**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-QSB**

 

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**ý****  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the Quarterly Period EndedSeptember 30, 2005**

 

**or**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission File Number 333-110249**

 

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**Earth Biofuels, Inc.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **71-0915825**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |

 

**3001 Knox Street, Suite 403**

**Dallas, TX 75205**

(Address of principal executive offices, including zip code)

 

**(214) 389-9800**

(Registrant’s telephone number, including area code)

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes ý   No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).  Yes  o  No ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o  No ý

 

As of September 30,2005 there were 24,350,000 shares of the registrant’s common stock outstanding.

 

 

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**EARTH BIOFUELS, INC.**

**BALANCE SHEET**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                               | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                                               | ** ** | ** **                   | ** ** |
| Current Assets                                                                                                                                                                           |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                |       | $                            | 40,257     |   |
| Trade accounts receivable                                                                                                                                                                |       | 62,485                       |       |
| Accounts receivable other                                                                                                                                                                |       | 75,406                       |       |
| Due from related party                                                                                                                                                                   |       | 119,500                      |       |
| Inventory                                                                                                                                                                                |       | 22,210                       |       |
| Total Current Assets                                                                                                                                                                     |       | 319,858                      |       |
| Property and equipment, net                                                                                                                                                              |       | 359,883                      |       |
| Total Assets                                                                                                                                                                             |       | $                            | 679,741    |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                           |       |                         |       |
| Current Liabilities                                                                                                                                                                      |       |                         |       |
| Accounts payable and accrued liabilities                                                                                                                                                 |       | $                            | 269,930    |   |
| Due to related party                                                                                                                                                                     |       | 232,558                      |       |
| Property, sales and payroll taxes payable                                                                                                                                                |       | 27,715                       |       |
| Other current liabilities                                                                                                                                                                |       | 190                          |       |
| Total Current Liabilities                                                                                                                                                                |       | 530,393                      |       |
|                                                                                                                                                                                     |       |                         |       |
| Stockholders’ Equity                                                                                                                                                                |       |                         |       |
| Common stock, $.001 par value; 25,000,000  shares authorized; and 24,350,000 and 3,350,000 shares issued and outstanding  at September 30, 2005 and June 30, 2005 respectively |       | $                            | 24,350     |   |
| Additional paid-in capital                                                                                                                                                               |       | 753,288                      |       |
| Accumulated deficit                                                                                                                                                                      |       | (628,290                     | )          |
| Total Stockholders’ Equity                                                                                                                                                          |       | 149,348                      |       |
| Total Liabilities and Stockholder’s Equity                                                                                                                                          |       | $                            | 679,741    |   |

 

Seeaccompanying notes to financial statements.

 

2

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**EARTH BIOFUELS****, INC.**

**STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                      | ** ** | **Three Months  Ended**      | ** ** | **Nine Months  Ended**       | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                      | ** ** | **September 30,  2005** | ** ** | **September 30,  2005** | ** ** |
| Total revenue                                                   |       | 392,564                      |       | 1,065,087                    |       |
|                                                            |       |                         |       |                         |       |
| Cost of sales                                                   |       | 403,921                      |       | 958,822                      |       |
| Gross profit (loss)                                             |       | (11,357                      | )          | 106,265                      |       |
|                                                            |       |                         |       |                         |       |
| Depreciation                                                    |       | 877                          |       | 2,167                        |       |
| Selling, general and administrative                             |       | 454,417                      |       | 683,381                      |       |
| Loss from operations before income taxes  and minority interest |       | (466,651                     | )          | (579,283                     | )          |
| Income taxes                                                    |       | —                       |       | —                       |       |
| Minority interest                                               |       | 3,362                        |       | 3,362                        |       |
| Net Loss                                                        |       | $                            | (463,289   | )                            | $          | (575,921 | ) |
|                                                            |       |                         |       |                         |       |
| Income (loss) per common share:                                 | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| ** **                                                      | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Basic and diluted:                                              |       |                         |       |                         |       |
| Net loss                                                        |       | $                            | (.06       | )                            | $          | (.12 | ) |
| ** **                                                      | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Weighted average shares:                                        | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Basic and diluted                                               |       | 7,458,696                    |       | 4,734,615                    |       |

 

See accompanying notes to financial statements.

