UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





_______________________________________________________





FORM
10-Q








_______________________________________________________
 
 
 |X|           QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
period ended December 31, 2009
 
 |_|           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 000-51403
 
 BLACKWATER
MIDSTREAM CORP.
 (Exact
name of small business issuer in its charter)
 
 NEVADA
              
              26-2590455(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      Number)
 
 660
LABAUVE DRIVE
 WESTWEGO,
LOUISIANA, 70094
 (Address
of principal executive offices)
 
 TELEPHONE:
(504) 340-3000
 (Issuer's
telephone number)
 
 
 
 Check
whether the issuer (1) 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer |_|
              Accelerated
      filer |_|Non-accelerated
      filer |_|
              Smaller
      reporting company |X|
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes |_|    No
|X|
 
 State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date:
 As of
February 9, 2010, there were 53,708,067 shares of Common Stock, $.001 par value
per share, outstanding.
 
 1
 
 
 PART
I - FINANCIAL INFORMATION
 
 
 
 ITEM 1.
FINANCIAL STATEMENTS
 
 Consolidated
      Balance Sheets (Unaudited)
              3Consolidated
      Statements of Operations (Unaudited)
              4Consolidated
      Statements of Cash Flows (Unaudited)
              5NOTES
      TO UNAUDITED FINANCIAL STATEMENTS
              6
 
 
 
 
 
 
 
 2
 BLACKWATER MIDSTREAM
CORP.
 CONSOLIDATED
BALANCE SHEETS
 (UNAUDITED)
 
 DECEMBER
      31,
                  
                  
                  MARCH
      31,2009
                  
                  
                  2009-
                  
                  
                  
                  -ASSETSCURRENT
      ASSETS:Cash
                  
                  $
                  1,556,959
                  
                  
                  $
                  12,565Restricted
      cash
                  
                  
                  125,884
                  
                  
                  
                  500,260Receivables-trade
      (net of allowance of $0 and $20,680 as of December 31, 2009 and March 31,
      2009, respectively)
                  
                  
                  6,698
                  
                  
                  
                  21,609Receivables-other
                  
                  
                  -
                  
                  
                  
                  181,585Deferred
      financing charges
                  
                  
                  445,756
                  
                  
                  
                  -Prepaid
      expenses and other current assets
                  
                  
                  80,161
                  
                  
                  
                  68,775Total
      current assets
                  
                  
                  2,215,458
                  
                  
                  
                  784,794Investment
      in Safeland Storage, LLC
                  
                  
                  -
                  
                  
                  
                  407,400Property,
      plant, equipment, net
                  
                  
                  7,249,070
                  
                  
                  
                  5,362,702TOTAL
      ASSETS
                  
                  $
                  9,464,528
                  
                  
                  $
                  6,554,896LIABILITIESCURRENT
      LIABILITIES:Accounts
      payable
                  
                  $
                  934,828
                  
                  
                  $
                  644,919Accounts
      payable-related parties
                  
                  
                  13,810
                  
                  
                  
                  27,222Accrued
      liabilities
                  
                  
                  275,172
                  
                  
                  
                  51,652Deferred
      revenue
                  
                  
                  626,684
                  
                  
                  
                  72,834Liabilities-disposal
      of asset
                  
                  
                  965,485
                  
                  
                  
                  1,215,437Current
      portion of long-term liabilities
                  
                  
                  500,000
                  
                  
                  
                  500,000Current
      portion of long-term liabilities-related party loans
                  
                  
                  -
                  
                  
                  
                  236,365Total
      current liabilities
                  
                  $
                  3,315,979
                  
                  
                  
                  2,748,429Long-term
      liabilitiesBank
      loan
                  
                  
                  1,625,000
                  
                  
                  
                  2,000,000Related
      party loans
                  
                  
                  -
                  
                  
                  
                  63,635Related
      party convertible debt subscriptions
                  
                  
                  180,000
                  
                  
                  
                  -Convertible
      debt
                  
                  
                  2,821,033
                  
                  
                  
                  -Total
      long-term liabilities
                  
                  
                  4,626,033
                  
                  
                  
                  2,063,635TOTAL
      LIABILITIES
                  
                  
                  7,942,012
                  
                  
                  
                  4,812,064STOCKHOLDERS'
      EQUITYPreferred
      stock - 20,000,000 "blank check" preferred shares,issuable
      in one or more series, no shares issued and outstanding
                  
                  
                  --
                  
                  
                  
                  --Common
      stock - 200,000,000 shares authorized, $0.001 par value:53,563,557
      and 51,993,024 issued, outstanding at December 31, 2009 and March 31,
      2009, respectively
                  
                  
                  53,564
                  
                  
                  
                  51,993Additional
      paid-in capital
                  
                  
                  8,930,550
                  
                  
                  
                  7,237,576Accumulated
      deficit
                  
                  
                  (7,461,598
                  )
                  
                  
                  (5,546,737
                  )TOTAL
      STOCKHOLDERS' EQUITY
                  
                  
                  1,522,516
                  
                  
                  
                  1,742,832TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  
                  9,464,528
                  
                  
                  $
                  6,554,896
 The
accompanying notes are an intergral part of these unaudited consolidated
financial statements.
 3
  BLACKWATER MIDSTREAM
CORP.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 
 Successor
                  
                  
                  Predecessor
                  
                  
                  Successor
                  
                  
                  PredecessorThree
      Months
                    Ended
                  
                  
                  Three
      Months
                    Ended
                  
                  
                  Nine
      Months
                    Ended
                  
                  
                  Nine
      Months
                    EndedDecember
      31,
                    2009
                  
                  
                  December
      31,
                    2008
                  
                  
                  December
      31,
                    2009
                  
                  
                  December
      31,
                    2008RevenueStorage
                  
                  $
                  973,758
                  
                  
                  $
                  476,697
                  
                  
                  $
                  2,581,652
                  
                  
                  $
                  1,527,030Other
      Services
                  
                  
                  11,542
                  
                  
                  
                  77,024
                  
                  
                  
                  173,163
                  
                  
                  
                  190,267Total
      Revenue
                  
                  
                  985,300
                  
                  
                  
                  553,721
                  
                  
                  
                  2,754,815
                  
                  
                  
                  1,717,297Cost
      of Revenue
                  
                  
                  225,369
                  
                  
                  
                  104,778
                  
                  
                  
                  756,140
                  
                  
                  
                  911,680GROSS
      PROFIT
                  
                  
                  759,931
                  
                  
                  
                  448,943
                  
                  
                  
                  1,998,675
                  
                  
                  
                  805,617OTHER
      OPERATING EXPENSES:Selling,
      general and administrative
                  
                  
                  1,292,059
                  
                  
                  
                  186,044
                  
                  
                  
                  3,776,482
                  
                  
                  
                  347,220Depreciation
                  
                  
                  87,185
                  
                  
                  
                  24,725
                  
                  
                  
                  253,616
                  
                  
                  
                  79,690Total
      other operating expenses
                  
                  
                  1,379,244
                  
                  
                  
                  210,769
                  
                  
                  
                  4,030,098
                  
                  
                  
                  426,910Income
      (loss) from operations
                  
                  
                  (619,313
                  )
                  
                  
                  238,174
                  
                  
                  
                  (2,031,423
                  )
                  
                  
                  378,707Gain
      on insurance settlement
                  
                  
                  131,497
                  
                  
                  
                  -
                  
                  
                  
