**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

| (Mark One)

x

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

For the quarterly period ended April 30, 2011

 

 

 

o

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  000-51574

**FOUR RIVERS BIOENERGY INC.**

*(Exact name of small business issuer as specified in its charter)*

**Nevada**

**980442163**

*(State or other jurisdiction of*

*incorporation or organization)*

*(I.R.S. Employer Identification No.)*

 

 

**14 South Molton Street, 3rd Floor**

**London, United Kingdom**

**W1K 5QP**

*(Address of principal executive offices)*

*(Zip Code)*

Issuer’s telephone number:  44 1642 674085

________________________________(Former name, former address and formerfiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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  ý     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated Filer o     Non-accelerated filer o     Smaller reporting company ý

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: **8,329,686** shares of common stock, par value $.001 per share, outstanding as of June 1, 2011.

**FOUR RIVERS BIOENERGY INC.**

**TABLE OF CONTENTS**

 

**Page**

**PART I – FINANCIAL INFORMATION**

 

 

 

 

 

Item 1.

 

Financial Statements:

4

 

 

Condensed Consolidated Balance Sheets at April 30, 2011 (Unaudited) and October 31, 2010

4

 

 

Condensed Consolidated Statements of Operations for the three and six months ended  April 30, 2011 and 2010 and the period from March 9, 2007 (date of inception) through April 30, 2011 (Unaudited)

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the period from March 9, 2007 (date of inception) through April 30, 2011  (Unaudited)

7

 

 

Condensed Consolidated Statements of Cash Flow for the six months ended  April 30, 2011 and 2010 and the period from March 9, 2007 (date of inception) through  April 30, 2011  (Unaudited)

9

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

10

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

 

Controls and Procedures

37

 

 

 

 

**PART II – OTHER INFORMATION**

 

 

 

 

 

Item 1.

 

Legal Proceedings

38

Item 1A.

 

Risk Factors

38

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

 

Defaults Upon Senior Securities

38

Item 4.

 

[Reserved]

38

Item 5.

 

Other Information

38

Item 6.

 

Exhibits

39

 

 

 

 

**SIGNATURES **

40

2

**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and Section 27A of the Securities Act of 1933. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will” and similar expressions, we are identifying forward-looking statements. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements.  These factors include the fact that we are a development stage enterprise and we are still developing our first Waste-to-Energy plant, as a consequence we have limited experience with our business plan and several key assumptions inherent in that plan are unproven and untested; the continuing world interest in alternative energy sources, the continued availability of government incentives to support renewable energy and our ability to gain the appropriate licenses to obtain such incentives; our ability to source the feedstock that we require at the right prices, quality and quantity; our exposure to competition in the rapidly changing market for renewable energy and our ability to raise adequate capital to finance the completion of the planned development of our UK plant and fund our working capital requirements.  

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.  

3

**PART I – FINANCIAL INFORMATION**

**Item 1.  Financial Statements.**

**Four Rivers BioEnergy Inc.**

 

 

 

 

 

*(A Development Stage Enterprise)*

 

 

 

 

 

**Condensed Consolidated Balance Sheets**

 

 

 

 

 

 

**April 30,**

 

**October 31,**

** **

**2011**

 

**2010**

** **

**(unaudited)**

 

 

 

**Assets**

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$

19,004 

 

$

86,609 

Inventory

 

12,667 

 

 

21,018 

Value added tax refunds receivable

 

10,642 

 

 

4,272 

Prepaid expenses and other current assets

 

278,761 

 

 

134,543 

Total Current Assets

 

321,074 

 

 

246,442 

 

 

 

 

 

 

Land, property plant and equipment, net

 

3,641,309 

 

 

1,678,028 

Land held for sale

 

- 

 

 

3,700,000 

Patents and other, net

 

249,198 

 

 

260,525 

Security deposit

 

127,321 

 

 

122,562 

Total Assets

$

4,338,902 

 

$

6,007,557 

 

 

 

 

 

 

**Liabilities and Stockholders' Equity**

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable and accrued liabilities

$

1,299,697 

 

$

1,470,294 

Accrued compensation payable

 

339,985 

 

 

339,985 

Payroll taxes payable

 

106,588 

 

 

100,339 

Land purchase note

 

440,000 

 

 

540,000 

Total Current Liabilities

 

2,186,270 

 

 

2,450,618 

 

 

 

 

 

 

Note payable

 

- 

 

 

500,000 

Deferred credit on asset purchase

 

252,000 

 

 

252,000 

Total Long Term Liabilities

 

252,000 

 

 

752,000 

 

 

 

 

 

 

Commitment and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

Preferred stock:

 

 

 

 

 

Authorized: 100,000,000 shares with par value of $0.001 per share:

 

 

 

 

 

Issued and Outstanding: - 0 - shares as of April 30, 2011 and October 31, 2010, respectively

 

- 

 

 

- 

Common stock:

 

 

 

 

 

Authorized: 500,000,000 shares with par value of $0.001 per share: 

 

 

 

 

 

Issued: 8,629,686 and 8,329,686 shares as of April 30, 2011 and October 31, 2010, respectively

 

 

 

 

 

Outstanding: 8,329,686 and 8,029,686 shares as of April 30, 2011 and October 31, 2010, respectively

 

8,330 

 

 

8,030 

Additional paid in capital

 

29,480,137 

 

 

29,603,027 

Accumulated other comprehensive income - foreign currency translation gain

 

653,942 

 

 

646,676 

Deficit accumulated during development stage

 

(28,191,689)

 

 

(26,999,277)

Stockholders' equity attributable to Four Rivers BioEnergy, Inc. Common Shareholders

 

1,950,720 

 

 

3,258,456 

Non controlling interest

 

(50,088)

 

 

(453,517)

Total Stockholders' Equity

 

1,900,632 

 

 

2,804,939 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

4,338,902 

 

$

6,007,557 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

**Four Rivers BioEnergy Inc.**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*(A Development Stage Enterprise)*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Condensed Consolidated Statements of Operations**

 

 

 

 

 

 

 

 

 

**(unaudited)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the Three Months Ended**

**April 30,**

 

**For the Six Months Ended**

**April 30,**

 

