of intent to sell the Coquille Bay field and expect to close the sale before December 31, 2011. We presently expect that our biodiesel sales will account for the majority of our revenues during the current fiscal year until such time as we are operational on our tar sand business. We expect revenues to remain at about the current levels throughout fiscal 2012 until we complete our proposed expansion of the biodiesel capacity. We are generally operating at capacity at the e-biofuels facility.

 

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Total operating expenses for the quarter ended October 31, 2011 were $36,951,661 compared to $15,211,152 for the same quarter ended a year earlier. Direct operating expenses have increased due to the costs associated with e-biofuels. Our gross margin from the production of biodiesel is approximately 8-10%. We experienced limited activity in Coquille Bay field for the year. General and administrative costs (“G&A”) for the quarter ended October 31, 2011 were $2,908,099 compared to $1,305,846 for the quarter ended October 31, 2010. Administrative costs include approximately $1,065,329 in non-cash write-offs associated with the termination of certain prepaid consulting agreements. We expect G&A costs to decline as a result of the elimination of these non-cash charges and we do not anticipate the addition of significant staff at e-biofuels despite increased production levels and as a result we anticipate increased overall margins. Interest costs increased to $756,686 for the quarter ended October 31, 2011 compared to $331,580 for the prior quarter as a result of the acquisition of e-biofuels and its debt. We expect interest rates to remain at or near the current levels in fiscal 2012.

The Company incurred a net after tax loss of $1,098,031 ($0.030 per share) for the quarter ended October 31, 2011 compared to an after tax gain of $689,372 ($0.030 per share) for the prior year quarter ended October 31, 2010. The net loss for the current quarter is primarily the result of the increased costs charged to G&A as discussed above, losses in our oil and gas operations and weakness in the market for biodiesel during October 2011. Operations of e-biofuels, LLC generated overall net income of $645,175 for the quarter.

FINANCIAL CONDITION

Capital Resources and Liquidity

The Company’s capital requirements in the past have related primarily to the remedial efforts to return wells to production and to workover and repair operations on various wells to increase production, including the repairs required at Coquille Bay after hurricane Katrina. Now that the repairs at Coquille Bay are completed and production has been re-established, the Company has a great deal of flexibility in the timing and amount of these expenditures. The Company did not make any capital expenditures for workovers in the most recent quarter due to limited production at Coquille Bay and due to a lack of capital. We do not expect significant capital improvements at the current levels of production at e-Biofuels, however, subject to available capital, we do anticipate expansion of the plant capacity by an additional 10 million gallons per year. The Company announced the completion of a private placement in September 2011 which resulted in net proceeds of approximately $2.9 million. The Company also received approximately $3.2 million in advanced biofuels payments from the USDA in September 2011.

As a result of the inability of the Company to raise capital for its mining operations, the Company is active in only one mine that will require significant capital expenditures, the Duke Mine located in Utah. The Company has a wide degree of discretion in the level of capital expenditures it must devote to the mining project on an annual basis and the timing of its development. The Company has primarily been engaged, in its recent past, in the acquisition and testing of mineral properties to be inventoried for future development.

The timing of expenditures for the Company’s oil and natural gas and mining activities are generally distributed over several months, however, any cessation of production or catastrophe type expenditures create significant cash flow shortages for the Company. The Company anticipates its current working capital will be sufficient to meet its required capital expenditures and that the Company will not be required to either access additional borrowings from its lender or access outside capital. The Company has signed a letter of intent to sell its oil and gas operations at Coquille Bay which should eliminate future capital expenditures in oil and gas operations, except for capital expenditures related to its tar sand operations in Kentucky.

In connection with the acquisition of e-biofuels, LLC as a wholly-owned subsidiary, the Company assumed senior debt under the following facilities: (1.) First Merchants Bank, N.A. Term Loans; (2.) Cienna Capital/Small Business Administration (“SBA”) Mortgage Note; (3.) SBA facilitated equipment loan and (4.) certain Capital Leases for vehicles. See Note 4 for further information pertaining to the debt.

The level of the Company’s capital expenditures will vary in the future depending on commodity market conditions, upon the level of biodiesel production and oil and gas activity achieved by the Company, the success of its remedial workover operations and upon the availability of capital for discretionary and non-discretionary projects. The Company anticipates that its cash flow will be sufficient to fund its operations at their current levels however, additional funds or borrowings will be required for expansion. Because the timing of acquisitions of additional oil and gas properties is uncertain, additional borrowings will be required to fund new acquisitions and the timing of those borrowings is uncertain.

 

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The Company has also has obtained certain unsecured loans from various individuals and from its former Chairman and President, Jeffrey T. Wilson, in the approximate amounts of $1,167,643 and $538,786 as of October 31, 2011. These loans bear market rates of interest and flexible terms and are generally unsecured. These funds have been used to maintain the Company’s biodiesel, oil and gas and mining activities and fund its overhead requirements. As of October 31, 2011, the Company has accrued salaries due its former Chairman and President of $377,667 .Management believes that the Company may need to borrow additional funds from these sources in the future, however there is no assurance such funding sources will continue to make advances to the Company.

At October 31, 2011, the Company had current assets of $4,793,723, including $1,823,460 in cash and cash equivalents, $411,369 in trade and oil and gas accounts receivable, $1,283,358 in prepaid expenses, $578,796 in advanced biofuels funds due from the USDA and $579,551 in inventories. The Company had current liabilities of $17,174,619, which resulted in negative working capital of $12,380,896. The negative working capital position is comprised of senior debt of $8,610,637; trade accounts payable of $2,139,034; of accrued expenses payable of $4,463,532 consisting primarily of accrued liabilities for feedstock purchases of $2,690,135, accrued salaries payable to the Company’s President of $377,677, accrued income taxes of $355,000, and oil and gas suspense accounts; notes payable to the related parties of $592,524; and short-term unsecured third party notes payable of $297,973. As of October 31, 2011 the Company had cash and cash equivalents of $1,823,460.