                  261,991
                  
                  
                  
                  -Interest
      income
                  
                  
                  130
                  
                  
                  
                  -
                  
                  
                  
                  624
                  
                  
                  
                  -Interest
      expenses
                  
                  
                  (79,715
                  )
                  
                  
                  -
                  
                  
                  
                  (146,052
                  )
                  
                  
                  -Income
      (loss)
                  
                  $
                  (567,401
                  )
                  
                  $
                  238,174
                  
                  
                  $
                  (1,914,860
                  )
                  
                  $
                  378,707NET
      LOSS PER COMMON SHARE,BASIC
      AND DILUTED
                  
                  $
                  (0.01
                  )
                  
                  
                  
                  
                  
                  $
                  (0.04
                  )Weighted
      average number of sharesoutstanding:
      basic and diluted
                  
                  
                  52,765,223
                  
                  
                  
                  
                  
                  
                  
                  52,374,549
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
 4
  BLACKWATER MIDSTREAM
CORP.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Successor
                  
                  
                  PredecessorNine
      Months Ended
                  
                  
                  Nine
      Months EndedDecember
      31, 2009
                  
                  
                  December
      31, 2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Income (loss)
                  
                  $
                  (1,914,860
                  )
                  
                  $
                  378,707Adjustments
      to reconcile net income (loss) tonet
      cash provided by operating activities:Depreciation
                  
                  
                  253,616
                  
                  
                  
                  79,690Impairment
      of investment
                  
                  
                  82,400
                  
                  
                  
                  -Stock
      based compensation
                  
                  
                  1,371,543
                  
                  
                  
                  -Stock
      issued with debt
                  
                  
                  120,000Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  196,497
                  
                  
                  
                  -Prepaid
      expenses
                  
                  
                  (11,385
                  )
                  
                  
                  -Deferred
      revenue
                  
                  
                  553,850
                  
                  
                  
                  -Accounts
      payable and accruals
                  
                  
                  (149,984
                  )
                  
                  
                  -Net
      cash provided by operating activities
                  
                  
                  501,677
                  
                  
                  
                  458,397CASH
      FLOWS FROM INVESTING ACTIVITIES:Net
      increase in cash from restricted cash
                  
                  
                  374,376
                  
                  
                  
                  -Proceeds
      from investments
                  
                  
                  325,000
                  
                  
                  
                  -Purchase
      of property, plant and equipment
                  
                  
                  (1,739,936
                  )
                  
                  
                  -Net
      cash used in investing activities
                  
                  
                  (1,040,560
                  )
                  
                  
                  -CASH
      FLOWS FROM FINANCING ACTIVITES:Financing
      Fees
                  
                  
                  (242,756
                  )Cash
      repayments to parent
                  
                  
                  -
                  
                  
                  
                  (458,397
                  )Cash
      proceeds from convertible debt investors
                  
                  
                  2,821,033
                  
                  
                  
                  -Cash
      proceeds from convertible debt related party investors
                  
                  
                  180,000Net
      cash payments to related party debt
                  
                  
                  (300,000
                  )
                  
                  
                  -Cash
      payments to bank note
                  
                  
                  (375,000
                  )
                  
                  
                  -Net
      cash provided by (used in) financing activities
                  
                  
                  2,083,277
                  
                  
                  
                  (458,397
                  )NET
      CHANGE IN CASH FOR THE PERIOD
                  
                  
                  1,544,394
                  
                  
                  
                  -CASH
      AT BEGINNING OF PERIOD
                  
                  
                  12,565
                  
                  
                  
                  -CASH
      AT END OF PERIOD
                  
                  $
                  1,556,959
                  
                  
                  $
                  -
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
 
 
 5
 
 BLACKWATER
MIDSTREAM CORP.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
              ORGANIZATION,
      AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 
 ORGANIZATION
 
 We were
incorporated in the State of Nevada, U.S.A., on March 23, 2004. Our fiscal year
end is March 31. On March 18, 2008, we changed our name to Blackwater Midstream
Corp. from Laycor Ventures Corp. On September 9, 2008, we formed Blackwater New
Orleans, L.L.C. (“BNO”) as a wholly-owned subsidiary of the Company, organized
in the State of Louisiana. On December 23, 2008, BNO acquired an existing bulk
liquid storage terminal in Westwego, LA (“the Westwego Terminal”) from NuStar
Terminals Operations Partnership L.P. (“NuStar”.)
 
 Successor
company references herein are referring to consolidated information pertaining
to Blackwater Midstream Corp., the registrant, our wholly-owned subsidiary
Blackwater New Orleans, L.L.C., and to Laycor Ventures Corp.
 
 Predecessor
company references herein relate to NuStar, the former owner and manager of the
Westwego Terminal, and its operations at the Westwego
Terminal.
 
 BASIS
OF PRESENTATION – SUCCESSOR
 
 The
accompanying unaudited consolidated financial statements as of December 31, 2009
included herein have been prepared without an audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with United States generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management of Blackwater Midstream Corp. (the "Company", "us", "our", or "we"),
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included.  These financial
statements should be read in conjunction with the March 31, 2009 audited
financial statements and notes thereto. The balance sheet at March 31, 2009 has
been derived from the audited financial statements at that date, but does not
include all of the information and footnotes required by accepted accounting
principles for complete financial statements.  Certain items in 2008
have been reclassified to conform to the 2009 financial statement presentation
generally accepted in the United States of America.  For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
March 31, 2009.  The results of operations for the three-month and
nine-month periods ended December 31, 2009 are not necessarily indicative of the
results that may be expected for the year.
 
 BASIS OF
PRESENTATION – PREDECESSOR
 
 These
financial statements include the accounts of the Westwego Terminal.
Historically, financial statements had not been prepared for the Westwego
Terminal, as it had no separate legal status of existence. The accompanying
carve-out financial statements have been prepared to present the statements of
financial position of the Westwego Terminal and statements of operations and
cash flows of the Westwego Terminal for inclusion in the Company’s Form 10-Q for
purposes of complying with the rules and regulations of the Securities and
Exchange Commission as required by S-X Rule 8-02. These statements include only
those assets, liabilities and related operations of the Westwego Terminal as
historically incurred by the Westwego Terminal and exclude all other assets,
liabilities and operations of NuStar. The accompanying carve-out financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America using Westwego Terminal-specific
information where available and allocations and estimates where data was not
maintained on a Westwego Terminal-specific basis within its books and
records.  Allocations were primarily based on a percentage of revenue
adjusted as necessary based on facts and circumstances where a more specific
allocation was deemed more appropriate.   Due to the significant
amount of allocations and estimates used to prepare these carve-out financial
statements, they may not reflect the financial position, cash flows or results
of operations of the Westwego Terminal in the future or what its operations,
cash flows and financial position would have been had the Westwego Terminal been
operating on a stand-alone basis during the periods presented. These financial
statements do not include a carve-out for cash as the operations have
historically been fully funded by NuStar.
   6
 
 REVENUE
RECOGNITION
 
 Revenues
for third-party terminals include storage tank lease fees, whereby a customer
agrees to pay for a certain amount of tank storage over a certain period of
time; and throughput fees, whereby a customer pays a fee based on volumes moving
through the terminal.  At our Westwego Terminal, we can also offer and
provide blending, handling, filtering and certain other ancillary
services.  Revenue from storage tank lease fees are recognized
ratably, which is typically monthly, over the term of the
lease.  Revenue from throughput fees and ancillary fees are recognized
as services are provided to the customer.  For services that are
billed and collected in advance, revenues are deferred until the period in which
the services are provided.
 