**For the Period**

**from March 9,**

**2007 (date of**

**inception)**

**through**

**April 30,**

 

**2011**

 

**2010**

 

**2011**

 

**2010**

 

**2011**

Revenues

$

- 

 

$

- 

 

$

- 

 

$

- 

 

$

3,201,412 

Cost of goods sold

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

(4,196,687)

Gross Loss

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

(995,275)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional fees

$

270,826 

 

$

253,592 

 

$

388,131 

 

$

435,117 

 

$

2,702,983 

Fair value of shares for services

 

18,208 

 

 

- 

 

 

31,733 

 

 

- 

 

 

253,567 

Contractors, payroll and administrative expenses

 

227,793 

 

 

511,092 

 

 

473,595 

 

 

1,234,907 

 

 

9,620,895 

Warrants issued for services

 

157,666 

 

 

113,895 

 

 

348,886 

 

 

113,895 

 

 

2,413,873 

Bank charges

 

1,904 

 

 

3,677 

 

 

3,624 

 

 

7,224 

 

 

39,140 

Consulting expenses

 

- 

 

 

- 

 

 

- 

 

 

77,446 

 

 

1,990,000 

Depreciation and amortization expense

 

56,712 

 

 

41,498 

 

 

112,587 

 

 

85,282 

 

 

350,127 

Asset impairment loss

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

4,457,103 

Reversal of land sale costs provision

 

- 

 

 

- 

 

 

(151,250)

 

 

- 

 

 

(151,250)

Farming costs

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

54,633 

Other site costs

 

136,056 

 

 

159,946 

 

 

233,450 

 

 

442,288 

 

 

2,100,701 

Patent protection costs STT

 

15,901 

 

 

8,689 

 

 

29,341 

 

 

21,293 

 

 

155,742 

Relocation, storage and other costs STT

 

- 

 

 

73,996 

 

 

- 

 

 

85,392 

 

 

282,775 

Office and sundry

 

28,800 

 

 

71,434 

 

 

24,500 

 

 

148,584 

 

 

870,197 

Property and land taxes and rent expense

 

(49,326)

 

 

112,155 

 

 

(350,009)

 

 

232,238 

 

 

368,197 

Telephone and communications

 

3,646 

 

 

6,523 

 

 

7,714 

 

 

16,864 

 

 

109,844 

Travel expense

 

13,967 

 

 

62,849 

 

 

37,679 

 

 

104,350 

 

 

1,299,317 

Total operating expenses

 

882,153 

 

 

1,419,346 

 

 

1,189,981 

 

 

3,004,880 

 

 

26,917,844 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on sale of STT assets

 

- 

 

 

 - 

 

 

- 

 

 

- 

 

 

(3,400,382)

Loss on sale of land

 

- 

 

 

- 

 

 

(423,573)

 

 

- 

 

 

(423,573)

Subsidy received

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

279,085 

Loss from operations

 

(882,153)

 

 

(1,419,346)

 

 

(1,613,554)

 

 

(3,004,880)

 

 

(31,457,989)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of scrap and surplus assets

 

93,507 

 

 

600,557 

 

 

411,747 

 

 

933,979 

 

 

1,887,765 

Interest income

 

- 

 

 

247 

 

 

2,349 

 

 

1,312 

 

 

563,859 

Interest expense

 

(16,383)

 

 

- 

 

 

(56,814)

 

 

- 

 

 

(75,424)

Other income

 

8,585 

 

 

31,315 

 

 

13,062 

 

 

57,162 

 

 

149,689 

Forgiveness of debt

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

296,714 

Total other income

 

85,709 

 

 

632,119 

 

 

370,344 

 

 

992,453 

 

 

2,822,603 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss before provision for income taxes

 

(796,444)

 

 

(787,227)

 

 

(1,243,210)

 

 

(2,012,427)

 

 

(28,635,386)

Income taxes (benefit)

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(796,444)

 

 

(787,227)

 

 

(1,243,210)

 

 

(2,012,427)

 

 

(28,635,386)

Net loss attributable to the non-controlling interest 

 

42,739 

 

 

52,305 

 

 

50,798 

 

 

185,674 

 

 

443,697 

Net loss attributable to Four Rivers BioEnergy, Inc.Common Shareholders

$

(753,705)

 

$

(734,922)

 

$

(1,192,412)

 

$

(1,826,753)

 

$

(28,191,689)

5

**Four Rivers BioEnergy Inc.**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*(A Development Stage Enterprise)*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Condensed Consolidated Statements of Operations (continued)**

 

 

 

 

 

 

 

 

 

**(unaudited)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the Three Months Ended**

**April 30,**

 

**For the Six Months Ended**

**April 30,**

 

**For the Period**

**from March 9,**

**2007 (date of**

**inception)**

**through**

**April 30,**

 

**2011**

 

**2010**

 

**2011**

 

**2010**

 

**2011**

Basic and diluted loss per share attributable to Four Rivers BioEnergy, Inc.

$

(0.09)

 

$

(0.09)

 

$

(0.15)

 

$

(0.23)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of basic and diluted common shares outstanding used in loss per share calculation

 

8,201,597 

 

 

7,921,356 

 

 

8,114,217 

 

 

7,921,356 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(796,444)

 

$

(787,227)

 

$

(1,243,210)

 

$

(2,012,427)

 

 

 

Foreign currency translation - loss

 

(7,189)

 

 

(24,053)

 

 

(9,983)

 

 

(45,298)

 

 

 

Comprehensive loss

$

(803,633)

 

$

(811,280)

 

$

(1,253,193)

 

$

(2,057,725)

 

 

 

Comprehensive (gain)/loss attributable to the non-controlling interest

 

71,845 

 

 

4,554 

 

 

68,047 

 

 

4,754 

 

 

 

Comprehensive loss attributable to Four Rivers BioEnergy, Inc. Common Shareholders

$

(731,788)

 

$

(806,726)

 

$

(1,185,146)

 

$

(2,052,971)

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

**Four Rivers BioEnergy Inc.**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*(A Development Stage Enterprise)*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Condensed Consolidated Statements of Stockholders' Equity**

 

 

 

 

 

 

 

 

 

 