 

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**EARTH BIOFUELS****, INC.**

**STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                | ** ** | **Nine Months Ended  September, 30, 2005** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
|                                      |       |                                       |       |
| **Cash Flows from Operating Activities:** |       |                                       |       |
| Net loss                                  |       | $                                          | (575,921   | ) |
| Non-cash items included in net loss:      |       |                                       |       |
| Depreciation                              |       | 2167                                       |       |
| Minority interest                         |       | (3,362                                     | )          |
| Changes in assets and liabilities:        |       |                                       |       |
| Decrease (increase) in:                   |       |                                       |       |
| Accounts receivable                       |       | (137,891                                   | )          |
| Due from related party                    |       | (119,500                                   | )          |
| Inventory                                 |       | 3,962                                      |       |
| Increase (decrease) in:                   |       |                                       |       |
| Accounts payable and accrued expenses     |       | 108,237                                    |       |
| Due to related party                      |       | 232,558                                    |       |
| Property, sales and payroll taxes payable |       | 27,194                                     |       |
| Other current liabilities                 |       | 190                                        |       |
| Net cash used in operating activities     |       | (462,366                                   | )          |
|                                      |       |                                       |       |
| **Cash Flows From Investing Activities:** |       |                                       |       |
| Purchase of property, plant and equipment |       | (229,280                                   | )          |
| Net cash used in investing activities     |       | (229,280                                   | )          |
|                                      |       |                                       |       |
| **Cash Flows From Financing Activities:** |       |                                       |       |
| Proceeds from sales of common stock       |       | 461,000                                    |       |
| Proceeds from member investment           |       | 260,000                                    |       |
| Net cash provided by financing activities |       | 721,000                                    |       |
|                                      |       |                                       |       |
| Net increase in cash                      |       | 29,354                                     |       |
|                                      |       |                                       |       |
| Cash and cash equivalents                 |       |                                       |       |
| Beginning of year                         |       | 10,903                                     |       |
| End of period                             |       | $                                          | 40,257     |   |
| ** **                                |       |                                       |       |
| Supplemental Cash From Information        |       |                                       |       |
| Cash paid for income taxes                |       | —                                     |       |
| Cash paid for interest                    |       | —                                     |       |

 

See accompanying notes to financial statements.

 

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**1.  NATURE OFOPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Companyand Purpose – Earth Biofuels, Inc., (formerly Meadows Springs, Inc.) (theCompany) was incorporated in the state of Nevada on July 15, 2002.  On September 13, 2005 the Company issued20,078,000 shares of common stock to Apollo Resources International, Inc.,a Utah corporation, in exchange for 80% of the outstanding shares of commonstock of Earth Biofuels, Inc., a Mississippi corporation. On October 7,2005 Earth Biofuels, Inc. (the Mississippi company) changed its name to EarthBiofuels Operating, Inc. Effective November 14, 2005, the domicile of the Companywas moved to Delaware by means of a merger of the Company with and into EarthBiofuels, Inc., a Delaware corporation.

 

Theprincipal business of the Company is the production, marketing, anddistribution of alternative fuels, with an emphasis on biodiesel fuel. TheCompany benefits from federal and local tax credits for producers of biodieselfuel such as those outlined the U.S. Energy Bill of 2005 and Oklahoma House BillNo. 1398. The Company also benefits from government subsidies forproducers of biodiesel fuel.

 

Theprimary operating subsidiary, Earth Biofuels Operating, Inc., owns andoperates a biodiesel refining/production facility located in Meridian,Mississippi. The subsidiary sells the biodiesel product through wholesaledistributors, as well as through direct retail sales at its leased servicestation in Jackson, Mississippi and its leased truck stop in Grenada,Mississippi (See Subsequent Events – Item 8). The biodiesel fuel product soldto retail customers is a 20% biodiesel blend with 80% regular diesel, known asB20.

 

EarthBiofuels Operating, Inc. wholly owns a subsidiary, Durant Biofuels, LLC,which is in the process of building a 10 million gallons per year biodieselmanufacturing plant on approximately 4 acres of land in an industrial park inDurant, Oklahoma.

 

Basisof Presentation - The unaudited condensed consolidated financial statements includedherein, include the accounts of the Company and its subsidiaries. Allsignificant inter-company transactions and balances have been eliminated. The acquisitionof an 80% interest in Earth Biofuels Operating, Inc., on September 13,2005 was recorded as a reverse acquisition using the purchase method ofbusiness combinations.  In a reverseacquisition all accounting history becomes that of the accountingacquirer.  Therefore, all historicalinformation prior to the acquisition is that of Earth Biofuels Operating, Inc.Since Earth Biofuels Operating, Inc. was formed in, but had no activity in,September, 2004, there are no comparative financial statements presented forthe three and nine month periods ended September 30, 2005.