 NEW ACCOUNTING
PRONOUNCEMENTS
 
 In June
2009, the Financial Accounting Standards Board (“FASB”) issued an update of
Accounting Standards Codification 105, “Generally Accepted Accounting
Principles” (“ASC 105”) which establishes the FASB Accounting Standards
Codification TM (the “ASC”).  The ASC is the sole source of
authoritative U.S. generally accepted accounting principles (“GAAP”) recognized
by the FASB to be applied by nongovernmental entities.  The ASC
superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered, non-SEC accounting literature not included in the ASC
is no longer authoritative. While the ASC does not change GAAP, it introduces a
new structure that reorganizes the GAAP pronouncements into accounting topics.
All content of the ASC carries the same level of authority.  The ASC
is effective for our financial statements as of September 30, 2009.
 In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” (now ASC
855) which modifies the definition of subsequent events and requires disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date. These requirements became effective for us on June 15,
2009. We evaluated subsequent events through February 9, 2010, which
represents the date our financial statements were issued.
  2.
              STOCK-BASED
      COMPENSATION.
 
 Net
income for the three-month and nine-month periods ended December 31, 2009
included $291,279 and $1,250,836 respectively of stock-based compensation
(restricted shares and stock options) costs for both management and directors;
all of which are included in general and administrative expenses in the
accompanying condensed consolidated statements of operations. As of December 31,
2009, there was approximately $1,073,329 of total unrecognized compensation
costs related to unvested stock-based compensation that is expected to be
recognized over a weighted-average period of approximately two
years.
 
 On April
1, 2009, pursuant to the Company’s 2008 Incentive Plan, the Company granted
2,823,528 shares of stock options with a fair value of $435,274 to four
directors.  These options vested immediately.  The exercise
price for the stock options was based on the Company’s closing stock price on
the date of grant which was $0.17.
 
 The
grant-date fair value for the stock options was estimated using a Black-Scholes
option valuation model which incorporated the following
assumptions.
 Grant-Date
      Fair Value
                $0.17Expected
      Term
                5Expected
      Volatility
                149%Risk-Free
      Interest rate
                1.79Expected
      Dividend Distributions
                N/A
  On
December 7, 2009, pursuant to the Company’s 2009 Non-Employee Directors Stock
Incentive Plan, the Company granted 1,200,000 shares of stock options with a
fair value of approximately $383,631 to three non-employee directors as
follows.  The options vest in three periods: 171,426 options vested
immediately on December 7, 2009, 514,287 options will vest on the date of the
Company’s annual shareholders’ meeting in 2010, and 517,287 options will vest on
the date of the Company’s annual shareholders’ meeting in 2011.  The
exercise price for the stock options was based on the Company’s closing stock
price on the date of grant, which was $0.35 per share.
 
 The
grant-date fair value for the stock options was estimated using a Black-Scholes
option valuation model which incorporated the following
assumptions.
 Grant-Date
      Fair Value
                $0.35Expected
      Term
                5Expected
      Volatility
                148%Risk-Free
      Interest rate
                2.19Expected
      Dividend Distributions
                N/A
  On
December 8, 2009 the Board of Directors granted Director Mathijs van Houweninge
$40,000 in restricted shares, pursuant to the Company’s 2008 Incentive Plan:
60,000 shares were granted as of December 8, 2009 with a share price of $0.32
per share; which vested immediately.  The remaining 61,176 shares were
granted and issued on January 4, 2010 with a share price of $0.34 per share, and
vested immediately upon such grant.
 
 On
December 1, 2009 the Board of Directors granted related parties, Isaac Suder, No
Logo Air, Inc. and Ter Mast Beheer Utrecht, B.V, restricted shares of the
Company’s common stock, 125,000 shares, 93,750 shares and 156,250 shares,
respectively; pursuant to loan agreements between the parties and the Company in
January 2009.  These shares vested immediately and were expensed by
the Company at $0.32 per share to coordinate with other common stock shares
issued and granted by the Company during the January 2009 time
period.
  7
  On
December 8, 2009 the Board of Directors amended all of the restricted share
grants to management wherein, the vesting dates were changed to be January 1,
2012.  This vesting amendment, in effect, increased the number of
periods required to expense these non cash transactions.
 
 3.
              COMMITMENTS
      AND CONTRACTUAL OBLIGATIONS.
 
 The
Company’s 2008 Incentive Plan allows annually, in August, each member of the
Company’s Board of Directors to be awarded shares of restricted common stock or
common stock purchase options as outlined below. The Plan allows directors to
choose one of the following methods of compensation:
 
 A)  Up
to $60,000 in value of shares of the Company’s common stock at the grant date
with immediate vesting, or
 B)  Stock
options equal to double the number of shares of stock equal to $60,000 at the
grant date, with immediate vesting.
 
 As of
August, 2009, and through December 2009, our 2008 Incentive Plan often did not
have adequate shares available to issue or grant shares or options to the Board
of Directors as called for in the Company’s 2008 Incentive Plan; therefore the
Board decided to create a new non-employee directors incentive
plan.
 
 On
December 7, 2009, the Board of Directors of the Company authorized and approved
the 2009 Non-Employee Directors Stock Incentive Plan.  The Plan allows
non-employee directors to receive up to an aggregate amount of stock options,
not to exceed 2,000,000 shares, of the common stock of the Company. The Plan
also establishes a vesting schedule and other terms and
conditions.  The Plan must be ratified by the Company’s
Shareholders.
 
 On
December 8, 2009 the Board of Directors granted Director Mathijs van Houweninge
$40,000 in shares of restricted common stock, pursuant to the Company’s 2008
Incentive Plan: 60,000 shares were granted as of December 8, 2009 with a share
price of $0.32 per share, which vested immediately.  The remaining
61,176 shares were granted and issued on January 4, 2010 with a share price of
$0.34 per share, and vested immediately upon such grant.
 
 On April
29, 2009, the Company entered into a one year supplemental retainer agreement
with Milling Benson Woodward, L.L.P. (“Milling”) wherein, as of April 1, 2009,
Milling agreed to accept 50% of its monthly retainer fee payable in the common
stock of the Company, with the remainder, payable in cash.  Through
December 2009, Milling had received 375,003 shares of common stock, equal to an
expense amount of $110,418; and is scheduled to receive 83,334 additional common
shares of the Company during the period of January and February
2010.
 