Seasonality

The results of operations of the Company are seasonal due to seasonal fluctuations in the market prices for biodiesel, crude oil and natural gas. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of results, which may be realized on an annual basis. Because of regional issues with cold weather, biodiesel sales are generally lower in colder climates during the winter months. The Company estimates that seasonal issues related to weather impacts result in a loss of sales of about 8-10%%.

Inflation and Prices

The Company’s revenues and the value of its biofuels, oil and natural gas and mining properties have been and will be affected by changes in the prices for biodiesel, crude oil, natural gas and gold prices. The Company’s ability to obtain additional capital on attractive terms is also substantially dependent on the price of these commodities. Prices for these commodities are subject to significant fluctuations that are beyond the Company’s ability to control or predict. Government incentives significantly affect the price of biodiesel as discussed previously.

Off Balance Sheet Arrangements

None.

Contractual Obligations

See above, Capital Resources and Liquidity.

 

Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk.

Commodity Risk

Our major commodity price risk exposure is to the prices received for our biodiesel, natural gas and oil production and prices paid for biodiesel feedstock. Realized prices for our production are the spot prices applicable to biodiesel, natural gas and crude oil. Purchase prices for biodiesel feedstocks are generally based on spot prices and are under short term contracts, usually month to month. Prices received for biodiesel, natural gas and oil are volatile and unpredictable and are beyond our control.

For every $0.10 per gallon decrease in the sales price of biodiesel at our current rate of production of 30 MMGPY and assuming there is not a comparable decline in the cost of feedstocks, our revenues will decrease approximately $3.0 million and our net income would decline by $0.20 million. The breakeven price for biodiesel assuming that feedstock costs remain constant and do not decrease with decreasing biodiesel prices is approximately $3.80 per gallon. Currently biodiesel prices are approximately $4.89 per gallon. However, it should be noted that as shown earlier, changes in waste grease prices generally mirror biodiesel prices due to the fact that the highest value that can be obtained by marketers of waste greases is currently in sales to biodiesel producers. Consequently, it is likely that as long as abundant supplies of waste greases remain available for biodiesel production, very little impact would actually occur due to price adjustments in biodiesel until such prices reach the marginal price under which such waste greases can be sold as animal feed additives or roughly $0.15/lb or $1.20 per gallon in feedstock costs or $2.40 per gallon in biodiesel prices.

Government incentives significantly affect the price of biodiesel in the market, as discussed above. Currently the Blender’s Credit ($1.00/gallon tax credit received by parties that blend B100 with petroleum diesel) is set to expire at the end of calendar 2011. While the Company generally does not receive this credit, indirectly, the subsidy has an impact on overall biodiesel prices and their relation to petroleum diesel prices. Previously in early 2010, when the Blender’s Tax Credit was allowed to expire, as a result of the mandated requirements imposed by RFS2, RIN values increased over a period of a few months and offset the impact to biodiesel prices by the loss of the credit. We would anticipate that a similar adjustment in RIN values would occur again, if the credit is allowed to expire. As a result, we would estimate that the short term impact to a loss of the Blender’s Tax Credit would be reduction in revenues over a three month period and would result in a reduction in annual revenues of about 7%. We believe net income would only be impacted during the adjustment period as RIN values increase and as a result we would estimate the impact to net income to be a reduction of approximately 1-2% for fiscal 2012.

 

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A legislative change that eliminated the RFS2 incentives could have a material adverse effect on our biodiesel sales prices by reducing the price of biodiesel to an equivalent price for petroleum diesel and by eliminating the significant demand premium that biodiesel currently receives. We would estimate that if biodiesel prices were to decline to the current level of petroleum diesel prices and assuming that waste grease prices declined as well in accordance with historical data, our gross margins would be about $0.37/gallon. Our revenues would be decreased by about 31% while net income would be reduced by about 46%.

Interest Rate Risk

We have long-term debt subject to risk of loss associated with movements in interest rates.

 

Item 4. Controls and Procedures.

Controls and Procedures.

In connection with the preparation of this quarterly report on Form 10-Q, our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2011, pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation , our Chief Financial Officer concluded that as of October 31, 2011 our disclosure controls and procedures were effective to provide reasonable assurance 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 the Security and Exchange Commission’s rules and forms; and to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosures.

Management’s Report on Internal Control over Financial Reporting.

Our Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(c) and (d) of the Exchange Act. Our internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, financial disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable and in accordance with generally accepted accounting principles of the United States of America (GAAP).

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.

A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. An internal control material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

As part of our compliance efforts relative to Section 404 of the Sarbanes-Oxley Act of 2002, our management assessed the effectiveness of our internal control over financial reporting as of October 31, 2011. In making this assessment, management used the criteria set forth in the Internal Control – Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). We evaluated control deficiencies identified through our test of the design and operating effectiveness of controls over financial reporting to determine whether the deficiencies, individually or in combination, are significant deficiencies or material weaknesses. In performing the assessment, our management had identified two material weaknesses in internal control over financial reporting existing as of July 31, 2011 which included (i.) a segregation of duties issue related to a lack of accounting personnel and (ii.) the inability of the Company’s prior accounting system to adequately track real-time purchases of feedstock and sales of biodiesel on a contract-by-contract basis. In connection with the remediation of these issues, the Company took the following steps: (i.) we added additional accounting personnel, including a Chief Financial Officer, a Controller and a logistics individual at e-biofuels, and (ii.) we implemented a new accounting system at e-biofuels to allow our accounting staff to more effectively track sales and inventory and to improve the overall accuracy of our reporting and we consolidated our overall accounting functions under the control of our accounting staff at e-biofuels and under the direction of our new CFO. Our evaluation of the significance of each deficiency and their remediation included both quantitative and qualitative factors. Based on that evaluation, the Company’s management concluded that as of October 31, 2011, and as of the date that the evaluation of the effectiveness of our internal controls and procedures was completed, the Company’s internal controls are now effective.