 

Theunaudited condensed consolidated financial statements included herein have beenprepared without audit pursuant to the rules and regulations of the Securitiesand Exchange Commission.  In management’sopinion, these financial statements include all adjustments necessary topresent fairly the financial position of the Company at September 30, 2005and the results of operations and changes in cash flows for the three and ninemonth periods ended September 30, 2005. The accounting and reportingpolicies of the Company conform to generally accepted accounting principles andreflect practices appropriate for its industry. These policies are summarized below.

 

Minorityinterest – Minority interest was recorded for the 20% interest of Earth BiofuelsOperating, Inc. on the date of the reverse acquisition.  At September 30, 2005 the cumulative lossesapplicable to minority interest shareholders exceed the minority's interest inEarth Biofuels Operating, Inc.  As aresult the excess loss was charged against the majority interest.

 

Management’sEstimates and Assumptions – The presentation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates. The Company reviews all significant estimates affectingthe financial statements on a recurring basis and records the effect of anynecessary adjustments prior to their issuance.

 

Cashand Cash Equivalents—Cash equivalents consist of highly liquid investments withoriginal maturities of three months or less.

 

AccountsReceivable— At September 30, 2005, the amounts carried in accountsreceivable were considered by management to be collectible in full.

 

5

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AccountsReceivable Other— The Company has filed Federal excise tax returns, claimingrefundable biodiesel mixture tax credits. Such credits, recorded reductions ofcost of goods sold in the accompanying financial statements, amounts to $75,406and $26,762 for the nine months and three months ended September 30, 2005respectively. As of September 30, 2005, $75,406 is included in accounts receivableother for federal tax subsidies.

 

Concentrationof Credit Risk— Financial instruments which potentially subject the Company toconcentrations of credit risk consist principally of accounts receivable andtemporary cash investments.  Exposure tolosses on receivables is principally dependent on each customer’s financialcondition.  The Company controls itsexposure to credit risk through credit approvals, credit limits and monitoringprocedures and establishes allowances for anticipated losses. The Companyplaces its temporary cash investments with quality financial institutions and,by policy, limits the amount of credit exposure with any one financialinstrument.

 

FairMarket Value of Financial Instruments— The estimated fair value of cash andcash equivalents, accounts receivable, investments in marketable equitysecurities, accounts payable, accrued expenses and other liabilitiesapproximate their carrying amounts in the financial statements.

 

Inventory—Inventories of fuel and merchandise manufactured and purchased for sale arestated at the lower of cost (on a first-in, first-out, moving–average basis) ormarket. Inventory is divided into raw material, work-in-process and finishedgoods as follows:

 
| ** **      | ** ** | **September 30, 2005** | ** ** |
|-----------------|------------|-----------------------------|------------|
| Raw material    |       | $                           | 15,167     |   |
| Work-in-process |       | —                      |       |
| Finished goods  |       | 7,043                       |       |
| Total           |       | $                           | 22,210     |   |

 

StockOptions and Warrants—The Company has no stock option plan and does not have anywarrants that have been authorized or granted at September 30, 2005.

 

Revenue– The geographic location of Earth Biofuels, Inc.’s customer base isprimarily in the Jackson, Mississippi market, although management intends toexpand operations throughout the State of Mississippi, and the Southeastern andSouthwestern United States. Sales are recorded at net realizable value, net ofallowances for returns, upon shipment of products to customers.

 

6

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EarningsPer Share— Basic net income per share is computed by dividing net incomeavailable to common shareholders (numerator) by the weighted average number ofcommon shares outstanding during the year (denominator).  Diluted net income per share is computedusing the weighted average number of common shares outstanding during the year.

 

IncomeTaxes— The Company utilizes the liability method for accounting for incometaxes.  The liability method accounts fordeferred income taxes by applying enacted statutory rates in effect at thebalance sheet date to differences between financial statement amounts and taxbases of assets and liabilities.  Theresulting deferred income tax liabilities are adjusted to reflect changes intax laws and rates.  Temporarydifferences consist of the difference in financial statement and income taxbases for accounting for start-up and organizational costs.  Deferred income taxes related to an asset orliability are classified as current or non-current based on the classificationof the related asset or liability. Deferred tax assets related to losses have been reduced by acorresponding valuation allowance at September 30, 2005, and accordingly,no income tax expense or benefit has been recognized. Net operating losscarryforwards approximating $580,000 expire in the year 2015.

 

**2.GOING CONCERN AND MANAGEMENT PLANS**

 

Forthe nine months ended September 30, 2005, the Company recorded a net lossof ($575,921). The Company’s continued existence is dependent upon its abilityto take advantage of acquisition opportunities, raise capital through privatesecurities offerings, secure collateralized debt financing and use thesesources of capital to grow and enhance its biodiesel production anddistribution operations. The Company has also continued to raise capitalthrough a variety of private securities offerings of its common stock.