**(unaudited)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the Period from March 9, 2007 (date of inception) through April 30, 2011**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Deficit**

 

**Accumulated**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Accumulated**

 

**Other**

 

 

 

 

 

**Preferred Stock**

 

**Common Stock**

 

**Additional**

 

**During the**

 

**Comprehensive**

 

 

 

**Total**

 

**Number of**

 

 

 

 

**Number of**

 

 

 

 

**Paid In**

 

**Development**

 

**Income /**

 

**Noncontrolling**

 

**Stockholders'**

 

**Shares**

 

**Par Value**

 

**Shares**

 

**Par Value**

 

**Capital**

 

**Stage**

 

**(Loss)**

 

**Interest**

 

**Equity**

Balance at inception (March 9, 2007), adjusted for recapitalization

- 

 

$

-

 

5,629,716 

 

$

5,630 

 

$

(5,630)

 

$

- 

 

$

- 

 

$

- 

 

$

- 

Shares issued for cash 

- 

 

 

-

 

1,197,029 

 

 

1,197 

 

 

1,998,803 

 

 

- 

 

 

- 

 

 

- 

 

 

2,000,000 

Net loss

- 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

(965,731)

 

 

- 

 

 

 

 

 

(965,731)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 31, 2007

- 

 

 

-

 

6,826,745 

 

 

6,827 

 

 

1,993,173 

 

 

(965,731)

 

 

- 

 

 

- 

 

 

1,034,269 

Shares issued for services prior to reverse merger

- 

 

 

-

 

1,197,030 

 

 

1,197 

 

 

245,303 

 

 

- 

 

 

- 

 

 

- 

 

 

246,500 

Effect of reverse merger and assumption of liabilities

- 

 

 

-

 

- 

 

 

- 

 

 

(270,185)

 

 

- 

 

 

- 

 

 

- 

 

 

(270,185)

Shares issued for cash in December 2007 at $13.77 per share, net

- 

 

 

-

 

1,657,881 

 

 

1,658 

 

 

22,827,364 

 

 

- 

 

 

- 

 

 

- 

 

 

22,829,022 

Shares issued for fees in December 2007

2 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

- 

Shares returned for cancellation in December 2007

- 

 

 

-

 

(3,008,028)

 

 

(3,008)

 

 

3,008 

 

 

- 

 

 

- 

 

 

- 

 

 

- 

Shares issued for cash in July 2008 at $15.26 per share, net

- 

 

 

-

 

131,061 

 

 

131 

 

 

1,631,433 

 

 

- 

 

 

- 

 

 

- 

 

 

1,631,564 

Foreign currency translation adjustment

- 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

(3,531)

 

 

- 

 

 

(3,531)

Net loss

- 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

(4,264,839)

 

 

 

 

 

- 

 

 

(4,264,839)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 31, 2008

2 

 

$

-

 

6,804,689 

 

$

6,805 

 

$

26,430,096 

 

$

(5,230,570)

 

$

(3,531)

 

 

- 

 

$

21,202,800 

Stock warrants issued for compensation

- 

 

 

-

 

- 

 

 

- 

 

 

1,404,283 

 

 

- 

 

 

- 

 

 

- 

 

 

1,404,283 

Shares issued for asset acquisition in March 2009

- 

 

 

-

 

900,000 

 

 

900 

 

 

755,100 

 

 

- 

 

 

- 

 

 

- 

 

 

756,000 

Warrants issued for asset acquisition in March 2009

- 

 

 

-

 

- 

 

 

- 

 

 

131,335 

 

 

- 

 

 

- 

 

 

- 

 

 

131,335 

Stock warrants issued for services in April 2009

- 

 

 

-

 

- 

 

 

- 

 

 

463,083 

 

 

- 

 

 

- 

 

 

- 

 

 

463,083 

Shares issued for services in October 2009

- 

 

 

-

 

216,666 

 

 

217 

 

 

179,450 

 

 

- 

 

 

- 

 

 

- 

 

 

179,667 

Foreign currency translation adjustment

- 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

660,129 

 

 

- 

 

 

660,129 

Net loss

- 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

(15,220,007)

 

 

 

 

 

- 

 

 

(15,220,007)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 31, 2009

2 

 

$

-

 

7,921,355 

 

$

7,922 

 

$

29,363,347 

 

$

(20,450,577)

 

$

656,598 

 

$

- 

 

$

9,577,290 

Termination of Preferred Stock

(2)

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

- 

Stock warrants issued for compensation

- 

 

 

-

 

- 

 

 

- 

 

 

197,621 

 

 

- 

 

 

- 

 

 

- 

 

 

197,621 

Shares issued for services in May 2010

- 

 

 

-

 

66,666 

 

 

66 

 

 

34,601 

 

 

- 

 

 

- 

 

 

- 

 

 

34,667 

Shares issued for services in October 2010

- 

 

 

-

 

41,665 

 

 

42 

 

 

7,458 

 

 

- 

 

 

- 

 

 

- 

 

 

7,500 

Foreign currency translation adjustment

- 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

(9,922)

 

 

(60,618)

 

 

(70,540)

Net loss

- 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

(6,548,700)

 

 

- 

 

 

(392,899)

 

 

(6,941,599)

7

**Four Rivers BioEnergy Inc.**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*(A Development Stage Enterprise)*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Condensed Consolidated Statements of Stockholders' Equity (continued)**

 

 

 

 

 

 

**(unaudited)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the Period from March 9, 2007 (date of inception) through April 30, 2011**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Deficit**

 

**Accumulated**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Accumulated**

 

**Other**

 

 

 

 

 

**Preferred Stock**

 

**Common Stock**

 

**Additional**

 

**During the**

 

**Comprehensive**

 

 

 

**Total**

 

**Number of**

 

 

 

 

**Number of**

 

 

 

 

**Paid In**

 

**Development**

 

**Income /**

 

**Noncontrolling**

 

**Stockholders'**

 

**Shares**

 

**Par Value**

 

**Shares**

 

**Par Value**

 

**Capital**

 

**Stage**

 

**(Loss)**

 

**Interest**

 

**Equity**

Balance, October 31, 2010

- 

 

$

-

 

8,029,686 

 

$

8,030 

 