Changes in Internal Controls

The changes noted above in internal controls were made during the period ended October 31, 2011.

 

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PART II OTHER INFORMATION

 

Item 1. Legal Proceedings.

See Note 7 above.

 

Item 1A. Risk Factors.

In addition to the other information set forth elsewhere in this Form 10-Q, you should carefully consider the following factors when evaluating the Company. An investment in the Company is subject to risks inherent in our business. The trading price of the shares of the Company is affected by the performance of our business relative to, among other things, competition, market conditions and general economic and industry conditions. The value of an investment in the Company may decrease, resulting in a loss. The risk factors listed below are not all inclusive.

An investment in us involves a high degree of risk and may result in the loss of all or part of your investment. You should consider carefully all of the information set out in this document and the risks attaching to an investment in us, including, in particular, the risks described below. The information below does not purport to be an exhaustive list and should be considered in conjunction with the contents of the rest of this document.

We have a history of operating losses.

We have had a history of net operating losses. There is no assurance that our current fiscal year results can be sustained.

The federal excise tax credit for biodiesel is set to expire on December 31, 2011 and Congress has not enacted legislation to extend this credit. If the credit is not renewed, our cost of producing biodiesel may increase and our sales price for biodiesel could be reduced, which could have an adverse effect on our financial position.

In October 2004, Congress passed a biodiesel tax incentive, structured as a federal excise tax credit, as part of the American Jobs Creation Act of 2004. The credit amounted to one cent for each percentage point of vegetable oil or animal fat biodiesel that was blended with petrodiesel (and one-half cent for each percentage point of recycled oils and other non-agricultural biodiesel), subsequently amended and increased to one cent. For example, blenders that blended B20 made from soy, canola and other vegetable oils and animal fats received a 20¢ per gallon excise tax credit. The tax incentive generally was taken by petroleum distributors and was passed on to the consumer. It was designed to lower the cost of biodiesel to consumers in both taxable and tax-exempt markets. The tax credit was scheduled to expire at the end of 2006, but was extended in the Energy Policy Act of 2005 to December 31, 2008 and most recently it was extended to December 31, 2011.

Congress did not enact any legislation to extend this tax credit beyond December 31, 2009 and it expired at that time. In December 2009, the United States House of Representatives passed a bill extending this credit to December 31, 2010. On March 10, 2010, the United States Senate passed a similar bill as part of the American Workers, State and Business Relief Act, H.R. 4213. In addition to extending the credit to December 31, 2011, both bills retroactively apply the credit to the beginning of 2010. If the tax credit is not renewed, our biodiesel sales prices will likely decrease by $1.00 per gallon. If biodiesel feedstock costs do not decrease significantly relative to biodiesel prices, we will realize a negative gross margin on biodiesel. As a result, we would cease producing biodiesel, which could have an adverse effect on our financial condition.

The current volatility in global economic conditions and the financial markets may adversely affect our industry, business and results of operations.

The volatility and disruption to the capital and credit markets since mid-2008 have affected global economic conditions, resulting in significant recessionary pressures and declines in consumer confidence and economic growth. These conditions have led to economic contractions in the developed economies and reduced growth rates in the emerging markets. Despite fiscal and monetary intervention, it is possible that further declines in consumer spending and global growth rates may occur in the foreseeable future. Reduced consumer spending may cause changes in customer order patterns including order cancellations, and changes in the level of inventory held by our customers, which may adversely affect our industry, business and results of operations. The impact of the credit crisis and economic slowdown will vary by region and country. The diversity of our geographic customer and operating footprint limits our reliance and exposure to any single economy.

These conditions have also resulted in a substantial tightening of the credit markets, including lending by financial institutions and other sources of credit and liquidity. This tightening of the credit markets has increased the cost of capital and reduced the availability of credit. Based on our latest discussions, we believe that our sources of credit and liquidity are able to fulfill their commitments to us as of our filing date. We cannot predict, however, how long the current economic and capital and credit market conditions will continue, whether they will deteriorate and which aspects of our products or business could be adversely affected. However, if current levels of economic and capital and credit market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse impact, which may be material, on our business, the cost of and access to capital and credit markets, and our results of operations. In addition, we monitor the financial condition of our customers on a regular basis based on public information or data provided directly to us. If the financial condition of one of our major customers was negatively impacted by market conditions or liquidity, we could be adversely impacted in terms of accounts receivable and/or inventory specifically attributable to them.

The industries in which we compete are highly competitive.

