##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended October 31, 2007
 Commission File No. 001-32695
 
 BPI Energy Holdings, Inc.
  British Columbia, Canada
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    75-3183021
(I.R.S. Employer Identification No.)
 30775 Bainbridge Road, Suite 280, Solon, Ohio
(Address of Principal Executive Offices)
    
    44139
(Zip Code)
 (440) 248-4200
 þ o
  o o þ
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial Statements.Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-31.1EX-31.2EX-32.1    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 BPI ENERGY HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands)
 October 31,
    
    
    July 31,2007
    
    
    2007(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    4,864
    
    
    $
    11,292Accounts receivable
    
    
    157
    
    
    
    94Other current assets
    
    
    1,133
    
    
    
    1,348Total current assets
    
    
    6,154
    
    
    
    12,734Property and equipment, at cost:Gas properties, full cost method of accounting:Proved, net of accumulated depreciation, depletion, amortization and impairment of $999 and $12,621
    
    
    19,866
    
    
    
    16,631Unproved, excluded from amortization
    
    
    9,375
    
    
    
    8,533Support equipment, net of accumulated depreciation and amortization of $789 and $741
    
    
    504
    
    
    
    552Net gas properties
    
    
    29,745
    
    
    
    25,716Other property and equipment, net of accumulated depreciation and amortization of $183 and $152
    
    
    448
    
    
    
    473Net property and equipment
    
    
    30,193
    
    
    
    26,189Restricted cash
    
    
    100
    
    
    
    100Other non-current assets
    
    
    161
    
    
    
    220Total assets
    
    $
    36,608
    
    
    $
    39,243LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    710
    
    
    $
    1,371Current maturities of long-term debt and notes payable
    
    
    26
    
    
    
    8,488Accrued liabilities and other
    
    
    726
    
    
    
    1,503Total current liabilities
    
    
    1,462
    
    
    
    11,362Long-term debt and notes payable, less current maturities
    
    
    8,827
    
    
    
    48Asset retirement obligation
    
    
    127
    
    
    
    114Other long-term liabilities
    
    
    60
    
    
    
    Total liabilities
    
    
    10,476
    
    
    
    11,524Shareholders EquityCommon shares, no par value, authorized 200,000,000 shares, 73,618,764 and 72,524,493 issued and
outstanding
    
    
    67,946
    
    
    
    67,946Additional paid-in capital
    
    
    7,957
    
    
    
    7,608Accumulated deficit
    
    
    (49,771
    )
    
    
    (47,835
    )Total shareholders equity
    
    
    26,132
    
    
    
    27,719Total liabilities and shareholders equity
    
    $
    36,608
    
    
    $
    39,243
  2




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BPI ENERGY HOLDINGS, INC.
 Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
 Three Months Ended October 31,2007
    
    
    2006RevenueGas sales
    
    $
    318
    
    
    $
    294Operating expensesLease operating expense
    
    
    259
    
    
    
    336General and administrative expenses
    
    
    1,884
    
    
    
    2,735Depreciation, depletion and amortization
    
    
    180
    
    
    
    184Total operating expenses
    
    
    2,323
    
    
    
    3,255Operating loss
    
    
    (2,005
    )
    
    
    (2,961
    )Other income (expense):Interest income
    
    
    97
    
    
    
    219Interest expense
    
    
    (2
    )
    
    
    (3
    )Other income (expense)
    
    
    (26
    )
    
    
    69
    
    
    
    216Net loss
    
    $
    (1,936
    )
    
    $
    (2,745
    )Basic and diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.04
    )Weighted average common shares outstanding
    
    
    70,133,653
    
    
    
    68,796,522
  3




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##### Table of Contents



BPI ENERGY HOLDINGS, INC.
 Consolidated
Statements of Shareholders Equity
(Dollars in thousands)
(Unaudited)
 Additional
    
    
    
    
    
    
    TotalCommon Shares
    
    
    Paid-in
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance, July 31, 2007
    
    
    72,524,493
    
    
    $
    67,946
    
    
    $
    7,608
    
    
    $
    (47,835
    )
    
    $
    27,719Share-based compensation 
common shares (number of shares
include non-vested portion of
restricted stock)
    
    
    1,537,270
    
    
    
    
    
    
    
    363
    
    
    
    
    
    
    
    363Shares forfeited
    
    
    (259,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Surrender of shares to pay taxes
    
    
    (183,999
    )
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,936
    )
    
    
    (1,936
    )Balance, October 31, 2007
    
    
    73,618,764
    
    
    $
    67,946
    
    
    $
    7,957
    
    
    $
    (49,771
    )
    
    $
    26,132
  4




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BPI ENERGY HOLDINGS, INC.
 Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 Three Months Ended October 31,2007
    