$

29,603,027 

 

$

(26,999,277)

 

$

646,676 

 

$

(453,517)

 

$

2,804,939 

Stock warrants issued for compensation

- 

 

 

-

 

- 

 

 

- 

 

 

348,886 

 

 

- 

 

 

- 

 

 

- 

 

 

348,886 

Shares issued upon exercise of warrant

- 

 

 

-

 

200,000 

 

 

200 

 

 

1,599,800 

 

 

- 

 

 

- 

 

 

- 

 

 

1,600,000 

Acquisition of noncontrolling interest in subsidiary

- 

 

 

-

 

100,000 

 

 

100 

 

 

(2,071,576)

 

 

- 

 

 

- 

 

 

471,476 

 

 

(1,600,000)

Foreign currency translation adjustment

- 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

7,266 

 

 

(17,249)

 

 

(9,983)

Net loss

- 

 

 

-

 

- 

 

 

- 

 

 

- 

 

 

(1,192,412)

 

 

- 

 

 

(50,798)

 

 

(1,243,210)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 30, 2011

- 

 

$

-

 

8,329,686 

 

$

8,330 

 

$

29,480,137 

 

$

(28,191,689)

 

$

653,942 

 

$

(50,088)

 

$

1,900,632 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

**Four Rivers BioEnergy Inc.**

 

 

 

 

 

 

 

 

*(A Development Stage Enterprise)*

 

 

 

 

 

 

 

 

**Condensed Consolidated Statements of Cash Flows**

 

 

 

 

 

 

 

 

**(unaudited)**

 

 

 

 

 

 

 

 

 

**For the Six Months Ended**

**April 30,**

 

**For the Period from March 9, 2007 (date of inception) through**

**April 30,**

 

**2011**

 

**2010**

 

**2011**

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

$

(1,243,210)

 

$

(2,012,427)

 

$

(28,635,386)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Asset impairment loss

 

- 

 

 

- 

 

 

4,457,103 

Reversal of land sale costs provision

 

(151,250)

 

 

- 

 

 

(151,250)

Depreciation and amortization expense

 

112,589 

 

 

85,282 

 

 

435,082 

Forgiveness of debt

 

- 

 

 

- 

 

 

(296,714)

Shares issued for services

 

42,864 

 

 

- 

 

 

511,198 

Stock warrants issued for compensation

 

306,022 

 

 

113,895 

 

 

2,371,009 

Reversal of capitalised cost and interest accruals - non-cash

 

- 

 

 

- 

 

 

71,605 

Loss on sale of land

 

423,573 

 

 

- 

 

 

423,573 

Gain on sale of scrap and surplus assets

 

(411,748)

 

 

(933,979)

 

 

1,512,616 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Value added tax refunds receivable

 

(5,954)

 

 

3,724 

 

 

(10,205)

Inventory

 

8,798 

 

 

73,359 

 

 

(15,093)

Prepaid expenses and other current assets

 

(144,417)

 

 

(30,422)

 

 

(440,930)

Deposits

 

- 

 

 

158,140 

 

 

(129,264)

Accounts payable and accrued liabilities

 

(193,142)

 

 

131,762 

 

 

1,945,002 

Value added tax payable

 

- 

 

 

99,476 

 

 

- 

Net cash used in operating activities

 

(1,255,875)

 

 

(2,311,190)

 

 

(17,951,654)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property, equipment and intangible assets

 

(25,000)

 

 

(54,220)

 

 

(10,611,331)

Plant construction costs

 

- 

 

 

- 

 

 

(1,953,122)

Cash collected from (placed in) escrow

 

- 

 

 

200,000 

 

 

- 

Proceeds from sale of assets

 

690,626 

 

 

1,481,617 

 

 

3,405,678 

Proceeds from sale of land

 

1,500,000 

 

 

- 

 

 

1,500,000 

Costs associated with sale of assets 

 

(367,863)

 

 

(305,683)

 

 

(1,116,840)

Cash acquired in reverse merger

 

- 

 

 

- 

 

 

51,544 

Prepaid expenses

 

- 

 

 

- 

 

 

(100,000)

Net cash provided by (used in) investing activities

 

1,797,763 

 

 

1,321,714 

 

 

(8,824,071)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Issuance of common stock, net of issuance costs

 

- 

 

 

- 

 

 

26,460,586 

Payment of deferred consideration

 

(100,000)

 

 

(60,000)

 

 

(160,000)

Repayment of note payable

 

(500,000)

 

 

- 

 

 

- 

Repayment of automobile loans

 

- 

 

 

- 

 

 

(40,821)

Repayment of directors loan

 

- 

 

 

- 

 

 

(10,015)

Net cash (used in) provided by financing activities

 

(600,000)

 

 

(60,000)

 

 

26,249,750 

 

 

 

 

 

 

 

 

 

Effects of accumulated foreign exchange on cash

 

(9,493)

 

 

(41,557)

 

 

544,979 

Net increase (decrease) in cash and cash equivalents

 

(67,605)

 

 

(1,091,033)

 

 

19,004 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

86,609 

 

 

1,399,437 

 

 

- 

Cash and cash equivalents at end of period

$

19,004 

 

$

308,404 

 

$

19,004 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Interest paid

$

48,196 

 

$

- 

 

$

64,495 

Income taxes paid

$

- 

 

$

- 

 

$

- 

 

 

 

 

 

 

 

 

 

Non-cash financing and investing activity

 

 

 

 

 

 

 

 

Account payable applied to asset sale

$

- 

 

$

- 

 

$

179,136 

Property and equipment purchased on credit and automobile loans

$

- 

 

$

- 

 

$

640,821 

Issuance of common stock for property and equipment

$

- 

 

$

- 

 

$

1,008,000 

Issuance for warrants for property and equipment

$

- 

 

$

- 

 

$

131,335 

Loan receivable applied to asset purchase

$

- 

 

$

- 

 

$

100,000 

Prepaid expenses applied to asset purchase

$

- 

 

$

- 

 