 4.
              PRIVATE
      OFFERING OF CONVERTIBLE DEBT
  The
Company engaged in a private offering of $2,250,000 of convertible debt (the
“September 2009 Offering”) on September 10, 2009.   Upon
termination of the September 2009 Offering, the Company had received
subscription agreements and collected funds in the amount of
$3,001,033.  Related party investors accounted for $180,000 of the
aggregate amount of convertible debt funds collected.
  As a
result of the oversubscription to the September 2009 Offering, the Company
elected to increase the amount of the Offering to $3,001,033, and accepted all
subscriptions received by the Company.  The relevant provisions
contained in the subscription agreement for the September 2009 convertible debt
private offering are as follows:
  The
closing date was October 15, 2009 and the maturity date is October 15,
2011.  Interest will be earned at 10% per annum; to be paid quarterly,
beginning on January 15, 2010.  The principal is to be repaid to
investors upon the maturity date, unless the convertible debt is converted into
restricted shares of the Company’s common stock at a price of $0.50 per
share.  The convertible debt may be converted at any time prior to the
maturity date, upon the option of the investor.
  US GAAP
requires that, if certain criteria are met, companies must bifurcate conversion
options from their host instruments and account for them as free standing
derivative instruments. The Company has evaluated the conversion options on the
convertible debt and has determined that the embedded conversion option should
not be bifurcated. Additionally, the Company analyzed the conversion feature and
determined that the effective conversion price was higher than the market price
at date of issuance; therefore no beneficial conversion feature was
recorded.
  The
Company engaged Falcon Capital to secure and assist with the September 2009
Offering.  As of December 31, 2009, Falcon Capital had earned a cash
fee of $265,103 and a fee payable in 700,000 restricted shares of common stock
of the Company, valued on October 15, 2009 at $0.29 per share which is equal to
$203,000.  These fees are included in the deferred financing costs in
the consolidated balance sheet as of December 31, 2009 and will be amortized
over the term of the convertible notes using the effective interest rate
method.  During the three months ended December 31, 2009, the
Company amortized $51,832 of deferred financing cost.  On
November 30, 2009 the Board of Directors and Falcon Capital agreed to amend the
terms relating to the payment of fees to Falcon for its services rendered in the
September 2009 Offering.  This amendment resulted in Falcon Capital
receiving 700,000 restricted shares of common stock of the Company instead of
approximately 914,000 shares.
  8
 
 5.
              GAIN
      AND LOSS ON DISPOSAL OF ASSETS
 
 On
February 9, 2009 one of our storage tanks developed a minor leak during the
introduction of product (sulfuric acid) into the tank. In connection with
this tank leak, we have incurred certain property damage and environmental
cleanup costs, part of which was covered under our insurance
policies.
 
 We
continue to work closely with our pollution insurance carrier related to
reimbursement for expenses related to this incident.  The table below
represents the costs incurred and insurance proceeds
 
 SuccessorFor the
      nine-month PeriodEnded
      Dec. 31,2009Insurance
      proceeds: clean up & mitigation reimbursement
              
              $
              445,675Cost
      incurred: clean up, mitigation & legal expenses
              
              
              (185,462
              )Property:
      tank disposal
              
              
              --Gain
      on disposal of asset
              
              $
              260,213
 
 During
the three and nine months ended December 31, 2009, we collected $133,833 and
$445,675, respectively, in insurance reimbursements from our pollution insurance
carrier.  During the three and nine months ended December 31, 2009, we
recorded additional expenses of approximately $3,132 and $185,462, respectively,
related to clean up and legal expenses.
 
 6.
              REDEMPTION
      OF SAFELAND STORAGE, L.L.C.
INVESTMENT
 
 On
September 4, 2009, the Company completed the redemption of its seven percent
(7%) interest in Safeland Storage, L.L.C  (“Safeland”), represented by
70,000 Class A units of Safeland membership interest.
 
 The
Company received $325,000 for its 7% interest in Safeland, resulting in a loss
of $82,400 for the three months ended September 30, 2009. In addition, the
Company recorded an impairment charge of $1,092,600 during the year ended March
31, 2009.
 
 7.
              SUBSEQUENT
      EVENTS
  Private Offering. On January
17, 2010 the Company commenced a private offering of $1,650,000 of convertible
debt (the “January 2010 Offering”).  As of February 9, 2010, the
Company had received subscription agreements and collected funds in the amount
of $585,000 related to the January 2010 Offering.
  The
relevant provisions contained in the subscription agreement for the January 2010
convertible debt private offering are as follows:
  The
closing date is March 31, 2010 and the maturity date is March 31,
2012.  Interest will be earned at 10% per annum; to be paid quarterly,
beginning on June 30, 2010.  The principal is to be repaid to
investors upon the maturity date, unless the convertible debt is converted into
restricted shares of the Company’s common stock at a price of $0.50 per
share.  The convertible debt may be converted at any time prior to the
maturity date, upon the option of the investor.
  US GAAP
requires that, if certain criteria are met, companies must bifurcate conversion
options from their host instruments and account for them as free standing
derivative instruments. The Company has evaluated the conversion options on the
convertible debt and has determined that the embedded conversion option should
not be bifurcated. Additionally, the Company analyzed the conversion feature and
determined that the effective conversion price was higher than the market price
at date of issuance; therefore no beneficial conversion feature was
recorded.
  The
Company engaged Falcon Capital to secure and assist with the January 2010
Offering.  As of February 9, 2010, Falcon Capital had earned a cash
fee of $58,500 and a fee payable of approximately 167,000 restricted shares of
common stock of the Company, to be valued on March 31, 2010 at the closing value
of the Company’s stock.
  The
acceptance and closing of this private offering is dependent upon the Company
closing a major terminal acquisition.
 
 9
 
 ITEM 2.   
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
 
 Forward-looking
Statements
 
 THE
FOLLOWING DISCUSSION OF THE RESULTS OF OUR OPERATIONS AND FINANCIAL CONDITION
SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES
THERETO INCLUDED ELSEWHERE IN THIS REPORT.
 
 This
section of this report includes a number of forward-looking statements that
reflect Blackwater Midstream Corp.'s (the "Company") current views with respect
to future events and financial performance. Forward-looking statements are often
identified by words like: "believe," "expect," "estimate," "anticipate,"
"intend," "project" and similar expressions, or words which, by their nature,
refer to future events. You should not place undue certainty on these
forward-looking statements, which apply only as of the date of this report.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or
our predictions.
 
 The
following discussion provides an analysis of the results of our operations, an
overview of our liquidity and capital resources and other items related to our
business.  The following discussion and analysis should be read in
conjunction with our unaudited consolidated financial statements and related
notes included in this Quarterly Report on Form 10-Q and our audited financial
statements and notes included in our Annual Report on Form 10-K as of and for
the year ended March 31, 2009.
 
 Overview
of Company and its Operations
 
 Successor
company references herein are referring to consolidated information pertaining
to the Company (formerly Laycor Ventures Corp.), the registrant, our wholly
owned subsidiary Blackwater New Orleans, L.L.C. and to Laycor Ventures
Corp.
 
 Predecessor
company references herein are referring to NuStar Terminals Operations
Partnership L.P. (“NuStar”), the former owner and manager of the storage
terminal in Westwego, LA, (the “Westwego Terminal”) and their operations at the
Westwego Terminal.
 
 Commencing
in May 2008, we hired new management and changed our business plan to become an
independent developer, manager and acquirer of bulk liquid fuel and chemical
storage facilities. Prior to that time, we were engaged in the exploration of a
single oil and gas property containing two claims relating to mineral rights in
British Columbia, Canada.
 
 General.  We were
incorporated in the State of Nevada on March 23, 2004.  We changed our
name from Laycor Ventures Corp. to Blackwater Midstream Corp. on March 18, 2008
and on March 21, 2008, a change in the ownership and management control of the
Company occurred.  At that time, we changed our business objective to
become an independent developer and manager of third-party fuel, agricultural
and chemical bulk liquid storage terminals. Commencing in May 2008 we hired new
management and appointed a new board of directors.
 
 Westwego Terminal Operations.
  On September 9, 2008, we formed Blackwater New Orleans, L.L.C.
(“BNO”), a Louisiana limited liability company, as a wholly owned subsidiary of
the Company, to acquire the Westwego Terminal.
 