 

Managementis focusing on expanding and improving its biodiesel production anddistribution operations. Through acquisition, organic growth and funding viacollateralized loans and private placement offerings, the Company plans tocontinue to increase the profitability of its operations necessary to supportoperating requirements.

 

Therecan be no assurance that any of management’s plans as described above will besuccessfully implemented or that the Company will continue as a going concern.

 

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TheCompany’s need to raise additional equity or debt financing and the Company’sability to generate cash flow from operations sufficient to capitalize onexpansion opportunities as they become available will depend on its futureperformance and the Company’s ability to successfully raise capital andimplement business and growth strategies. The Company’s performance will alsobe affected by prevailing economic conditions. Many of these factors are beyondthe Company’s control. If future cash flows and capital resources areinsufficient to meet the Company’s commitments, the Company may be forced toreduce or delay activities and capital expenditures, obtain additional equitycapital or debt financing. In the event that the Company is unable to do so,the Company may be left without sufficient liquidity and it may not be able tocontinue operations.

 

**3.PROPERTY AND EQUIPMENT**

 

TheCompany records property and equipment at cost less accumulated depreciation.Depreciation is provided using the straight-line method over the useful livesof the assets for financial reporting purposes. Expenditures for maintenanceand repairs are charged to expense. The Company records impairment losses onlong-lived assets used in operations when events and circumstances indicatethat the assets might be impaired and the undiscounted cash flows estimated tobe generated by those assets are less than the carrying amounts of thoseassets.

 

Depreciationis calculated on a straight-line basis over the estimated useful lives of thevarious assets as follows:

 
| Buildings  and improvements |   | 7-30 |   | Years |   |
|-----------------------------|--------|------|--------|-------|--------|
| Equipment  and Furnishings  |   | 5-7  |   | Years |   |

 

Property,plant and equipment consist of the following:

 
| ** **                     | ** ** | **September 30, 2005** | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| Land                           |       | $                           | 212,141    |   |
| Leasehold  Improvements        |       | 3,216                       |       |
| Construction  in progress      |       | 108,062                     |       |
| Equipment  and furnishings     |       | 38,744                      |       |
|                           |       | 362,163                     |       |
| Less  accumulated depreciation |       | (2,280                      | )          |
|                           |       | $                           | 359,883    |   |

 

Depreciationexpense for the three and nine months ended September 30, 2005 was $877and $2,167, respectively.

 

**4.ACQUISITIONS**

 

OnSeptember 13, 2005 the Company issued 20,078,000 shares of common stock toApollo Resources International, Inc., a Utah corporation, in exchange for80% of the outstanding shares of common stock of Earth Biofuels Operating, Inc.,a Mississippi corporation. This transaction was recorded using the purchasemethod of business combinations as a reverse acquisition.

 

**5.EQUITY TRANSACTIONS**

 

TheCompany received additional capital investments from Apollo ResourcesInternational, Inc. of $50,000 in June, 2005, $85,000 in July, 2005 and$125,000 in August, 2005. These investments were recorded as Additional paid incapital.

 

OnSeptember, 13, 2005 the Company issued 20,078,000 shares of common stock topurchase Earth Biofuels Operating, Inc.

 

8

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DuringSeptember, 2005 the Company issued 922,000 shares of its common stock throughprivate placements.  Proceeds of thesesales total $461,000 for the three months ended September 30, 2005.

 

**6.LEASES**

 

EarthBiofuels Operating, Inc. leases a retail fuel center/convenience store inByram, Mississippi under terms of a one-year agreement, beginning November 1,2004 providing for monthly rentals of $3,000. The agreement is renewable, asmutually agreed by both parties.

 

EarthBiofuels Operating, Inc. leases a building in Byram, Mississippi from aShareholder and Director of Earth Biofuels, Inc. under terms of a month tomonth agreement for $3,834 per month.

 

Rentexpense for the three and nine months ended September 30, 2005 amounted to$20,402 and $47,781 respectively.

 

**7.RELATED PARTY TRANSACTIONS**

 

TheCompany at September 30, 2005 had receivables for payments made on behalfof related parties totaling $119,500. These payments were made on behalf ofApollo Resources International, Inc.

 

TheCompany at September 30, 2005 had payables for payments by the relatedparties on behalf of the Company totaling $232,558. These included payments byMAC Partners, LP (“MAC”) of $93,500 for advances to the company and $15,356 forpayment for financial services performed by Richard D. White prior to hisemployment by the Company. MAC has a management services agreement with ApolloResources International, Inc. to provide general administration, humanresources, turnkey office and legal services. Earth Biofuels, Inc. usesthe services of a MAC employee to perform financial analysis withoutcompensation to MAC. In addition, MAC provided the services of Mr. RichardD. White, the Company’s Chief Financial Officer. Effective October 7,2005, Mr. White’s services were no longer provided by MAC and he became anemployee of the Company.