$

150,000 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

9

**Four Rivers BioEnergy Inc.**

**(A Development Stage Company)**

**Notes to Condensed Consolidated Financial Statements**

**April 30, 2011 and 2010**

**(Unaudited)**

**Note 1:  Organization and Nature of Business**

Four Rivers BioEnergy Inc. (“Four Rivers” or the “Company”) was incorporated under the name Med-Tech Solutions, Inc. (which is referred to as MTSI) in the State of Nevada on May 28, 2004, and the Company changed the name on January 25, 2008 to Four Rivers BioEnergy Inc., (reference herein to Four Rivers and the Company includes, where the context requires, the Company and its subsidiaries).  On March 26, 2007, the Company entered into an Acquisition Agreement (the “Agreement”) with The Four Rivers BioEnergy Company Inc., a Kentucky corporation (which is referred to as 4Rivers), and all of the shareholders of 4Rivers to acquire 4Rivers by share purchase and share exchange.  Pursuant to the Agreement, MTSI acquired the entire issued and outstanding shares of common stock of 4Rivers in two stages: (a) on March 26, 2007, 15% was acquired in exchange for an investment by MTSI in cash into 4Rivers of $2,000,000; and (b) on December 4, 2007, the remaining 85% was acquired by the issuance of 2,392,059 shares of MTSI’s common stock to the shareholders of 4Rivers.  On December 4, 2007, as a condition of the acquisition, the Company raised $22,829,022, net of expenses, through a private placement of 1,657,881 shares of common stock.  As a further condition of the Agreement, the Company received 3,655,087 shares of common stock (647,059 shares were received in October 2007 and 3,008,028 shares were received during the quarter ended January 31, 2008) for cancellation held by certain former stockholders and former management of MTSI.  In addition, a former director agreed to waive his prior loans extended to MTSI amounting to $296,714. Upon consummation of the acquisition, 4Rivers became a wholly-owned subsidiary of the Company. The acquisition of 4Rivers was accounted for as a “reverse merger”, since the stockholders of 4Rivers owned a majority of the Company’s common stock immediately following the transaction and their management has assumed operational, management and governance control. The reverse merger is recorded as a recapitalization of 4Rivers pursuant to which 4Rivers is treated as the surviving and continuing entity.  The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s consolidated financial statements presented for periods prior to the reverse merger are those of 4Rivers. The Company has been a development stage entity, as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, since March 9, 2007 (which is regarded as the ‘date of inception’).

On July 30, 2008, the Company raised an additional $1,631,564, net of expenses, in a private placement of 131,061 shares of common stock.

The Company is currently engaged in the final stages of development of an Integrated Waste to Energy Plant which it is developing on a 41 acre secure, developed industrial site that it acquired in April, 2009 in the North East of England. The industrial site was a former Glaxo penicillin plant which had been partially converted by its previous owners into an operational waste liquid biomass processing plant and an operational biodiesel plant. The Company has invested in the site, equipment and infrastructure to re-configure it into an Integrated Waste-to-Energy plant, which will use waste liquid biomass as a feedstock. The Company plans to carry out the following principle processes on the reconfigured site: (a) it will process and pre-treat waste liquid biomass, using its established know-how, at the waste liquid biomass processing plant located on the site; (b) it will crush rape seed and create virgin oil which will be used as an additional feedstock for blending and will also be sold to food processors under contract to backhaul their used oil output and use as captive waste biomass feedstock; (c) it will produce renewable electricity from generators which it plans to acquire and install, which will use fuel produced by the Company from the processing plant. The site already has access to the power grid through on-site electricity sub-stations; and (d) it will also be able to produce Bio-diesel from its on-site bio-diesel plant, using the processed biomass and virgin oil in a blend as feedstock. Further, the Company plans to vertically integrate into the procurement of waste liquid biomass by acquisition and/or merger of existing established operators in this space. 

The Company is presently in the final stages of (i) completing the planned Integrated Waste-to-Energy plant; (ii) finalizing the necessary commercial arrangements and regulatory licenses and permits, to the extent not already in place; and (iii) completing its first acquisition in line with its plans to secure vertical integration into the waste liquid biomass feedstock space which is further discussed in Note 12 (“Subsequent Events”).

10

As further explained in Note 12 (“Subsequent Events”), on May 5, 2011 the Company raised $1,600,000 by way of issuance of a secured, convertible debenture, dated May 5, 2011.  After (i) paying the purchaser a fee and reimbursing its expenses  of $124,997 and (ii) redeeming an existing secured promissory note in the amount of $454,600, the net cash available from the issuance of the debenture (of $1,020,403) is being used to provide ongoing working capital and to purchase, install and operate the first generator train at the Waste-to-Energy Plant. 

The Company continues to be engaged in raising further amounts of capital required to enable it to complete the Waste-to-Energy plant, commence production of Renewable Electricity and conclude and implement its planned vertical integration acquisition strategy; however, there can be no assurance that the Company will be able to raise sufficient capital, on terms acceptable to it or at all, to be able to complete the Plant.

**Note 2: Going Concern, Liquidity and Management’s Plan**

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is a development stage enterprise and has not commenced planned principal operations. As shown in the accompanying unaudited condensed consolidated financial statements, the Company has incurred aggregate losses for the period from March 9, 2007 (date of inception) through April 30, 2011 of $28,191,689, which also represents its accumulated deficit at April 30, 2011. The Company has negative cash flows from operations since inception of $17,951,654. The limited revenues (of $3,201,412) that the Company has recorded were for a relatively short period in 2009 while it was testing and commissioning its UK oil processing and bio-diesel plant on a trial basis. 

These factors raise substantial doubt about the Company’s ability to continue as a going concern and the Company’s continued existence is dependent upon adequate additional financing being raised to enable it to successfully complete its planned Integrated Waste-to-Energy project and commence its planned operations. In connection with and as part of the Company’s ongoing and continuous process of seeking new financing, on May 5, 2011 the Company announced that it had entered into a securities purchase agreement with GCP VIII, LLC (“GCP”) whereby GCP agreed to purchase and the Company agreed to sell to GCF a two year Original Issue Discount Senior Secured Convertible Debenture (the “Debentures”) in the principal amount of up to $5,000,000. The Debenture is to be drawn down in two amounts. The first draw down was made on May 5, 2011, when the Company issued to GCP a Debenture in the principal amount of $2,133,333 in respect of which it received cash of $1,600,000. The second draw down will be made available to the Company (in the principal amount of $2,866,667, in respect of which the Company will receive cash of $2,150,000) when and if it achieves certain final operational milestones in its Waste-to-Energy pre-launch plan, which are described in the securities purchase agreement. In the event that these milestones are not met the second draw down will not be available and alternative financing will need to be found to enable the Company to continue with its operational plans.