    
    2006Cash Provided by (Used in):Operating ActivitiesNet loss
    
    $
    (1,936
    )
    
    $
    (2,745
    )Adjustments
to reconcile net loss to net cash used in operating activities:Depreciation, depletion, and amortization
    
    
    180
    
    
    
    184Share-based compensation expense
    
    
    363
    
    
    
    873Loss on commodity derivative contract
    
    
    60
    
    
    
    Accretion of asset retirement obligation
    
    
    1
    
    
    
    1Changes in assets and liabilities:Accounts receivable
    
    
    (63
    )
    
    
    53Other current assets
    
    
    136
    
    
    
    (240
    )Accounts payable
    
    
    (242
    )
    
    
    283Accrued liabilities and other
    
    
    (777
    )
    
    
    431Other assets and liabilities
    
    
    59
    
    
    
    (158
    )Net cash used in operating activities
    
    
    (2,219
    )
    
    
    (1,318
    )Investing ActivitiesAdditions to property and equipment
    
    
    (4,181
    )
    
    
    (3,193
    )Net cash used in investing activities
    
    
    (4,181
    )
    
    
    (3,193
    )Financing ActivitiesPayments on long-term debt and notes payable
    
    
    (8
    )
    
    
    (70
    )Payment of deferred financing costs
    
    
    (6
    )
    
    
    Payments for surrender of shares
    
    
    (14
    )
    
    
    Net cash used in financing activities
    
    
    (28
    )
    
    
    (70
    )Net decrease in cash and cash equivalents
    
    
    (6,428
    )
    
    
    (4,581
    )Cash and cash equivalents at the beginning of the year
    
    
    11,292
    
    
    
    19,279Cash and cash equivalents at the end of the year
    
    $
    4,864
    
    
    $
    14,698Supplementary disclosure of cash flow information:Interest paid (net of interest capitalized)
    
    $
    2
    
    
    $
    3Non-cash financing activity  interest costs incurred and added to debt principal
    
    $
    264
    
    
    $
    
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##### Table of Contents



BPI ENERGY HOLDINGS, INC.
 Notes to Consolidated Financial Statements
Unaudited
(Dollars in thousands)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation and Going Concern
      Use of Estimates
  6




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Accounts Receivable
  Deferred Financing Costs
  Commodity Derivatives
       7




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Capitalized Interest
  Gas Properties
      i)
    
    there are no firm plans for further drilling on the unproved property;ii)
    
    negative results were obtained from studies of the unproved property;iii)
    
    negative results were obtained from studies conducted in the vicinity of the unproved
property; oriv)
    
    the remaining term of the unproved property does not allow sufficient time for further
studies or drilling.
  Other Property and Equipment
  8




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Income Taxes
    Loss Per Share
  October 31,
    
    
    October 31,2007
    
    
    2006Outstanding warrants
    
    
    5,311,600
    
    
    
    5,311,600Outstanding stock options
    
    
    1,579,931
    
    
    
    1,823,265Nonvested portion of restricted shares issued
    
    
    2,882,838
    
    
    
    3,057,3389,774,369
    
    
    
    10,192,203
 Recently Issued Accounting Standards
    9




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2. SHARE-BASED COMPENSATION
 SFAS No. 123(R)
  Incentive Stock Option Plan
  Omnibus Stock Plan
   10




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Exercise
    
    Number
    
    
    RemainingPrice
    
    Outstanding
    
    
    Life (Years)
    
    
    Expiry Date$0.49
    
    
    345,000
    
    
    
    1.0
    
    
    November 3, 20080.70
    
    
    10,000
    
    
    
    1.9
    
    
    September 22, 20090.83
    
    
    50,000
    
    
    
    4.6
    
    
    June 7, 20121.26
    
    
    695,666
    
    
    
    2.1
    
    
    November 29, 20091.75
    
    
    10,000
    
    
    
    2.9
    
    
    September 23, 20101.80
    
    
    136,000
    
    
    
    2.4
    
    
    March 27, 20101.95
    
    
    333,265
    
    
    
    2.2
    
    
    January 20, 2010$1.27
    
    
    1,579,931
    
    
    
    2.0
   Weighted AverageNonvested Shares
    
    Shares
    
    
    Grant-Date Fair ValueNonvested at July 31, 2007
    
    
    2,437,338
    
    
    $
    0.71Granted
    
    
    1,024,770
    
    
    
    0.55Vested
    
    
    (350,000
    )
    
    
    0.93Forefeited
    
    
    (259,000
    )
    