 

Inaddition the Company at September 30, 2005 had payables outstanding toDGMAC, LLC, a limited liability corporation controlled by Dennis McLaughlin,Chairman of the Company, for $70,000 and to R. Bruce Blackwell, director of theCompany and minority owner of Earth Biofuels Operating, Inc., for $53,702.

 

9

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**8.SUBSEQUENT EVENTS**

 

*Reincorporation merger and resultant changes*

 

OnOctober 7, 2005 the Board of Directors approved the following changes:

 

Thereincorporation merger of the Company which was merged with and into EarthBiofuels, Inc., a Delaware corporation formed for such purposes whichresulted in:

 

•                                          a change of domicile of the Company from theState of Nevada to the State of Delaware;

•                                          the change of the corporate name to “EarthBiofuels, Inc.”;

•                                          the issuance of six (6) shares of commonstock of Earth Biofuels, Inc. for one (1) share of common stock (ofthe former Meadows Springs, Inc.) as of the effective date of thereincorporation;

•                                          the adoption of a new Certificate ofIncorporation under the laws of the State of Delaware, pursuant to which the authorizedcapital stock consist of 250,000,000 shares of common stock, par value $0.001per share, and 15,000,000 shares of “blank check” preferred stock, par value$0.001 per share;

•                                          the persons serving as executive officers anddirectors continuing to serve in their same respective positions with EarthBiofuels; and

•                                          the adoption of new By-laws under the laws ofthe State of Delaware.

* *

Thereincorporation was effective November 14, 2005.

* *

*Letter of intent re Gulf Coast*

 

OnOctober 11, 2005 Earth Biofuels, Inc. executed a Letter of Intentwith Gulf Coast Fuels to purchase a fuel storage terminal in Houston, TX. EarthBiofuels intends to utilize the facility for biodiesel fuel storage and salesto both wholesale and retail customers. Definitive agreements are subject todue diligence and final financing approval for the transaction.

 

*Lease of Truck Stop in Grenada, Mississippi*

 

OnOctober 17, 2005 Earth Biofuels Operating, Inc. leased a truck stopin Grenada, Mississippi from RBB Properties, LLC which is controlled by R.Bruce Blackwell, a director of Earth Biofuels, Inc. The lease has a 5 yearterm, effective October 17, 2005 and requires lease payments of $10,000per month. Earth Biofuels Operating, Inc. is responsible for operationsand repair and maintenance of the facility.

 

*Letter of intent re Wing Sail*

 

OnOctober 21, 2005, Earth Biofuels, Inc. executed a Letter of Intent topurchase 100% of the stock of The Wing Sail Company, Inc., dbaDistribution Drive, through a share exchange agreement. Distribution Drive is adistributor of biodiesel fuel and is the only distributor for Willie Nelson’s “BioWillie”biodiesel fuel. Definitive agreements are subject to due diligence and normalclosing conditions.

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Overview

 

Theprincipal business of the Company is the production, marketing, anddistribution of alternative fuels, with an emphasis on biodiesel fuel. TheCompany benefits from federal and local tax credits for producers of biodieselfuel such as those outlined the U.S. Energy Bill of 2005. The Company derivesits revenue primarily from sales of 100% biodiesel (B-100) to fuel wholesalerswho blend it with petroleum diesel and fuel sales and food and beverage salesat the Company’s service station in Byram, Mississippi.

 

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TheCompany is also focused on raising capital through private placements of itscommon stock and securing collateralized debt financing essential to providingthe capital to expand its business segments.

 

CriticalAccounting Policies

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the accompanying financialstatements and related footnotes. Management bases its estimates andassumptions on historical experience, observance of industry trends and variousother sources of information and factors. Actual results could differ fromthese estimates. Critical accounting policies are defined as those that arereflective of significant judgments and uncertainties, and potentially couldresult in materially different results under different assumptions andconditions.

 

RevenueRecognition

 

Thegeographic location of Earth Biofuels, Inc.’s customer base is primarilyin the Jackson, Mississippi market, although management intends to expandoperations throughout the State of Mississippi, and the Southeastern andSouthwestern United States. Sales are recorded at net realizable value, net ofallowances for returns, upon shipment of products to customers.