 The
purchase price for the Westwego Terminal was $4,800,000, subject to certain
adjustments for prepaid third-party fees, adjustment to inventory, and NuStar’s
transaction-related expenses. At purchase, the Westwego Terminal had an
approximate leasable capacity of 752,000 barrels.
 
 As of
December 31, 2009 our asset portfolio and operations consisted of the Westwego
Terminal.  The above-the-ground storage tanks at the Westwego Terminal
range in size from approximately a 5,000 barrel capacity to tanks with over a
100,000 barrel capacity.  Our operations support many different
commercial customers, including refiners and chemical manufacturers. The
diversity of our customer base, lends to the potential diversity of the products
customers may want stored in the Westwego Terminal.  The products will
however generally fall into the three broad categories: petroleum, chemical and
agricultural.
 
 Our
income is derived from tank leasing, throughput charges for receipt and delivery
options and other services requested by our customers.  The terms of
our storage leasing contracts range from month-to-month, to multiple years, with
renewal options. Cash generated from the operations at the Westwego Terminal is
our primary source of liquidity for funding debt service, maintenance, and
small-scale potential capital expenditures.  Based on long-term
contracts, we would seek debt financing to fund larger-scale capital
expenditures.
 
 At the
Westwego Terminal, we generally receive our customer’s liquid product by river
barge at our Mississippi River barge dock.  The product is transferred
from barge to the leased storage tank via the terminal’s internal pipeline
apparatus.  The customer’s product is removed from storage at our
terminal by truck, railcar and/or by barge.  The length of time that
the customer’s product is held in storage without transfer varies depending upon
the customer’s needs.
  10
 As of
December 31, 2009 we had leased approximately 559,200 barrels of storage, for a
storage utilization rate of approximately 74%.  The products currently
stored at the Westwego Terminal are lubricating oils, 50% grade caustic and
sulfuric acid.  Our utilization rate is expected to increase to more
than 79% by the end of April 2010 due to recently signed agreements for
additional long-term storage.  This expected utilization rate of
approximately 79% is considering the increase in storage tank capacity of
approximately 150,000 barrels currently under construction.
 
 Growth of our Business. The
importance of bulk terminal facilities in the refined product and chemical
manufacturing segments has grown significantly over the past decade as the
nation’s product supply patterns have become increasingly more complex. Bulk
liquid terminals allow producers to operate their refineries and manufacturing
plants more efficiently by providing capacity to level out both increases and
decreases in product demand.  In addition, bulk liquid terminals
provide a more efficient supply chain by storing the product either closer to
the production or consumption locations.
 
 A
December 24, 2009 article in The Financial Times, “Storage tank owners gain as
oil demand dips” reported storage terminal industry leaders speaking about the
world’s current increased demand and increase storage rates for independent tank
storage due to the world’s glut of oil and “new environmental rules that require
oil products to be blended with biofuels, multiplying the number of separate
tanks necessary to serve customers.”
 
 Additionally,
chemical commodity prices have fallen, prompting traders to buy and
hold.  The Company attributes some of it increased utilization to this
effect and expects these opportunities to continue in the near
future.
 
 Our
current business model is to continue to increase the utilization rate of the
existing storage tanks at the Westwego Terminal and to construct additional
storage tanks at that site as needed.  In July 2009, we announced our
plans to add up to 120,000 barrels of new capacity on existing tank foundations.
In September 2009, we updated these plans from 120,000 barrels to 150,000
barrels based on signing a five-year storage contract.  Current
construction plans call for two of the 50,000 barrel steel tanks to be erected
and ready for leasing during the first quarter of 2010 and the third 50,000
barrel steel tank to be erected and ready for leasing by the end of the second
quarter of 2010.  We are also in the permitting and engineering stage
of constructing a new Mississippi River ship dock, with scheduled completion by
the end of the second quarter of 2010.  The addition of the
Mississippi River ship dock to our Westwego Terminal facilities will greatly
increase our potential for servicing a larger range and number of customers and
their products.
 
 Additionally,
we plan to pursue the acquisition of other underachieving, underutilized storage
terminals through asset purchases and management agreements. We believe the
considerable experience of the Company’s management team will be a key factor in
transitioning underperforming terminals into viable profit centers. We expect
these acquisitions to provide immediate accretive results to the Company’s
operations, and will also allow us to serve the specific storage needs of our
customers at our various terminals.
 
 As per
our acquisition plans, on January 28, 2010, we signed and executed a Letter of
Interest (“LOI”) with a major terminal facility owner (the “Seller”) to
negotiate and execute a definitive purchase and sale agreement (“PSA”) to
acquire one of their terminal assets (the “Terminal”) in the southeastern area
of the United States for $1,800,000 (the “Purchase Price). The Terminal has a
current storage capacity of approximately 160,000 barrels, available acreage for
expansion and access for ocean vessels, inland barges, railcars and
trucks.  The Seller does not have any existing customers or storage
contracts for the Terminal.  Upon execution of the LOI, we remitted to
the Seller a $75,000 payment (the “Deposit), which will be credited toward the
Purchase Price at closing.  In the event the acquisition of the
Terminal is not consummated for any reason (other than due to the Seller’s
breach of the LOI) the Seller would retain the Deposit.
 
 The
Company and the Seller will use their reasonable efforts to negotiate and arrive
at a mutually acceptable PSA as soon as is commercially practicable, but not
later than February 28, 2010 and close the transaction as soon as commercially
practicable thereafter, but not later than March 31, 2010.
 
  11
 Results
of Operations
 
 For
the Three-Month and Nine-Month Periods Ended December 31, 2009 and December 31,
2008.
 
 We became
an operational entity when we acquired the Westwego Terminal on December 23,
2008.  Prior to this date, the Westwego Terminal was owned and
operated by the predecessor company.
 
 Revenues-Revenues
from storage terminal facilities are derived from two mains areas of operation:
recurring contractual storage tank lease fees and monthly ancillary services.
The following is a discussion about each.
 
 Revenues-Storage
Leases. The Company’s storage tank revenues for the three-month period
ended December 31, 2009 totaled approximately $974,000; averaging approximately
$325,000 per month.  This is an approximate 7.5% increase from the
previous three-month period average of approximately $302,000.  This
rise is attributable to an increase in the number of tanks and barrels leased to
one of the Westwego Terminal’s customers during the last quarter.  The
Company’s storage tank revenues for the three-month period ended December 31,
2009 is approximately 104% higher than the predecessor’s storage tank revenues
for the three-month period ended December 31, 2008.
 
 During
the three-month period ended December 31, 2008 the predecessor’s storage tank
revenues totaled approximately $477,000, averaging approximately $159,000 per
month.
 
 The
Company’s storage tank revenues for the nine-month period ended December 31,
2009 totaled approximately $2,582,000; averaging approximately $287,000 per
month.  This is approximately a 7% increase from the previous
six-month period average of approximately $268,000.  This rise is also
attributable to an increase in the number of tanks and barrels leased to one of
the Westwego Terminal’s customers during the last quarter.  The
successor’s storage tank revenues for the nine-month period ended December 31,
2009 is approximately 69% higher than the predecessor’s storage tank revenues
for the nine-month period ended December 2008.
 
 During
the nine-month period ended December 31, 2008 the predecessor’s storage tank
revenues totaled approximately $1,527,000, averaging approximately $170,000 per
month.
 