The biodiesel industry, as well as the oil and gas business, are highly competitive. There is competition within these industries and also with other industries in supplying the energy, fuel and chemical needs of industry and individual consumers. We will compete with other firms in the sale or purchase of various goods or services in many national and international markets. We will compete with large national and multi-national

 

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companies that have longer operating histories, greater financial, technical and other resources and greater name recognition than we do. In addition, we will compete with several smaller companies capable of competing effectively on a regional or local basis, and the number of these smaller companies is increasing. Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. As a result of competition, we may lose market share or be unable to maintain or increase prices for our products and/or services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Although we will employ all methods of competition which are lawful and appropriate for such purposes, no assurances can be made that they will be successful. A key component of our competitive position, particularly given the expected commodity-based nature of many of our products, will be our ability to manage expenses successfully, which requires continuous management focus on reducing unit costs and improving efficiency. No assurances can be given that we will be able to successfully manage such expenses.

Our competitive position in the markets in which we participate is, in part, subject to external factors in addition to those that we can impact. Natural disasters, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which we operate or do business, or in countries or regions that are key suppliers of strategic raw materials, could negatively impact our competitive position and our ability to maintain market share.

Increases in the construction of biodiesel production plants may cause excess biodiesel production capacity in the market. Excess capacity may adversely affect the price at which we are able to sell the biodiesel that we produce and may also adversely affect our anticipated results of operation and financial condition.

In 2008, 2009 and 2010, approximately 700 million gallons; 450-490 million gallons and 315 million gallons, respectively, of biodiesel were produced in the United States. There is a reported 2.49 billion gallons per year of biodiesel production capacity in the United States operated by 173 companies. With such biodiesel production capacity in the United States, compared to historical production levels, there is a risk that there will be a significant amount of excess biodiesel produced in the U.S., which may adversely affect the price at which we are able to sell the biodiesel that we produce and thereby adversely affect our anticipated results of operation and financial condition.

Anti-subsidy and anti-dumping complaints have been filed with the European Commission concerning imports of biodiesel originating in the United States. The existence of such complaints, and an adverse decision by the European Commission, could reduce demand for biodiesel produced in the United States.

Anti-subsidy and anti-dumping complaints have been filed with the European Commission concerning imports of biodiesel originating in the United States. Although we are not a target of such complaints and do not import biodiesel into the European community, the existence of such complaints, and an adverse decision by the European Commission, could reduce demand for biodiesel produced in the United States. Such a reduction in demand could reduce the amount of biodiesel that we sell, which could have an adverse effect on our financial condition.

Fluctuations in commodity prices may cause a reduction in the demand or profitability of the products or services we produce.

Prices for alternative fuels tend to fluctuate widely based on a variety of political and economic factors. These price fluctuations heavily influence the oil and gas industry. Lower energy prices for existing products tend to limit the demand for alternative forms of energy services and related products and infrastructure. Historically, the markets for alternative fuels have been volatile, and they are likely to continue to be volatile. Wide fluctuations in alternative fuel prices may result from relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and other factors that are beyond our control, including:

 

   

worldwide and domestic supplies of oil and gas;

 

   

the price and/or availability of biodiesel feedstocks;

 

   

weather conditions;

 

   

the level of consumer demand;

 

   

the price and availability of alternative fuels;

 

   

the availability of pipeline and refining capacity;

 

   

the price and level of foreign imports;

 

   

domestic and foreign governmental regulations and taxes;

 

   

the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

 

   

political instability or armed conflict in oil-producing regions; and

 

   

the overall global economic environment.

These factors and the volatility of the commodity markets make it extremely difficult to predict future alternative fuel price movements with any certainty. There may be a decrease in the demand for our products or services and our profitability could be adversely affected.

 

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We are reliant on certain strategic raw materials for our operations.

We are reliant on certain strategic raw materials (such as soybean oil, waste greases and fats and methanol) for our operations. We have implemented certain risk management tools, such as a long term supply agreement and hedging, as appropriate, to mitigate short-term market fluctuations in raw material supply and costs. There can be no assurance, however, that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, natural disasters, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which we operate or do business, or in countries or regions that are key suppliers of strategic raw materials, could affect availability and costs of raw materials.

While temporary shortages of raw materials may occasionally occur, these items have historically been sufficiently available to cover current requirements. However, their continuous availability and price are impacted by natural disasters, plant interruptions occurring during periods of high demand, domestic and world market and political conditions, changes in government regulation, and war or other outbreak of hostilities. In addition, as we increase our biodiesel capacity, we will require larger supplies of raw materials which have not yet been secured and may not be available for the foregoing reasons, or may be available only at prices higher than current levels. Our operations or products may, at times, be adversely affected by these factors.

Our ability to market our biodiesel may be impaired by capacity constraints, modifications to third party facilities and by weather issues.

We generally sell our biodiesel to large retail outlets such as Element Renewable, Fusion Renewables, Flying J, Pilot and others and much of that product is transported by truck. As such adverse weather conditions or modifications to facilities owned by others could limit our ability to sell our products and result in increased inventories or plant shut-downs.

Changes in technology may render our products or services obsolete.

The alternative fuel industry may be substantially affected by rapid and significant changes in technology. Examples include competitive product technologies, such as green gasoline and renewable diesel produced from catalytic hydroforming of renewable feedstock oils and competitive process technologies such as advanced biodiesel continuous reactor and washing designs that increase throughput. These changes may render obsolete certain existing products, energy sources, services and technologies currently used by us. We cannot assure you that the technologies used by or relied upon by us will not be subject to such obsolescence. While we may attempt to adapt and apply the services provided by us to newer technologies, we cannot assure you that we will have sufficient resources to fund these changes or that these changes will ultimately prove successful.

Failure to comply with governmental regulations could result in the imposition of penalties, fines or restrictions on operations and remedial liabilities.