 

BusinessCombinations

 

Businesscombinations are accounted for using the purchase method. Under the purchase methodthe Company reports the acquired entities’ assets and liabilities at fairmarket value. Any excess of the fair market value of the consideration givenover the fair market value of the net assets acquired is reported as goodwill.If the fair market value of the consideration given is less than the fairmarket value of the net assets acquired, the resulting excess of fair value ofacquired net assets over the cost of the acquired entity is allocated, on a prorata basis, against certain assets acquired in the business combination. If anyexcess over cost remains after reducing certain assets to zero, the remainingexcess is recognized as an extraordinary gain.

 

**RESULTSOF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2005**

 

Sales

 

Netsales for fuel and food and beverage were $392,654 for the quarter ended September 30,2005.  The operations of the Company’sbiodiesel plant in Meridian, Mississippi and its service station/conveniencestore in Jackson, Mississippi were greatly affected by Hurricane Katrina. Thebiodiesel plant was spared major equipment or plant damage, but was shut downfor most of September for cleanup of the fallen trees caused by the storm.Lack of fuel hindered the sales of products from the service station.

 

# **Costof Sales**

# ** **

Cost of sales was $403,921consisting of material costs for biodiesel production and cost of fuel, foodand beverages, net of $26,762 in federal tax subsidies.

 

Selling, General and Administrative Expenses

 

Selling,general and administrative expenses were $434,417 for the quarter ended September 30,2005. These costs reflect $106,036 of payroll related expenses and $143,555 forthe BIO-BIKE marketing program. The balance of operating expenses was primarilyrelated to professional fees for construction management associated with theDurant Biofuels, LLC facility, legal and accounting services, repair andmaintenance and travel.

 

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**RESULTSOF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005**

 

Sales

 

Netsales for fuel and food and beverage were $1,065,087 for the nine months ended September 30,2005.  The operations of the Company’sbiodiesel plant in Meridian, Mississippi and its service station/conveniencestore in Jackson, Mississippi were greatly affected by Hurricane Katrina. Thebiodiesel plant was spared major equipment or plant damage, but was shut downfor most of September for cleanup of the fallen trees caused by the storm.Lack of fuel hindered the sales of products from the service station.

 

# **Costof Sales**

# ** **

Cost of sales was $958,822consisting of material costs for biodiesel production and cost of fuel, foodand beverages, net of $75,406 in Federal Tax Subsidies.

 

Selling, General and Administrative Expenses

 

Selling,general and administrative expenses were $683,381 for the nine months ended September 30,2005. These costs reflect $223,383 of payroll related expenses and $143,555 forthe BIO-BIKE marketing program. The balance of operating expenses was primarilyrelated to professional fees for construction management associated with theDurant Biofuels, LLC facility, legal and accounting services, rent, utilities,repair and maintenance and travel.

 

**Liquidityand Capital Resources**

 

Cashused in operating activities was $462,366 for the nine months ended September 30,2005.  This use of cash reflects the cashportion of the Company’s net loss for the period as well as increases inaccounts receivable both of which were partially offset with increases inaccounts payable.

 

Netcash used in investing activities was $229,280 for the nine months ended September 30,2005. This use of cash relates mainly to the purchase of land in Durant, OK fora 10,0000,000 gallons per year biodiesel plant and the related site preparationand infrastructure upgrades required prior to installation of the manufacturingequipment and inventory storage tanks.

 

Netcash provided by financing activities was $721,000 for the nine months ended September 30,2005. Proceeds from sales of common stock of $461,000 and proceeds from equitycontributions by Apollo Resources International, Inc. of $260,000 accountfor this positive cash flow.

 

Forthe nine months ended September 30, 2005, the Company recorded a net lossof ($575,921). The Company’s continued existence is dependent upon its abilityto take advantage of acquisition opportunities, raise capital through privatesecurities offerings, secure collateralized debt financing and use thesesources of capital to grow and enhance its biodiesel production anddistribution operations. The Company has also continued to raise capitalthrough a variety of private securities offerings of its common stock.

 

Managementis focusing on expanding and improving its biodiesel production anddistribution operations. Through acquisition, organic growth and funding viacollateralized loans and private placement offerings, the Company plans tocontinue to increase the profitability of its operations necessary to supportoperations.

 

Therecan be no assurance that any of management’s plans as described above will besuccessfully implemented or that the Company will continue as a going concern.

 

TheCompany’s Liquidity Plan

 

TheCompany’s need to raise additional equity or debt financing and the Company’sability to generate cash flow from operations sufficient to capitalize onexpansion opportunities as they become available will depend on its futureperformance and the Company’s ability to successfully raise capital andimplement business and growth strategies. The Company’s performance will alsobe affected by prevailing economic conditions. Many of these factors are beyondthe Company’s control. If future cash flows and capital resources areinsufficient to meet the Company’s debt obligations and commitments, theCompany may be forced to reduce or delay activities and capital expenditures,obtain additional equity capital or debt financing. In the event that theCompany is unable to do so, the Company may be left without sufficientliquidity and it may not be able to continue operations.