The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

The Company intends to fund its operations and complete the planned Integrated Waste-to-Energy Plant through the issuance of new equity and debt financing. This includes the Debentures referred to above, however additional financing will be required in addition to that provided by the Debentures and the Company is continuing to seek to raise such additional financing. There can be no assurance that additional financing (including the second draw-down of the Debentures, which is conditional upon certain performance milestones being met) will be made available to the Company on satisfactory terms and conditions, if at all.  In the event that the Company is unable to continue as a going concern, it may be forced to realize assets in order to remain viable or even elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative as a likely outcome, since it is progressing with various potential sources of new capital and the Company anticipates a successful outcome from these activities.  However, the capital markets remain difficult and there can be no certainty about these matters.

11

**Note 3:  Summary of Significant Accounting Policies**

**Basis of Presentation**

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and the instructions to Form 10-Q; accordingly, they do not include all the information and footnotes required by United States generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal accruals) considered for fair presentation have been included. The Company has evaluated subsequent events through the issuance of this Form 10-Q. Operating results for the six months ended April 30, 2011 are not necessarily indicative of the results that may be expected for the year ending October 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended October 31, 2010 filed with the Securities and Exchange Commission on February 15, 2011.

**Consolidation Policy**

The unaudited condensed consolidated financial statements include the accounts of Four Rivers BioEnergy Inc., The Four Rivers BioEnergy Company Inc., The Four Rivers BioEthanol Company Limited, Four Rivers STT Trading Company Inc., Four Rivers STT Technology Inc., Four Rivers Real Estate Inc., BF Group Holdings Limited, Verta Energy Group Limited, Verta Energy Oils Limited, Verta Energy Trading Limited and Verta Energy Generation Limited (collectively the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. The 1.25% third party ownership of BF Group Holdings Limited at April 30, 2011 is recorded as non-controlling interest in the financial statements.

**Use of Estimates**

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Examples include stock-based compensation assumptions and the potential outcome of future tax consequences of events that have been recognized in our financial statements. Actual results could differ from those estimates.

**Development Stage Company**

The Company is considered to be a development stage entity as defined by the FASB ASC Topic 915. The Company has been a development stage entity since March 9, 2007. The Company undertook a testing and commissioning process to establish the quality of bio-diesel product that could be made to certain specification levels, and that suitable volume quantities could be produced consistently, prior to commercial production. During the third and fourth quarters of fiscal 2009, the Company generated trial revenue through these operations of the plant as an initial stage to fully commercializing this plant.

Although the Company has completed commissioning and testing the plant to its satisfaction, it will not commence production until (i) it has raised sufficient capital to enable it to complete the Integrated Waste-to-Energy Plant project, at least to the stage where the Plant has reached the point where significant profits may be reasonably anticipated and (ii) it has raised sufficient working capital to support operations.

The Company has recently raised part of the financing that it requires to commence production, but it requires further financing to enable it to do so and it is currently negotiating with various parties to obtain access to such additional capital. There can be no certainty about the outcome of such negotiations. Until such time, if ever, as the Company obtains access to adequate capital it is not able to commence production at its Waste-to-Energy plant. Company will remain as a development stage entity until the Plant commences commercial scale production.

The Company has not generated material revenues to date and has incurred significant expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from March 9, 2007 (date of inception) through April 30, 2011, the Company has accumulated losses of $28,191,689.

12

**Revenue Recognition**

The Company recognizes revenue from product sales in accordance with ASC 605 “Revenue Recognition”. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists (through written sales documentation); (2) delivery has occurred (through delivery into customer’s tanks and acceptance); (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded, although the Company has not experienced any such items to date and does not expect any significant provisions in the future. The Company has no discount, rebate or warranty programs. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Payments received in advance are deferred until revenue recognition is appropriate. 

**Foreign Currency Translation**

The Company’s functional and reporting currency is the United States Dollar.  The functional currency of the Company’s subsidiaries, The Four Rivers BioEthanol Company Limited and BF Group Holdings Limited, and its group subsidiaries, is their local currency (Great British Pound – GBP). Monetary assets and liabilities are translated into U.S. Dollars as at the balance sheet date and revenue and expense accounts are translated at the average exchange rate for the period or for year end. Transaction gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated statements of operations.

**Impairment of Long-Lived Assets**

The Company follows ASC 360, "Property, Plant and Equipment" which requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted discounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived assets and certain identifiable intangibles will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  ASC 360 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less disposal costs.

**Basic and Diluted Loss per Share**

The Company utilizes ASC 260, “Earnings Per Share” for calculating the basic and diluted loss per share. In accordance with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities were exercised or converted into common stock. Potentially dilutive securities were not included in the calculation of the diluted loss per share as their effect would be anti-dilutive. The diluted net loss per share for the three and six month periods ended April 30, 2011 and 2010 does not reflect the effect of 2,955,659 and 1,725,000 shares potentially issuable upon the exercise of the Company’s stock warrants (calculated using the treasury method) because they would be anti-dilutive, thereby decreasing the net loss per common share.

**Derivative instruments**

ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of ASC 815 and should be classified as a liability and marked-to-market. 

**Fair value of financial instruments**

In May 2009, the Company adopted accounting guidance which requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements.

13

Our short-term financial instruments, including cash, receivables, prepaid expenses and other assets and accounts payable, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value.

**Income taxes**

The Company utilizes ASC 740 “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. 

**Comprehensive Income (Loss)**

The Company utilizes ASC 220, "Comprehensive Income" which establishes standards for the reporting and displaying of comprehensive income (loss) and its components.  Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The guidance requires other comprehensive income (loss) to include foreign currency translation adjustments.

**Stock-Based Compensation**

The Company accounts for its stock based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

The Company uses the fair value method for equity instruments granted to non-employees and uses the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.