 Management
monitors the utilization rate of the leasable storage tanks at the Westwego
Terminal each month.  At the commencement of the Company’s operations
at the Westwego Terminal in December 2008, the storage tank utilization rate was
38%.  As of December 31, 2009, the storage tank utilization rate was
approximately 74%.  See the table below for the month-to-month
utilization percentage.  Management attributes this approximate 95%
increase in the utilization rate to aggressive marketing of the Westwego
Terminal, its desirable location as a distribution hub from the Port of New
Orleans, the services offered, storage capacity, and to management’s industry
associations.
  Dec 2009
= 74.0%
 Nov 2009
= 73.3%
 Oct 2009
= 71.8%
 Sep 2009
= 71.8%
 Aug 2009
= 71.8%
 Jul   2009  =
65.6%
 Jun
2009  = 56.4%
 May
2009  = 55.9%
 Apr
2009  = 56.9%
 Mar
2009  = 57.8%
 Feb
2009  = 57.8%
 Jan
2009  = 57.8%
 Dec
2008  = 38.0%
 
 Revenues-Ancillary
Services. Ancillary revenues are earned based on a customer’s particular
needs; and, therefore, by their nature fluctuate from month to
month.  The Company’s ancillary revenues for the three-month period
ended December 31, 2009 totaled approximately $11,500 or approximately 85% less
than the predecessor’s ancillary revenues for period ended December 31,
2009.  The predecessor’s ancillary revenues during the three-month
period ended December 31, 2008 totaled approximately $77,000.
 
 The
Company’s ancillary revenues for the nine-month period ended December 31, 2009
totaled approximately $173,000 or approximately 9% less than the predecessor’s
ancillary revenues. The predecessor’s ancillary revenues during the nine-month
period ended December 31, 2008 totaled approximately $190,000.
  12
 
 Cost of
Revenues. The Company’s cost of revenues for the three-month period ended
December 31, 2009 totaled approximately $225,000 or 23% of revenues; which is
consistent with our previous operating periods.  While the Company’s
cost of revenues remained stable for this period, the predecessor’s costs of
revenues for the three-month period ended December 31, 2008 decreased to
approximately $105,000 or 19% of revenues.  This is attributable to a
reduction by the Predecessor, during this one period, in their use of outside
services and temporary labor and differences in the method of classifying some
labor related costs.  The predecessor classified all Westwego Terminal
managerial cost to cost of revenues; whereas, the Company distinguishes
managerial labor costs between cost of revenues and administrative expenses.
 
 The
Company’s cost of revenues for the nine-month period ended December 31, 2009
totaled approximately $756,000 or 27% of revenues.  The predecessor’s
costs of revenues for the nine-month period ended December 31, 2008 were
approximately $912,000 or 53% of revenues.
 
 The
Company’s gross profit for the three-month period ended December 31, 2009 was
approximately $760,000 or 77% of revenues as compared to the predecessor’s
three-month period ended December 31, 2008 of approximately $449,000 or 81% of
revenues.
 
 The
Company’s gross profit for the nine-month period ended December 31, 2009 was
approximately $1,999,000 or 73% of revenues as compared to the predecessor’s
nine-month period ended December 31, 2008 of approximately $806,000 or 47% of
revenues.
 
 Selling, General
and Administration Expenses (SG&A). The Company’s consolidated
SG&A expenses of approximately $1,292,000 for the three-month period ended
December 31, 2009 and the expenses of approximately $3,777,000 for the
nine-month period ended December 31, 2009 were significantly higher, by
approximately $1,106,000 and $3,430,000, respectively, than those SG&A
expenses reported for the predecessor for the three-month period ended December
31, 2008 of approximately $186,000, and expenses for the nine-month period ended
December 31, 2008 of approximately $347,000.
 
 The
Company’s SG&A expenses include expenses relate to owning, managing, and
operating our corporate organization and the Westwego Terminal; which includes
executive management salaries, executive management non-cash compensation
(restricted stock grants), director non-cash compensation (restricted stock
grants and stock option grants), expenses related to being a public company and
other professional fees, insurance, impairment on investments and other expenses
that were not allocated or expensed by the predecessor’s parent company to the
terminal’s operations.  The table below outlines these
differences.
 
 For the
                Three-Month
                Period
      EndedDecember 31,
              
              For the
                Nine-Month
                Period
      Ended
                December
      31,2009
              
              2009Successor
              
              SuccessorSelling, General & Administrative
      Expenses:Management
      Salaries
              
              $
              379,969
              
              
              $
              875,906Management
      & Director Share-based Compensation
              
              
              291,279
              
              
              
              1,250,836Professional
      Fees
              
              
              181,132
              
              
              
              698,506Insurance-Business
              
              
              121,405
              
              
              
              285,543Other
      SG&A Expenses
              
              
              318,274
              
              
              
              665,691Total
      SG&A Expenses
              
              $
              1,292,059
              
              
              $
              3,776,482
 
 The
Company’s average monthly SG&A expenses, for both the three-month and
nine-month periods ended December 2009, were relatively unchanged for each
category, when excluding one-time and/or non-recurring expenses.
 
 ü
              Management
      salaries (including payroll burden), excluding a bonus accrual of $132,000
      in the 3rd quarter, averaged approximately $83,000 per
    month.
 ü
              Management
      and director non-cash, share-based compensation, excluding $435,274 for
      director options expensed in the 1st
      quarter, and excluding $65,838 for director options and $19,201 for
      director restricted shares expensed in the 3rd quarter, averaged
      approximately $81,000 per month.
 ü
              Professional
      fees, excluding $100,000 for annual director fees expensed in August 2009,
      averaged approximately $66,500 per
month.
 ü
              Business
      insurance averaged approximately $32,000 per
  month.
 ü
              Other
      SG&A expenses, excluding an investment impairment expense in September
      2009 of $82,400 and a non-cash restricted stock grant to related parties
      of $120,000 in December 2009, averaged approximately $51,000 per
      month.
 
  13
 
 In
summary, the Company’s recurring SG&A expenses are currently averaging
approximately $314,000 per month.  This is compared to the
predecessor’s average SG&A expenses of approximately $39,000 per
month.
 
 Non-Cash
Expenses. Included in the Company’s SG&A expenses are certain
non-cash expenses from share based compensation and from impairment
charges.  For the three-month period and the nine-month period ended
December 31, 2009 these totaled approximately $485,000 and $1,585,000,
respectively.  These are summarized below.
 The
Company’s non-cash SG&A expense for management and director share-based
compensation was $291,279 for the three-month period ended December 31, 2009,
and totaled $1,250,836 for the nine-month period ended December 31,
2009:
 ·
              During
      the period ended June 30, 2009, the Company expensed the August 2008
      director stock option share-based compensation of $435,274; which the
      Company’s Board of Directors approved in January 2009 as per the Company’s
      2008 Incentive Plan.
 ·
              During
      the period ended December 31, 2009, the Company expensed the August 2009
      director stock option share-based compensation of $65,838; which the
      Company’s Board of Directors approved in December 2009 as per the
      Company’s 2009 Non-Employee Directors Incentive
  Plan.
 ·
              During
      the period ended December 31, 2009, the Company expensed the additional
      director restricted share-based compensation of $19,200; which the
      Company’s Board of Directors approved in December 2009 as per the
      Company’s 2008 Incentive Plan.
 ·
              During
      the period April 2009 through December 31, 2009, the Company expensed
      approximately $730,526 for non-vested restricted stock granted to
      management.
 