 

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# **Off-BalanceSheet Arrangements**

# ** **

# **At September 30, 2005 the Company had noobligations that would qualify to be disclosed as off-balance sheetarrangements.**

# ** **

RiskFactors

 

The Company’s revenue andoperating results may fluctuate significantly from quarter to quarter, andfluctuations in operating results could cause its stock price to decline.

 

The Company’s revenue andoperating results may vary significantly from quarter-to-quarter due to anumber of factors. In future quarters, operating results may be below theexpectations of public market analysis or investors, and the price of itscommon stock may decline. Factors that could cause quarterly fluctuationsinclude:

 

•              the ability to secure necessary fuel suppliesto keep the retail sales facilities functioning;

 

•              the ability to quickly bring new productioncapacity on stream;

 

•              the ability to raise the necessary capital tofund working capital, execute mergers, acquisitions and asset purchases.

 

The market in which theCompany competes is intensely competitive and actions by competitors couldrender its services less competitive, causing revenue and income to decline.

 

The ability to competedepends on a number of factors outside of the Company’s control, including:

 

•              the prices at which others offer competitiveservices, including aggressive price competition and discounting;

 

•              actions taken by the Federal Government orState Governments to remove subsidies and tax credits associated with thebiodiesel business;

 

•              large swings in the price of oil which willaffect the price at which we can purchase fuel supplies;

 

•              the ability of competitors to undertake moreextensive marketing campaigns;

 

•              the extent, if any, to which competitorsdevelop proprietary tools that improve their ability to compete; and

 

•              the extent of competitors’ responsiveness tocustomer needs.

 

TheCompany may not be able to compete effectively on these or other factors. Ifthe Company is unable to compete effectively, market position, and thereforerevenue and profitability, would decline.

 

TheCompany must continually enhance its services to meet the changing needs of itscustomers or face the possibility of losing future business to competitors.

 

Futuresuccess will depend upon the Company’s ability to enhance existing products andto introduce new products to meet the requirements of customers in a rapidlydeveloping and evolving market. Present or future products may not satisfy theneeds of the market. If the Company is unable to anticipate or respondadequately to its customers’ needs, lost business may result and financialperformance will suffer.

 

TheCompany is dependent on a limited number of key personnel, and the loss ofthese individuals could harm its competitive position and financialperformance.

 

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TheCompany’s business consists primarily of the manufacturing, distribution andsale of biodiesel and, accordingly, its success depends upon the efforts,abilities, business generation capabilities and project execution of itsexecutive officers. The Company’s success is also dependent upon themanagerial, operational and administrative skills of its executive officers.The loss of any executive officer could result in a loss of customers orrevenue, and could therefore harm the Company’s financial performance.

 

TheCompany’s ability to secure debt and equity financing could have an adverseeffect on the Company’s financial health.

 

Theinability to raise debt to fund working capital may:

 

•              increase the Company’s vulnerability togeneral adverse economic and industry conditions;

 

•              limit the Company’s ability to fund futureworking capital and other general corporate requirements; and

 

•              limit the Company’s flexibility in planning for,or reacting to, changes in the Company’s business and the industry in which itoperates.

 

Therecan be no assurance that the Company’s business will generate sufficient cashflow from operations or that future borrowings will be available to it in an amountsufficient to enable it to obtain debt or to fund other liquidity needs.

 

“SafeHarbor” Statement Under The Private Securities Litigation Reform Act:

 

Withthe exception of historical information, the matters discussed in this reportare “forward looking statements” as that term is defined in Section 21E ofthe Securities Exchange Act of 1934.

 

Cautionaryand Forward Looking Statements

 

Inaddition to statements of historical fact, this Form 10-QSB containsforward-looking statements.  Thepresentation of future aspects of the Company found in these statements issubject to a number of risks and uncertainties that could cause actual resultsto differ materially from those reflected in such statements.  Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. Without limiting the generality of the foregoing words such as “may,” “will,”“expect,” “believe,” “anticipate,” “intend,” or “could” or the negative variationsthereof or comparable terminology are intended to identify forward-lookingstatements.

 

Theseforward-looking statements are subject to numerous assumptions, risks anduncertainties that may cause the Company’s actual results to be materiallydifferent from any future results expressed or implied by the Company in thosestatements.