The biofuel industry subject to extensive federal, state, local and foreign laws and regulations related to the general population’s health and safety and those associated with compliance and permitting obligations (including those related to the use, storage, handling, discharge, emission and disposal of municipal solid waste and other waste, pollutants or hazardous substances or waste, or discharges and air and other emissions) as well as land use and development. Existing laws also impose obligations to clean up contaminated properties or to pay for the cost of such remediation, often upon parties that did not actually cause the contamination. Compliance with these laws, regulations and obligations could require substantial capital expenditures. Failure to comply could result in the imposition of penalties, fines or restrictions on operations and remedial liabilities. These costs and liabilities could adversely affect our operations.

Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our business segments in general and on our results of operations, competitive position or financial condition. We are unable to predict the effect of additional environmental laws and regulations which may be adopted in the future, including whether any such laws or regulations would materially adversely increase our cost of doing business or affect our operations in any area.

Under certain environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination, or if current or prior operations were conducted consistent with accepted standards of practice. Such liabilities can be significant and, if imposed, could have a material adverse effect on our financial condition or results of operations.

Our biofuels operations may be harmed if the government were to change current laws and regulations.

Alternative fuels businesses benefit from tax credits and government subsidies and is highly regulated. If any of the state or federal laws and regulations relating to the tax credits, government subsidies, RFS2, RINS or the use and/or treatment of off-spec methyl esters utilized by the Company change, the ability to recover capital expenditures from our alternative fuels business could be harmed. Our biofuels platform is subject to federal, state, and local laws and regulations governing the application and use of alternative energy products, including those related specifically to biodiesel. For instance, biodiesel products benefit from being the only alternative fuel certified by the U.S. Environmental Protection Agency that fulfills the requirements of Section 211(B) of the Clean Air Act. If agency determinations, laws, and regulations relating to the application and use of alternative energy are changed, the marketability and sales of biodiesel production could be materially adversely affected.

 

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Market conditions or transportation impediments may hinder access to raw goods and distribution markets.

Market conditions, the unavailability of satisfactory transportation, or the location of our manufacturing complex from more lucrative markets may hinder our access to raw goods and/or distribution markets. The availability of a ready market for biodiesel depends on a number of factors, including the demand for and supply of biodiesel and the proximity of the plant to trucking and terminal facilities. The sale of large quantities of biodiesel necessitates that we transport our biodiesel to other markets since the Indiana regional market is not expected to absorb all of our contemplated production. Currently, common carrier pipelines are not transporting biodiesel. This leaves trucks, barges, and rail cars as the means of distribution of our product from the plant to these storage terminals for further distribution. However, the current availability of rail cars is limited and at times unavailable because of repairs or improvements, or as a result of priority transportation agreements with other shippers. If transportation is restricted or is unavailable, we may not be able to sell into more lucrative markets and consequently our cash flow from sales of biodiesel could be restricted.

The biodiesel industry also faces several challenges to wide biodiesel acceptance, including cold temperature limitations, storage stability, fuel quality standards, and exhaust emissions. If the industry does not satisfy consumers that these issues have been resolved or are being resolved, biodiesel may not gain widespread acceptance which may have an adverse impact on our cash flow from sales of biodiesel.

Our insurance may not protect us against our business and operating risks.

We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance policies may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Although we will maintain insurance at levels we believe are appropriate for our business and consistent with industry practice, we will not be fully insured against all risks which cannot be sourced on economic terms. In addition, pollution and environmental risks generally are not fully insurable. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition and results of operations.

If a significant accident or other event resulting in damage to our operations (including severe weather, terrorist acts, war, civil disturbances, pollution, or environmental damage) occurs and is not fully covered by insurance or a recoverable indemnity from a customer, it could adversely affect our financial condition and results of operations.

We depend on key personnel, the loss of any of whom could materially adversely affect our future operations.

Our success will depend to a significant extent upon the efforts and abilities of our executive officers. The loss of the services of one or more of these key employees could have a material adverse effect on us. Our business will also be dependent upon our ability to attract and retain qualified personnel. Acquiring or retaining these personnel could prove more difficult to hire or cost substantially more than estimated. This could cause us to incur greater costs, or prevent us from pursuing our expansion strategy as quickly as we would otherwise wish to do.

We depend heavily on the services of John Ryer, chief executive officer, and Tim Jones our chief financial officer and on the services of key management in our biodiesel subsidiary, Craig Ducey and Chad Ducey. We have employment agreements with John Ryer and Tim Jones and a consulting agreement with Werks Management for the services of Craig Ducey and Chad Ducey. We do not presently have a “key person” life insurance policy on the lives of any of these individuals to offset our losses in the event of their death.

If we are unable to effectively manage the commodity price risk of our raw materials or finished goods, we may have unexpected losses.

We hedge our raw materials and/or finished products for our biofuels segment to some degree to manage the commodity price risk of such items. This requires the purchase or sale of commodity futures contracts and/or options on those contracts or similar financial instruments. We may be forced to make cash deposits available to counterparties as they mark-to-market these financial hedges. This funding requirement may limit the level of commodity price risk management that we are prudently able to complete. If we do not or are not capable of managing the commodity price risk of our raw materials and/or finished products for our biofuels segment, we may incur losses as a result of price fluctuations with respect to these raw materials and/or finished products.

If we are unable to acquire or renew permits and approvals required for our operations, we may be forced to suspend or cease operations altogether.

The operation of our manufacturing plant requires numerous permits and approvals from governmental agencies. We may not be able to obtain all necessary permits (or modifications thereto) and approvals and, as a result, our operations may be adversely affected. In addition, obtaining all necessary renewal permits (or modifications to existing permits) and approvals for future expansions may necessitate substantial expenditures and may create a significant risk of expensive delays or loss of value if a project is unable to function as planned due to changing requirements.