    
    0.50Nonvested at October 31, 2007
    
    
    2,853,108
    
    
    $
    0.64
  Restricted Shares
    
    
    Fully Vested Shares
    
    
    Total SharesEmployee bonuses
    
    
    754,500
    
    
    
    512,500
    
    
    
    1,267,000Directors fees
    
    
    270,270
    
    
    
    
    
    
    
    270,270Total number of shares granted
    
    
    1,024,770
    
    
    
    512,500
    
    
    
    1,537,270
 Employee Bonuses
  Directors Fees
    11




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3. OTHER CURRENT ASSETS
  October 31,
    
    
    July 31,2007
    
    
    2007Deferred financing costs
    
    $
    756
    
    
    $
    836Separation agreement costs
    
    
    307
    
    
    
    322Prepaid expenses and other
    
    
    70
    
    
    
    190$
    1,133
    
    
    $
    1,348
   4. OTHER NON-CURRENT ASSETS
  October 31,
    
    
    July 31,2007
    
    
    2007Separation Agreement
    
    $
    
    
    
    $
    59Advance royalties
    
    
    161
    
    
    
    161$
    161
    
    
    $
    220
 5. ACCRUED LIABILITIES
  October 31,
    
    
    July 31,2007
    
    
    2007Professional fees
    
    $
    309
    
    
    $
    133Employee compensation
    
    
    278
    
    
    
    1,112Separation agreement
    
    
    100
    
    
    
    100Directors fees
    
    
    27
    
    
    
    57Other
    
    
    12
    
    
    
    101$
    726
    
    
    $
    1,503
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6. LONG-TERM DEBT AND NOTES PAYABLE
         13




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October 31,
    
    

July 31,2007
    
    
    2007Advances
under GasRock Credit Agreement (1)
    
    $
    9,324
    
    
    $
    9,060GMAC term note due in fiscal year 2009, 6.50%
    
    
    12
    
    
    
    14GMAC term notes due in fiscal year 2010, 6.1% to 6.50%
    
    
    56
    
    
    
    629,392
    
    
    
    9,136Less unamortized debt discount
    
    
    (539
    )
    
    
    (600
    )Less current maturities (1)
    
    
    (26
    )
    
    
    (8,488
    )Long-term debt and notes payable
    
    $
    8,827
    
    
    $
    48
 
 (1)
    
    On November 29, 2007, the Company and GasRock entered into a First Amendment to Advancing Term
Credit Agreement, which extended the initial Loan Termination Date from July 25, 2008 to January
30, 2009. Therefore, the advances under the GasRock Credit Agreement have been reclassified from
current to long-term as of October 31, 2007. See Note 14 for a more detailed description of this
amendment.  Remaining Fiscal Year 2008
    
    $
    20Fiscal Year 2009
    
    
    9,354Fiscal Year 2010
    
    
    18$
    9,392
 7. ASSET RETIREMENT OBLIGATIONS
   Three Months Ended October 31,2007
    
    
    2006Beginning asset retirement obligation
    
    $
    114
    
    
    $
    71Additional liability incurred
    
    
    12
    
    
    
    3Accretion expense
    
    
    1
    
    
    
    1Asset retirement costs incurred
    
    
    
    
    
    
    (27
    )Loss on settlement of liability
    
    
    
    
    
    
    14$
    127
    
    
    $
    62
 14




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8. CONCENTRATIONS
   9. INCOME TAXES
  10. SHAREHOLDERS EQUITY
 Common shares
 Additional paid-in capital
 Share purchase warrants
  Number
    
    ExerciseOutstanding
    
    Price
    
    
    Expiry Date4,274,400
    
    $
    1.50
    
    
    December 13, 2007643,200
    
    $
    1.25
    
    
    December 31, 2009394,000
    
    $
    1.25
    
    
    January 12, 20105,311,600
 15




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11. RELATED PARTY TRANSACTIONS
    12. LEGAL PROCEEDINGS
 Drummond Coal Co. Litigation
        16




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ICG Litigation
   13. OTHER INCOME (EXPENSE)
  Three Months October 31,2007
    
    
    2006Gain on settlements of derivative contract
    
    $
    41
    
    
    $
    Change in fair value of derivative contract
    
    
    (60
    )
    
    
    Other
    
    
    (7
    )
    
    
    $
    (26
    )
    