 

Someof these risks might include, but are not limited to, the following:

 

(a)           volatility or decline of the Company’s stockprice;

 

(b)           potential fluctuation in quarterly results;

 

(c)           failure of the Company to earn revenues orprofits;

 

(d)           inadequate capital to continue or expand itsbusiness, inability to raise additional capital or financing to implement itsbusiness plans;

 

(e)           failure to commercialize its technology or tomake sales;

 

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(f)            rapid and significant changes in markets;

 

(g)           litigation with or legal claims andallegations by outside parties; and

 

(h)           insufficient revenues to cover operatingcosts.

 

Thereis no assurance that the Company will be profitable, the Company may not beable to successfully develop, manage or market its products and services, theCompany may not be able to attract or retain qualified executives andtechnology personnel, the Company’s products and services may become obsolete,government regulation may hinder the Company’s business, and additionaldilution in outstanding stock ownership may be incurred due to the issuance ofmore shares, warrants and stock options, or the exercise of warrants and stockoptions, and there exist other risks inherent in the Company’s businesses.

 

TheCompany undertakes no obligation to publicly revise these forward-lookingstatements to reflect events or circumstances that arise after the datehereof.  Readers should carefully reviewthe factors described in other documents the Company files from time to timewith the Securities and Exchange Commission, including the Quarterly Reports onForm 10-QSB and Annual Report on Form 10-KSB filed by the Company andany Current Reports on Form 8-K filed by the Company.

 

**Controlsand Procedures**

 

An evaluation of the effectiveness of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was carried out by us under the supervision and with the participation of our President (“President”) and Chief Financial Officer (“CFO”). Based upon that evaluation, our President and CFO concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Specifically, our independent auditors identified deficiencies in our controls related to valuation and recording of fixed assets.  We have improved our controls in an effort to remediate these deficiencies through hiring a CFO and outsourcing the accounting function to a CPA firm.  We are continuing our efforts to improve and strengthen our control processes and procedures to fully remedy these deficiencies. Our management and directors will continue to work with our auditors and other outside advisors to ensure that our controls and procedures are adequate and effective.

 

There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of the most recent evaluation of such, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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**PART II – OTHER INFORMATION**

 

**Item 1.****   ****Legal Proceedings - None**

 

**Item 2.****   ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

During the quarter ended September 30, 2005,the Company issued 922,000 shares of common stock, at $0.50 per share, viaprivate placement.  The gross proceeds ofthese sales amounted to $461,000.  TheCompany is seeking working capital and funds to build its biodiesel plant inDurant, OK and to make additional asset acquisitions. The common stock was soldat $.50 per share.

 

**Item 3.****   ****Defaults upon Senior Securities** – None

 

**Item 4.****   ****Submission of Matters to a Voteof Security Holders**– None

 

**Item 5.****   ****Other Information** – None

 

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**Item 6.****   ****Exhibits and Reports on Form 8-K**

 

Reportson Form 8-K.

 
| **Date of Filing**       |   | **Subject**                                                                                                                                                     | ** ** |
|--------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| September 20, 2005  |   | Announcing Securities  Purchase Agreement to purchase 80% of Earth Biofuels, Inc, a Mississippi  company and departure of directors.                            |       |
| September 27, 2005  |   | Describing principal  business and resumes of new directors.                                                                                                    |       |
| September 29, 20005 |   | Announced changes in  directors and election of officer of the Company.                                                                                         |       |
| October 19, 2005    |   | Executed letter of intent  with Gulf Coast Fuels to purchase a fuel storage terminal in Houston, TX.                                                            |       |
| October 25, 2005    |   | Executed letter of intent  to purchase 100% of the stock of The Wing Sail Company, Inc. dba  Distribution Drive through a share exchange agreement.        |       |
| November 14, 2005   |   | Appoint new auditor of  record and accept resignation of prior auditor.  Announce changes in management — CFO, company secretary and additional  director. |       |

 

Exhibit.

 
| Exhibit 3.1       |   | Certificate of  Incorporation                                                                                                                                   |   |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Exhibit 3.2       |   | Bylaws                                                                                                                                                          |   |
| Exhibit 31.1 |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) under the Securities  Act of 1934.                                               |   |
| Exhibit 31.2 |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) under the Securities  Act of 1934.                                               |   |
| Exhibit 32.1 |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C., Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |   |
| Exhibit 32.2 |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |   |

 

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**SIGNATURES**

 

Pursuantto the requirement of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized this 22nd day of November, 2005.

 
|   | Earth  Biofuels          |
|--------|--------------------------|
|   |                     |
|   | /s/  Tommy Johnson       |   |
|   |                     |
|   | Tommy  Johnson           |
|   | Chief  Executive Officer |

 

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