 The
Company’s non-cash, share-based compensation recorded in SG&A expenses for
legal services to Milling, Benson, Woodward for the period April 2009 through
December 31, 2009 totaled $110,418.
 
 The
Company’s non-cash, share-based compensation recorded in SG&A expenses for
convertible debt financing charges allocated through December 31, 2009 totaled
approximately $20,935.
 
 The
Company’s non-cash, share-based compensation recorded in SG&A expenses for
related party loan financing charges through December 31, 2009 totaled
$120,000.
 
 The
Company’s non-cash charge recorded in SG&A expenses for impairment charges
relating to the redemption of its Safeland Storage investment totaled
$82,400.
 
 Depreciation.
Our consolidated depreciation expense for the three-month period and the nine
month ended December 31, 2009 were approximately $87,000 and $254,000;
respectively. This was approximately three times higher than the predecessor’s
depreciation expense of approximately $25,000 for the three-month period ended
December 31, 2008 and approximately $80,000 for the nine-month period ended
December 31, 2008.  This is mainly due to a step-up in the value of
the property, plant and equipment assets, and changes in Management’s assessment
of the estimated life of the assets, in connection with the acquisition of the
Westwego Terminal.  Additionally, the Company had capitalized
long-term improvements to the Westwego Terminal.
   14
 
 Interest
Expense. We incurred approximately $108,000 in interest for the
three-month period ended December 31, 2009 and approximately $188,000 in
interest for the nine-month period ended December 31, 2009; whereas the
predecessor did not record any interest for either of these
periods.  The following table summarizes the Company’s interest
expense, and capitalized interest incurred during the three-month period ended
December 31, 2009 and the nine-month period ended December 31,
2009.  The bank loan refers to our loan agreement with JPMorgan Chase
Bank as per our acquisition of the Westwego Terminal.  The convertible
debt loan refers to our loan agreements with investors as per our September 2009
Offering. The Company accrued interest as of the date funds were received during
the September 2009 Offering period through December 31, 2009, with the first
quarterly interest payment due on January 15, 2010.  The related party
loan refers to loans obtained by the Company in January 2009 from related
parties.  In December 2009, the Company remitted payments of the
remaining outstanding principal on the related party loans and therefore will
not incur any future interest expense.
 
 For
      the Three-Month Period Ended
                December
      31,
                2009
                Successor
              
              
              For
      the Nine-Month Period Ended
                December
      31, 2009
                SuccessorBank
      Loan Interest
              
              $
              26,801
              
              
              $
              84,637Convertible
      Debt Loan Interest
              
              $
              75,223
              
              
              $
              75,223Related
      Party Loan Interest
              
              $
              4,537
              
              
              $
              21,343Other
      Interest
              
              $
              1,660
              
              
              $
              7,172Total
      Interest incurred
              
              $
              108,221
              
              
              $
              188,375Less
      Interest Capitalized to Construction in Process Projects
              
              $
              (28,506
              )
              
              $
              (42,323
              )Net
      Interest Expense
              
              $
              79,715
              
              
              $
              146,052
 
 Gain and Loss on
Disposal of Asset.  Pertaining to the tank leak incident at the
Westwego terminal in February 2009, we have recorded the amounts paid
from our insurance carriers and the expenses we have incurred as of
December 31, 2009 in the consolidated statement of
operations.
 
 During
the three-month period ended December 31, 2009, we collected $133,833 in
pollution insurance expense reimbursements from our pollution insurance
carrier.  In October 2009 we collected $250,000 we had previously
recorded, as of September 30, 2009, as a receivable from a property insurance
settlement, due from our property insurance carrier.  During the
three-month period ended December 31, 2009, we recorded additional expenses
incurred of approximately $3,132 and we recorded $185,462 for the nine-month
period ended December 2009.  During the three-month and nine-month
period ended December 31, 2008, the predecessor had no such
activities.  The table below summarizes amounts related to this
incident.
 
 We are
continuing to work closely with our pollution insurance carrier and have
retained legal advice to obtain reimbursement for expenses related to this
incident.  We have not recorded any contingent reimbursement income in
our consolidated statement of operations for the period ended December 31,
2009.
 
 Successor
                For the
      Nine-Month Period
              
              
              Successor
                For the period
              
              Predecessor
                For
      the periodEnded
      Dec. 31,
              
              
              Ended March
      31,
              
              Ended
      Dec. 31,2009
              
              
              2009
              
              2008Pollution
      & Property Insurance: Clean up & mitigation
      reimbursement, excluding deductibles equaling
$275,000
              
              $
              445,675
              
              
              $
              181,585
              
              
              $
              --Pollution:
      Clean up, mitigation & legal expenses
              
              
              (185,462
              )
              
              
              (1,000,668
              )
              
              
              --Property:
      Tank disposal
              
              
              --
              
              
              
              (83,678
              )
              
              
              --Gain
      (Loss) on Disposal of Asset
              
              $
              260,213
              
              
              $
              (902,761
              )
              
              $
              --
 
 
 15
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As shown
in the accompanying consolidated financial statements for the three-month and
nine-month periods ended December 31, 2009, we have incurred a net loss of
approximately $567,000 and approximately $1,915,000, respectively; and have an
accumulated deficit of approximately $7,461,598 as of December 31,
2009.
 
 As of
December 31, 2009, we have negative working capital of approximately $1,101,000,
resulting in a current asset to current liability ratio of
67%.  Management is diligently working to increase the utilization at
the Westwego Terminal and to reduce expenses to positively affect working
capital.
 
 An
analysis of our working capital for the quarterly periods ended March 2009
through December 2009 does reveal that when the non-recurring Disposal of Asset
liability associated with the Westwego Terminal leak incident in February 2009
is removed from the working capital calculations, the Company’s operations are
producing improving working capital ratios.  To summarize: our working
capital ratios without the liability adjustment and with the liability
adjustment are:
  PERIOD
      ENDING
                RATIO
                ADJUSTED
      RATIODecember
      31, 2009
                67%
                94%September
      30, 2009
                69%
                101%June
      30, 2009
                17%
                24%March
      31, 2009
                29%
                51%
 
 This
improvement is attributable to proceeds from increased utilization and revenues
at the Westwego Terminal, collection and receipt of February 2009 insurance
claim related funds, and proceeds from the September 2009
Offering.  While we have not recorded any contingent reimbursement
receivable in our consolidated balance sheet for the period ended December 31,
2009, we are continuing to work closely with our pollution insurance carrier and
have retained legal advice to obtain reimbursement for expenses related to this
incident.
 
 Our
operation at the Westwego Terminal continues to expand with increasing
utilization and revenues and is generating industry accepted gross
margins.  However, management is aware that our corporate and
administrative overhead is designed and structured to accommodate and manage
multiple storage terminals.  Our pending acquisition of the storage
terminal pursuant to the LOI, when leased, will contribute to our increased cash
flow and liquidity.
 
 The
Company generated positive cash flow of approximately $502,000 from its
operations for the nine-month period ended December 31, 2009.  This
included an increase of approximately $554,000 from prepaid storage lease fees
invoiced and collected as of December 31, 2009.  The predecessor, for
the nine-month period ended December 31, 2008, generated positive cash flows
from operations of approximately $458,000, which was returned to its parent
corporation.
 