 

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The lack of business diversification may adversely affect our results of operations.

Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is possible that we will not have the resources to diversify effectively our operations or benefit from the possible spreading of risks or offsetting of losses.

Our indebtedness may limit our ability to borrow additional funds or capitalize on acquisition or other business opportunities.

Our biofuels subsidiary operates under an extension to its credit facility through January 31, 2012. There is no assurance that the bank will grant an additional extension of time if we are unable to secure alternative financing. The restrictions governing this indebtedness may reduce our ability to incur additional indebtedness, engage in certain transactions or capitalize on acquisition or other business opportunities. If we are unable to meet our future debt service obligations and other financial obligations, we could be forced to restructure or refinance such indebtedness and other financial transactions, seek additional equity or sell assets.

We expect to have capital expenditure requirements, and we may be unable to obtain needed financing on satisfactory terms.

We expect to make capital expenditures for the expansion of our biofuels production capacity and complementary infrastructure. We intend to finance these capital expenditures primarily through proceeds from the recent financing, cash flow from our operations and existing cash. However, if our capital requirements vary materially from those provided for in our current projections, we may require additional financing sooner than anticipated. A decrease in expected revenues or adverse change in market conditions could make obtaining this financing economically unattractive or impossible. As a result, we may lack the capital necessary to complete the projected expansions or capitalize on other business opportunities.

We may be unable to successfully integrate future acquisitions with our operations or realize all of the anticipated benefits of such acquisitions.

Failure to successfully integrate future acquisitions, if any, in a timely manner may have a material adverse effect on our business, financial condition, results of operations, and cash flows. The difficulties of combining acquired operations include, among other things:

 

   

operating a significantly larger combined organization;

 

   

consolidating corporate technological and administrative functions;

 

   

integrating internal controls and other corporate governance matters; and

 

   

diverting management’s attention from other business concerns.

In addition, we may not realize all of the anticipated benefits from future acquisitions, such as increased earnings, cost savings, and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher and unexpected acquisition and operating costs, unknown liabilities, and fluctuations in markets. If benefits from future acquisitions do not meet the expectations of financial or industry analysts, the market price of our shares of common stock may decline.

Natural gas, and oil prices fluctuate widely, and low prices would have a material adverse effect on our revenues, profitability and growth.

The market price of all energy products remains enormously volatile and recent high prices have been replaced with relatively low prices and all within a few months. Our revenues, profitability and future growth will depend significantly on natural gas and crude oil prices. Prices received also will affect the amount of future cash flow available for capital expenditures and repayment of indebtedness and will affect our ability to raise additional capital. Lower prices may also affect the amount of natural gas, oil and biodiesel that we can economically produce. Factors that can cause price fluctuations include:

 

   

The domestic and foreign supply of natural gas and oil.

 

   

Overall economic conditions.

 

   

The level of consumer product demand.

 

   

Adverse weather conditions and natural disasters.

 

   

The price and availability of competitive fuels such as heating oil and coal.

 

   

Political conditions in the Middle East and other natural gas and oil producing regions.

 

   

The level of LNG imports.

 

   

Domestic and foreign governmental regulations.

 

   

Potential price controls and special taxes.

Natural gas and oil reserves are depleting assets and the failure to replace our reserves would adversely affect our production and cash flows.

Our future natural gas and oil production depends on continuing to make our current properties productive and our success in finding or acquiring new reserves. If we fail to replace reserves, our level of production and cash flows would be adversely impacted. Production from

 

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natural gas and oil properties decline as reserves are depleted with the rate of decline depending on reservoir characteristics. Our total proved reserves will decline as reserves are produced unless we conduct other successful exploration and development activities or acquire properties containing proved reserves, or both. Further, the majority of our reserves are proved developed producing. Accordingly, we do not have significant opportunities to increase our production from our existing proved reserves. Our ability to make the necessary capital investment to maintain or expand our asset base of natural gas and oil reserves would be impaired to the extent cash flow from operations is reduced and external sources of capital become limited or unavailable. We may not be successful in exploring for, developing or acquiring additional reserves. If we are not successful, our future production and revenues will be adversely affected.

Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions could materially affect the quantities and present values of our reserves.

The process of estimating natural gas and oil reserves is complex and involves a degree of subjective interpretation of technical data and information. It requires analysis of available technical data and the application of various assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in this report.

In order to prepare these estimates, our independent third party petroleum engineer must project production rates and timing of development expenditures as well as analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary. The process also requires economic assumptions relating to matters such as natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of natural gas and oil reserves are inherently imprecise.

Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and pre-tax net present value of reserves shown in this report. In addition, estimates of our proved reserves may be adjusted to reflect production history, results of exploration and development, prevailing natural gas and oil prices and other factors, many of which are beyond our control. Some of the producing wells included in our reserve report have produced for a relatively short period of time. Because some of our reserve estimates are not based on a lengthy production history and are calculated using volumetric analysis, these estimates are less reliable than estimates based on a more lengthy production history. You should not assume that the pre-tax net present value of our proved reserves prepared in accordance with SEC guidelines referred to in this report is the current market value of our estimated natural gas and oil reserves. We base the pre-tax net present value of future net cash flows from our proved reserves on prices and costs on the date of the estimate. Actual future prices, costs, taxes and the volume of produced reserves may differ materially from those used in the pre-tax net present value estimate.

Exploration is a high risk activity, and our participation in drilling activities may not be successful.