    $
    
 14. SUBSEQUENT EVENT
    
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview and Outlook
  17




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18




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
    
    continue development at our Southern Illinois Basin Project;
    
    continue to obtain test data and initiate pilot projects to
determine the commercial potential of CBM at our various acreage blocks and projects in the Basin;
    
    continue to reduce well drilling and completion costs;
    
    continue acreage acquisitions;
    
    increase total company reserves; and
    
    grow total production.
    19




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
    
    negotiating to obtain leases that grant us the broadest possible rights to CBM for any
given tract of land;
    
    conducting ongoing title reviews of existing mineral interests;
    
    where possible, negotiating with and utilizing multiple service companies in order to
increase competition and minimize the risk of disruptions caused by the loss of any one
service provider; and
    
    attempting to create a low cost structure in order to reduce our vulnerability to many of
these factors.
 Results of Operations
 Three Months Ended October 31, 2007 Compared to Three Months Ended October 31, 2006
  Three Months Ended October 31,Dollar
    
    
    %2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenues:Gas sales
    
    $
    318,186
    
    
    $
    294,002
    
    
    $
    24,184
    
    
    
    8
    %Expenses:Lease operating expense
    
    
    259,062
    
    
    
    335,974
    
    
    
    (76,912
    )
    
    
    (23
    %)General and administrative expense
    
    
    1,884,028
    
    
    
    2,734,710
    
    
    
    (850,682
    )
    
    
    (31
    %)Depreciation, depletion and amortization
    
    
    179,869
    
    
    
    183,998
    
    
    
    (4,129
    )
    
    
    (2
    %)Total operating expenses
    
    
    2,322,959
    
    
    
    3,254,682
    
    
    
    (931,723
    )
    
    
    (29
    %)Operating loss
    
    
    (2,004,773
    )
    
    
    (2,960,680
    )
    
    
    955,907
    
    
    
    32
    %Other income (expense):Interest income
    
    
    96,516
    
    
    
    218,906
    
    
    
    (122,390
    )
    
    
    (56
    %)Interest expense
    
    
    (1,925
    )
    
    
    (3,153
    )
    
    
    1,228
    
    
    
    39
    %Other income (expense)
    
    
    (25,823
    )
    
    
    
    
    
    
    (25,823
    )
    
    
    100
    %Total other income (expense)
    
    
    68,768
    
    
    
    215,753
    
    
    
    (146,985
    )
    
    
    (68
    %)Net loss
    
    $
    (1,936,005
    )
    
    $
    (2,744,927
    )
    
    $
    808,922
    
    
    
    29
    %
 Revenue
 Lease operating expense 
 20




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General and administrative expense
 Three Months Ended October 31,Dollar
    
    
    %2007
    
    
    2006
    
    
    Variance
    
    
    ChangeSalaries and benefits
    
    $
    658,439
    
    
    $
    1,092,147
    
    
    $
    (433,708
    )
    
    
    (40
    %)Share-based payments
    
    
    363,189
    
    
    
    644,851
    
    
    
    (281,662
    )
    
    
    (44
    %)Professional and regulatory
    
    
    637,598
    
    
    
    706,391
    
    
    
    (68,793
    )
    
    
    (10
    %)Other
    
    
    224,802
    
    
    
    291,321
    
    
    
    (66,519
    )
    
    
    (23
    %)Total general and administrative expense
    
    $
    1,884,028
    
    
    $
    2,734,710
    
    
    $
    (850,682
    )
    
    
    (31
    %)
     Depreciation, depletion and amortization expense 
 Interest income
 Interest expense
 Other income (expense)
 21




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Critical Accounting Policies and Estimates
   Capitalized Interest
 .
 Financial Condition
    22




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
    
    the price of, and demand for, natural gas;
    
    availability of drilling equipment;
    
    lease terms;
    
    availability of sufficient capital resources; and
    
    the accuracy of production estimates for current and future wells.
   Cautionary Statement Concerning Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Commodity Risk
   23




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Interest Rate Risk
  Financial Instruments
  Inflation and Changes in Prices
  
 Item 4. Controls and Procedures
  24




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Drummond Coal Co. Litigation
        ICG Litigation
  25




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Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    First Amendment to Advancing Term Credit Agreement, dated as of November 29, 2007, by and
among BPI Energy, Inc., as Borrower, BPI Energy Holdings, Inc., as Guarantor, and GasRock
Capital LLC, as Lender (Filed as Exhibit 10.1 to the Current Report on Form 8-K of BPI Energy
Holdings, Inc. filed with the SEC on December 4, 2007 and incorporated herein by reference).31.1
    
    Section 302 Certification of the Chief Executive Officer (Principal Executive Officer).31.2
    
    Section 302 Certification of the Acting Chief Financial Officer (Principal Financial Officer).32.1
    
    Section 906 Certification of the Principal Executive Officer and Principal Financial Officer.
 26




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SIGNATURES
  BPI ENERGY HOLDINGS, INC.Date: December 17, 2007
    /s/ James G. AzleinJames G. Azlein,President and Chief Executive Officer/s/ Randall L. ElkinsRandall L. Elkins,Controller and Acting Chief Financial Officer 27