 Cash used
in investing activities totaled approximately $1,041,000 for the nine-month
period ended December 31, 2009.  The Company invested approximately
$1,740,000 in modifications, improvements and expansion to its Westwego Terminal
storage tanks and apparatus.
 
 Net cash
flow from financing activities totaled approximately $2,083,000.  This
included proceeds of approximately $3,001,000 from the Company’s September 2009
Offering, use of cash to pre-pay related party loans in the amount of $300,000
and use of cash to make payments on its bank loan in the amount of
$375,000.
 
 As of
December 31, 2009, our total assets were approximately
$9,465,000.   For the nine-month period ended December 31, 2009
our total assets increased approximately $2,910,000. Sixty-five percent of this
increase is attributable to net increases in our property, plant and equipment,
with the remaining thirty-five percent attributable to net increases in cash and
prepaid expenses.
 
 As of
December 31, 2009 our total current liabilities were approximately $3,316,000;
while our long-term liabilities were approximately $4,626,000.  This
is a net increase in total liabilities of approximately $3,130,000 for the
nine-month period ended December 31, 2009.  Our total current
liabilities increased by approximately $568,000 due to an increase of accounts
payable of approximately $250,000 and deferred revenue of approximately
$554,000; as one of our major customers prepaid a year of storage lease fees.
Offsetting the period to period current liabilities was our pre-payment of the
entire outstanding principal on the related party loans in the amount of
approximately $236,000.  Our total long-term liabilities increased by
approximately $2,562,000 due to the addition of convertible debt loans and were
reduced by the pay-off of principal on our bank loan and related party
loans.
 
 At
December 31, 2009, we had cash totaling approximately $1,683,000, of which we
classify $125,884 as restricted cash as per our agreement with JPMorgan
Chase.  As of March 31, 2009 our cash totaled approximately $516,000;
of which $500,260 was restricted as per our agreement with JPMorgan
Chase.
  On
September 15, 2009, the Company made a private offering of $2,250,000 of
convertible debt of the Company.  Upon termination of the offering
period, the Company received Subscription Agreements and collected funds in the
amount $3,001,033.  As a result of the oversubscription to the
September 2009 Offering, the Company elected to increase the amount of the
Offering to $3,001,033, and accept all subscriptions received by the
Company.
  On
January 17, 2010 the Company commenced a private offering of $1,650,000 of
convertible debt (the “January 2010 Offering”).  As of February 9,
2010, the Company had received subscription agreements and collected funds in
the amount of $585,000 related to the January 2010 Offering.
  The
Company intends to use the proceeds of the January 2010 Offering to partially
fund the acquisition of the storage terminal pursuant to the LOI.
  
 16
 ITEM
3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
 
 Not
required for smaller reporting companies.
 
 ITEM
4.   CONTROLS AND PROCEDURES.
 
 (a)  
Evaluation of Disclosure Controls and Procedures.
 
 Disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) are designed to ensure that information required to be disclosed
in our reports filed under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms.
This information is also accumulated and communicated to management, including
our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to
allow timely decisions regarding required disclosure. Our management, under the
supervision and with the participation of our CEO and, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the most recent fiscal quarter reported on herein.
Based upon that evaluation, our CEO and CFO have concluded that our disclosure
controls and procedures were effective as of December 31, 2009.
 
 (b)  
Changes in Internal Control over Financial Reporting.
 
 There
have been no changes in the Company’s  internal controls over
financial reporting that occurred during its fiscal quarter ended December 31,
2009 that have materially affected; or are reasonably likely to materially
affect its internal control over financial reporting.
 
 
 
 17
 
 PART
II. OTHER INFORMATION
 
 ITEM
1.   LEGAL PROCEEDINGS.
 
 None.
 
 ITEM
2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
 
 None.
 
 ITEM
3.   DEFAULTS UPON SENIOR SECURITIES.
 
 None.
 
 ITEM
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
 None.
 
 ITEM
5.   OTHER INFORMATION.
 
 None.
 
 
 18
 
 
 ITEM 6.   EXHIBITS. THE
FOLLOWING DOCUMENTS ARE INCLUDED HEREIN:
 
 EXHIBIT
      NO.
              DOCUMENT
      DESCRIPTION
 
 5.1
              Amendment
      to Credit Agreement with JP Morgan Chase Bank, N.A.5.2
              Credit
      Agreement with JP Morgan Chase Bank, N.A. (1)5.3
              $2,500,000
      term loan with JP Morgan Chase Bank, N.A.(1)5.4
              Collateral
      Mortgage in favor of JP Morgan Chase Bank, N.A. (1)5.5
              Assignment
      of Deposit Account to JP Morgan Chase Bank, N.A. (1)6.1
              Redemption
      Agreement with Safeland Storage, L.L.C. (2)7.1
              Private
      Offering of Convertible Debt-September 2009 Offering
(3)7.2
              Private
      Offering of Convertible Debt Amendment-September 2009 Offering
      (4)8.1
              Press
      Release pursuant to LOI, dated January 28, 2010 (5)31.1
              Certification
      of Principal Executive Officer pursuant to Rule 13a-15(e) and 15d-15(e),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.31.2
              Certification
      of Principal Financial Officer pursuant to Rule 13a-15(e) and 15d-15(e),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.32.1
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
  Officer).32.2
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer).
   (1)
                (2)
                (3)
                (4)
                (5)
              Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on December 31, 2008.
                Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on September 8, 2009.
                Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on October 21, 2009.
                Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on November 18, 2009.
                Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on February 2, 2010.
 
 
 19
 
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized on this 9th day
of February, 2010.
 
 BLACKWATER
      MIDSTREAM CORP.
                
                
                BY:
      /s/ Michael D.
      Suder
                Michael
      D. Suder
                Chief
      Executive Officer
                
                
                BY:
      /s/ Donald St.
      Pierre
                Donald
      St. Pierre
                Chief
      Financial Officer
 
 
 
 20
 
 
 
 
 EXHIBIT
INDEX
 
 
 EXHIBIT
      NO.
              DOCUMENT
      DESCRIPTION
 
 5.1
              Amendment
      to Credit Agreement with JP Morgan Chase Bank, N.A.5.2
              Credit
      Agreement with JP Morgan Chase Bank, N.A. (1)5.3
              $2,500,000
      term loan with JP Morgan Chase Bank, N.A.(1)5.4
              Collateral
      Mortgage in favor of JP Morgan Chase Bank, N.A. (1)5.5
              Assignment
      of Deposit Account to JP Morgan Chase Bank, N.A. (1)6.1
              Redemption
      Agreement with Safeland Storage, L.C.C. (2)7.1
              Private
      Offering of Convertible Debt-September 2009 Offering
(3)7.2
              Private
      Offering of Convertible Debt Amendment-September 2009 Offering
      (4)8.1
              Press
      Release pursuant to LOI, dated January 28, 2010 (5)31.1
              Certification
      of Principal Executive Officer pursuant to Rule 13a-15(e) and 15d-15(e),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.31.2
              Certification
      of Principal Financial Officer pursuant to Rule 13a-15(e) and 15d-15(e),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.32.1
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
  Officer).32.2
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer).
 _______________
 (1)
                (2)
                (3)
                (4)
                (5)
              Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on December 31, 2008.
                Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on September 8, 2009.
                Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on October 21, 2009.
                Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on November 18, 2009.
                Incorporated
      herein by reference to the Current Report on Form 8-K filed with the
      Commission on February 2, 2010.
 
 
 
 21