**Reclassifications**

Certain amounts in the prior year’s condensed consolidated financial statements and the related notes have been reclassified to conform to the current period presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

**Recent accounting pronouncements**

Recent accounting pronouncements issued by the FASB and the SEC did not have, or are not believed by management to have, a material impact on the Company's present or future consolidated financial statements.

14

**Note 4: Non-Controlling Interest**

The Company has acquired operating assets through a holding company structure consisting of a holding company, BF Group Holdings Limited, a United Kingdom formed company (“BF Group”), and several subsidiaries to own the land in freehold and leasehold, plant, patents and intellectual property and other assets and to operate those assets, as appropriate, for greatest operational, financing, income and tax efficiency.  The Company had an 85% equity interest in BF Group at October 31, 2010. On March 10, 2011, the Company received notice from BlueCrest Strategic Limited (“BlueCrest”) that, pursuant to a Put Option, dated April 6, 2009, by and between the Company and BlueCrest (the “Put Option”), BlueCrest exercised its option (the “Option”) to sell to the Company its 6,875 ordinary shares of £0.10 each (the “Shares”) in BF Group Holdings Limited (“BF Group”). Under the terms of the Put Option, BlueCrest was entitled to receive $1,600,000 from the Company in consideration for the Shares. Also, in connection with the exercise of its Option, BlueCrest exercised a warrant (the “Warrant”) to purchase 200,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) for an aggregate exercise price of $1,600,000. The Warrant was issued by the Company to BlueCrest on April 6, 2009 in connection with the Put Option. Accordingly, upon exercise of the Option, the Company owed BlueCrest $1,600,000 and upon exercise of the Warrant, BlueCrest owed the Company $1,600,000, which the Company and BlueCrest agreed to set-off against each other. In addition, in connection with acquisition of the Shares, the Company issued another 100,000 shares of its Common Stock to BlueCrest. As a result of the acquisition of the Shares, the Company now owns 98.75% of BF Group’s issued and outstanding ordinary shares. 

The third party ownership of BF Group is recorded as a non-controlling interest in the financial statements effective November 1, 2009.

**Note 5: Property, Plant and Equipment**

A breakdown of the Company’s main items of property, plant and equipment are given in the table below:

 

 

 

 

 

 

 

**April 30,**

**2011**

 

**October 31,**

**2010**

Land – Kentucky

$

2,016,663 

 

$

- 

Plant and equipment

 

1,836,488 

 

 

1,807,940 

Plant in process

 

92,877 

 

 

67,877 

Office equipment

 

4,078 

 

 

3,925 

Automobiles

 

32,500 

 

 

31,286 

Cost basis

 

3,982,606 

 

 

1,911,028 

Accumulated depreciation and amortization

 

(341,297)

 

 

(233,001)

Carrying value

$

3,641,309 

 

$

1,678,027 

Depreciation expense was $51,048 and $41,497 for the three month periods ended April 30, 2011 and 2010, respectively.

Depreciation expense was $101,259 and $85,282 for the six month periods ended April 30, 2011 and 2010, respectively.

Depreciation expense was $401,097 for the period from March 9, 2007 (date of inception) to April 30, 2011 of which $84,951 was included as part of cost of goods sold.

**Note 6: Land Held for Sale**

Between 2007 and 2008 the Company acquired approximately 437 acres of land on a site located on the Tennessee River approximately 12 miles upriver of Paducah near Calvert City, Marshall County, Kentucky.  The total purchase price of the land was approximately $6.3 million.  

Based on a valuation of the Kentucky land during the year ended October 31, 2008, the Board concluded that it was appropriate in the circumstances to adjust the carrying value of the land in the balance sheet by an impairment charge of $532,224 at October 31, 2008. Consequently, the land value was reduced to $5,811,240 at October 31, 2008. This reduction in value was a consequence of the general downward trend in the value of land and property across the US during 2008. 

15

During the fourth quarter of the fiscal year ended October 31, 2009 the Company’s management decided that it would commence activities to market and sell the land in Kentucky that it had purchased in early 2008. This land had originally been acquired in the context of the Company’s initial plan to build a green field bio-energy plant on it. Management made this decision because the global capital markets were averse to financing green field bio fuels developments and, in the opinion of management, this situation will prevail for some time to come, and because the cash tied up in the land can be released for better use in operations.  As a result, the Company classified the land as ‘Land Held for Sale’ at October 31, 2009. The Company recorded an impairment charge of $2,111,239 during the fourth quarter of fiscal 2009, reducing the carrying value of the land to $3,700,000, which was the then fair value less estimated costs to sell.

On December 9, 2010, the Company entered into a contract to sell approximately 220 acres of its 437 acre plot of land in Kentucky for total cash consideration of approximately $1,500,000. On January 18, 2011 the sale transaction was completed and the Company received the net proceeds of the sale which amounted to approximately $910,000, after payment of costs, land taxes and redemption of the $500,000 loan which was secured by way of mortgage against the land. The Company recorded a loss of $423,573 on the sale of the land.

**Reclassification of ‘Land Held for Sale’ to ‘Land, Property, Plant and Equipment’**

During the first quarter of fiscal 2011, the Company made the decision to retain approximately 217 acres of the land that was previously classified as land ‘held-for sale’ for use as a site for a possible future Waste-to-Energy plant.  In January 2011, the Company had an independent appraiser value this 217 acres site at $2,080,000 (market value). The Company’s current intention is to retain this land and not sell it.  Thus, with this renewed intention to hold the remaining land the Company has considered that it should reclassify that land from ‘held-for-sale’ to ‘held-and-used’ during the quarter ending January 31, 2011. As a result, the Company has recorded land with a carrying amount of $2,016,663 as a part of Land, Property, Plant and Equipment at January 31, 2011, this amount being the lower of the current appraised value of the land or the carrying value of the land prior to its classification as ‘held-for-sale’. Upon the decision to retain the land, the Company has reversed a provision which it had previously established for possible land sales costs of $151,250.