Our future success will largely depend on the success of our exploration drilling program. Participation in exploration drilling activities involves numerous risks, including the risk that no commercially productive natural gas or oil reservoirs will be discovered. The cost of drilling, completing and operating wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including:

 

   

Unexpected drilling conditions.

 

   

Blowouts, fires or explosions with resultant injury, death or environmental damage.

 

   

Pressure or irregularities in formations.

 

   

Equipment failures or accidents.

 

   

Tropical storms, hurricanes and other adverse weather conditions.

 

   

Compliance with governmental requirements and laws, present and future.

 

   

Shortages or delays in the availability of drilling rigs and the delivery of equipment.

Even when properly used and interpreted, 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators. They do not allow the interpreter to know conclusively if hydrocarbons are present or economically producible. Poor results from our drilling activities would materially and adversely affect our future cash flows and results of operations.

In addition, as a “successful efforts” company, we choose to account for unsuccessful exploration efforts (the drilling of “dry holes”) and seismic costs as a current expense of operations, which immediately impacts our earnings. Significant expensed exploration charges in any period would materially adversely affect our earnings for that period and cause our earnings to be volatile from period to period.

The natural gas and oil business involves many operating risks that can cause substantial losses.

The natural gas and oil business involves a variety of operating risks, including:

 

   

Blowouts, fires and explosions.

 

   

Surface cratering.

 

   

Uncontrollable flows of underground natural gas, oil or formation water.

 

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Natural disasters.

 

   

Pipe and cement failures.

 

   

Casing collapses.

 

   

Stuck drilling and service tools.

 

   

Abnormal pressure formations.

 

   

Environmental hazards such as natural gas leaks, oil spills, pipeline ruptures or discharges of toxic gases and liquids.

If any of these events occur, we could incur substantial losses as a result of:

 

   

Injury or loss of life.

 

   

Severe damage to and destruction of property, natural resources or equipment.

 

   

Pollution and other environmental damage.

 

   

Clean-up responsibilities.

 

   

Regulatory investigations and penalties.

 

   

Suspension of our operations or repairs necessary to resume operations.

Offshore operations are subject to a variety of operating risks peculiar to the marine environment, such as capsizing and collisions. In addition, offshore operations, and in some instances, operations along the Gulf Coast, are subject to damage or loss from hurricanes or other adverse weather conditions. These conditions can cause substantial damage to facilities and interrupt production. As a result, we could incur substantial liabilities that could reduce the funds available for exploration, development or leasehold acquisitions, or result in loss of properties.

If we were to experience any of these problems, it could affect well bores, platforms, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations. In accordance with customary industry practices, we maintain insurance against some, but not all, of these risks. Losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We may not be able to maintain adequate insurance in the future at rates we consider reasonable, and particular types of coverage may not be available. An event that is not fully covered by insurance could have a material adverse effect on our financial position and results of operations.

Not hedging our oil and gas production may result in losses.

Due to the significant volatility in natural gas and oil prices and the potential risk of significant hedging losses if NYMEX natural gas and oil prices spike on the date options settle, our oil and gas production is not currently hedged. By not hedging our production, we may be more adversely affected by declines in natural gas and oil prices than our competitors who engage in hedging arrangements. We do have short term hedges in place for our biodiesel production to cover the period of time from which we purchase the feedstock and produce the biodiesel product. Typically these hedges are in place for less than 30 days and do not provide any long-term protection from volatility.

Our ability to market our natural gas and oil may be impaired by capacity constraints on the gathering systems and pipelines that transport our natural gas and oil.

All of our natural gas and oil is transported through gathering systems and pipelines, which we do not own. Transportation capacity on gathering systems and pipelines is occasionally limited and at times unavailable due to repairs or improvements being made to these facilities or due to capacity being utilized by other natural gas or oil shippers that may have priority transportation agreements. If the gathering systems or our transportation capacity is materially restricted or is unavailable in the future, our ability to market our natural gas or oil could be impaired and cash flow from the affected properties could be reduced, which could have a material adverse effect on our financial condition and results of operations.

We have no conclusive assurance of title to our oil and gas leased interests.

Our practice in acquiring exploration leases or undivided interests in natural gas and oil leases is to not incur the expense of retaining title lawyers to examine the title to the mineral interest prior to executing the lease. Instead, we rely upon the judgment of third party land men to perform the field work in examining records in the appropriate governmental, county or parish clerk’s office before leasing a specific mineral interest. This practice is widely followed in the industry. Prior to the drilling of an exploration well the operator of the well will typically obtain a preliminary title review of the drill site lease and/or spacing unit within which the proposed well is to be drilled to identify any obvious deficiencies in title to the well and, if there are deficiencies, to identify measures necessary to cure those defects to the extent reasonably possible. We have no assurance, however, that any such deficiencies have been cured by the operator of any such wells. It does happen, from time to time, that the examination made by title lawyers reveals that the lease or leases are invalid, having been purchased in error from a person who is not the rightful owner of the mineral interest desired. In these circumstances, we may not be able to proceed with our exploration and development of the lease site or may incur costs to remedy a defect. It may also happen, from time to time, that the operator may elect to proceed with a well despite defects to the title identified in the preliminary title opinion.

 

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Competition in the energy industry is intense, and we are smaller and have a more limited operating history than most of our competitors.

We compete with a broad range of energy companies in our activities. We also compete for the equipment and labor required to operate and to develop these properties. Most of our competitors have substantially greater financial resources than we do. These competitors may be able to pay more for exploratory prospects and productive natural gas and oil properties. Further, they may be able to evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to explore for natural gas and oil and to acquire additional properties in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. In addition, most of our competitors have been operating for a much longer time than we have and have substantially larger staffs. We may not be able to compete effectively with these companies or in such a highly competitive environment.

We are subject to complex laws and regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business.

Our operations are subject to numerous laws and regulations governing the operation and maintenance of our facilities and the discharge of materials into the environment. Failure to comply with such rules and regulations could result in substantial penalties and have an adverse effect on us. These laws and regulations may:

 

   

Require that we obtain permits before commencing drilling.

 

   

Restrict the substances that can be released into the environment in connection with drilling and production activities.

 

   

Limit or prohibit drilling activities on protected areas, such as wetlands or wilderness areas.

 

   

Require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells.

Under these laws and regulations, we could be liable for personal injury and clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. We maintain only limited insurance coverage for sudden and accidental environmental damages. Accordingly, we may be subject to liability, or we may be required to cease production from properties in the event of environmental damages. These laws and regulations have been changed frequently in the past. In general, these changes have imposed more stringent requirements that increase operating costs or require capital expenditures in order to remain in compliance. It is also possible that unanticipated factual developments could cause us to make environmental expenditures that are significantly different from those we currently expect. Existing laws and regulations could be changed and any such changes could have an adverse effect on our business and results of operations.

We cannot control the activities on properties we do not operate.

Other companies currently operate properties in which we have an interest. As a result, we have a limited ability to exercise influence over operations for these properties or their associated costs. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence operations and associated costs could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities. The success and timing of our drilling and development activities on properties operated by others therefore depend upon a number of factors that are outside of our control, including:

 

   

Timing and amount of capital expenditures.

 

   

The operator’s expertise and financial resources.

 

   

Approval of other participants in drilling wells.

 

   

Selection of technology.

Acquisition prospects are difficult to assess and may pose additional risks to our operations.

We expect to evaluate and, where appropriate, pursue acquisition opportunities on terms our management considers favorable. Acquisition of biodiesel facilities will depend on facility cost versus replacement value, proximity to feedstocks and to retail markets, rail access, operating systems and costs and potential environmental liabilities. We expect to pursue acquisitions that have the potential to increase our biodiesel production and our domestic natural gas and oil reserves. The successful acquisition of natural gas and oil properties requires an assessment of various of the following:

 

   

Recoverable reserves.

 

   

Exploration potential.

 

   

Future natural gas and oil prices.

 

   

Operating costs.

 

   

Potential environmental and other liabilities and other factors.

 

   

Permitting and other environmental authorizations required for our operations.

In connection with such an assessment, we would expect to perform a review of the subject properties that we believe to be generally consistent with industry practices. Nonetheless, the resulting conclusions are necessarily inexact and their accuracy inherently uncertain, and such an assessment may not reveal all existing or potential problems, nor will it necessarily permit a buyer to become sufficiently familiar with the properties to fully assess their merits and deficiencies. Inspections may not always be performed on every platform or well, and structural and environmental problems are not necessarily observable even when an inspection is undertaken.

 

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Future acquisitions could pose additional risks to our operations and financial results, including:

 

   

Problems integrating the purchased operations, personnel or technologies.

 

   

Unanticipated costs.

 

   

Diversion of resources and management attention from our exploration business.

 

   

Entry into regions or markets in which we have limited or no prior experience.

 

   

Potential loss of key employees, particularly those of the acquired organizations.

We do not currently intend to pay dividends on our common stock.

We have never declared or paid a dividend on our common stock and do not expect to do so in the foreseeable future. Our current plan is to retain any future earnings for funding growth, and, therefore, holders of our common stock will not be able to receive a return on their investment unless they sell their shares.

Anti-takeover provisions of our certificate of incorporation, bylaws and Nevada law could adversely affect a potential acquisition by third parties that may ultimately be in the financial interests of our stockholders.

Our certificate of incorporation, bylaws and the Nevada General Corporation Law contain provisions that may discourage unsolicited takeover proposals. These provisions could have the effect of inhibiting fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts, preventing changes in our management or limiting the price that investors may be willing to pay for shares of common stock. These provisions, among other things, authorize the board of directors to:

 

   

Designate the terms of and issue new series of preferred stock.

 

   

Limit the personal liability of directors.

 

   

Limit the persons who may call special meetings of stockholders.

 

   

Prohibit stockholder action by written consent.

 

   

Establish advance notice requirements for nominations for election of the board of directors and for proposing matters to be acted on by stockholders at stockholder meetings.

 

   

Require us to indemnify directors and officers to the fullest extent permitted by applicable law.

 

   

Impose restrictions on business combinations with some interested parties.

Our common stock is thinly traded.

We have approximately 39.8 million shares of common stock outstanding, held by approximately 625 holders of record. Directors, officers and management own or have voting control over approximately 11.8 million shares. Since our common stock is thinly traded, the purchase or sale of relatively small common stock positions may result in disproportionately large increases or decreases in the price of our common stock.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

 

Item 3. Defaults Upon Senior Securities.

Not applicable.

 

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

 

Item 5. Other Information.

Not applicable.

 

Item 6. Exhibits.

 

10.    Purchase and Sale Agreement, dated May 1, 2006 incorporated herein by reference to Form 8 K filed May 5, 2006
31.1    Section 302 Certification of CFO
32.    Section 906 Certification by CFO
101    The following materials from Imperial Petroleum, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statements of Cash Flows; (iv) Condensed Consolidated Statements of Shareholders’ Equity; and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text

 

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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 there unto duly authorized.

 

Imperial Petroleum, Inc.
By:  

/s/ Tim Jones

 

Tim Jones,

Chief Financial Officer

Dated: December 15, 2011

 

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