**Note 7: Intangible Assets**

Amortization expense was $5,664 and $0 for the three month periods ended April 30, 2011 and 2010, respectively. Amortization expense was $11,328 and $0 for the six month periods ended April 30, 2011 and 2010, respectively. Amortization expense was $33,983 for the period from March 9, 2007 (date of inception) to January 31, 2011.Expected amortization expense for each of the next five years is $22,655 per year.

**Note 8: Related Party Transactions**

The Company has entered into the following transactions with related parties who are executive officers, directors and/or shareholders of the Company, as described in more detail below:

**Services provided by PCF Solutions Limited to the Company**

On February 2, 2009, the Company entered into a contract with P.C.F. Solutions Limited (“PCF”), a private Limited Company, of which Mr. Stephen Padgett, our Chief Executive Officer, is a director and majority shareholder. Under the terms of this contract, PCF provides the Company with services of certain of its employees, who provide the Company with accounting and administrative support.

Since February 2, 2009 PCF has also supplied Mr. Padgett’s services to the Company under contract and Mr. Padgett’s compensation is paid to him via the service contract with PCF. Mr. Padgett was an employee of the Company from January 2008 to January 2009 and prior to his employment he provided services as a part-time contractor.

Amounts charged to the Company under these arrangements are set out in the Related Party Payments Summary Table below.

16

**Services provided by PCF to Four Rivers Biofuels Limited**

On September 16, 2010, the Company’s subsidiary, Four Rivers Biofuels Limited (“Biofuels”), entered into a series of agreements with PCF, whereby PCF agreed to provide payroll, accounting support, business planning and financial modeling support, human resources and general management services to Biofuels.

The monthly payments due to PCF under these agreements reflect the charges for the provision of services by specific individuals and an amount to contribute to the cost of PCF’s offices in Stockton upon Tees, which now serves as Biofuels’ administration offices in addition to being PCF’s office. Services were provided in line with this agreement since February 2010 on a transitioning basis. PCF and Biofuels are required to provide three months’ notice to the other party to terminate the agreements.

PCF currently provides all services to the Company and Biofuels at a discount to market prices and on a flexible basis, to accommodate the Company during a period of shortage of working capital.

Amounts charged to Biofuels under this contract are set out in the Related Party Payments Summary Table below.

**Services provided by the ARM Partnership to the Company**

On February 1, 2009, the Company entered into a contract with The ARM Partnership (“ARM”), a private UK partnership of which Mr. Martin Thorp, the Company’s Chief Financial Officer, is the managing partner. ARM  is being compensated under this agreement for procuring the services of Mr. Thorp to the Company.

Under the terms of the agreement, ARM also provides the Company with the services of Mr. Robert Galvin, a partner of ARM, who is the Company’s Corporate Secretary, and in addition provides compliance and business services at agreed rates, which are a direct re-charge of the payments made to Mr. Galvin by ARM related to the services that he provides to the Company.

Amounts charged to the Company under this contract are set out in the Related Party Payments Summary Table below.

**Services provided by Mr. Gary Hudson**

Mr. Hudson, who has been a director of the Company since March 2007, provided his services as an employee of the Company’s US subsidiary until November 1, 2009, after that date he provided his services as a contractor to the Company. Amounts charged to the Company under these arrangements are set out in the Related Party Payments Summary Table below.

**Services provided by independent, non-executive directors**

Mr. Neil McRae, who has been a non-executive director of the Company since May 2009, provides his services to the Company under a contract for services.

Mr. John Nangle, who was a non-executive director of the Company from December 2007 to April 2009, provided his services to the Company under a contract for services.

Amounts charged to the Company under these arrangements are set out in the Related Party Payments Summary Table below.

**Services provided by employees and contractors who are also shareholders**

Certain of the former shareholders of The Four Rivers BioEnergy Company Inc., (“FRBEC”) who received shares of the Company’s common stock by virtue of the Company’s acquisition of FRBEC in 2007 (“Founding Shareholders”), but are not now directors or officers of the Company, have also provided services to the Company under contract or as employees of the Company and/or its subsidiaries, from time to time since the inception of the Company on March 9, 2007.

Amounts charged to the Company under these arrangements are set out in the Related Party Payments Summary Table below.

17

**Services provided by the holder of our Series A Preferred Stock**

The holder of our Series A Preferred Stock (International Capital Partners SA (“ICP”)) received payments, prior to the cancellation of the Series A Preferred Stock on October 31, 2009, in respect of (a) their role as a placement agent in the Private Placements of the Company’s shares of Common Stock, which they arranged in 2007 and 2008 and (b) in respect of certain consulting contracts entered into by the Company and ICP to provide corporate finance, investor relations and related advice and support.

Amounts charged to the Company under these arrangements are set out in the Related Party Payments Summary Table below.

**Related Party Payments Summary Table**

**Amounts payable to Related Parties**

**Three months ended**

**April 30,**

 

**Six months ended**

**April 30,**

 

**From inception (March 9, 2007) to**

**April 30,**

 

**2011**

 

**2010**

 

**2011**

 

**2010**

 

**2011**

Mr. Stephen Padgett (both from employment and as a PCF consultant)

$

30,000

 

$

42,300

 

$

60,000

 

$

84,600

 

$

1,006,567

PCF Solutions Limited (excluding Mr. Stephen Padgett)

 

88,483

 

 

98,557

 

 

176,623

 

 

133,882

 

 

891,687

Total PCF

 

118,483

 

 

140,857

 

 

236,623

 

 

218,482

 

 

1,898,254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARM Consulting fees (Mr. Martin Thorp)

 

28,500

 

 

40,500

 

 

57,000

 

 

81,000

 

 

708,198

ARM consulting fees (Mr. Robert Galvin)

 

5,086

 

 

12,150

 

 

11,312

 

 

28,350

 

 

271,291

Total ARM

 

33,586

 

 

52,650

 

 

68,312

 

 

109,350

 

 

979,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Gary Hudson 

 

21,000

 

 

7,250

 

 

42,000

 

 

53,000

 

 

966,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Neil McRae

 

4,500

 

 

6,300

 

 

9,000

 

 

14,000

 

 

54,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. John Nangle

 

-

 

 

-

 

 

-

 

 

-

 

 

69,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Founder Shareholders (excluding directors)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Who were engaged on a long-term basis on our US projects

 

-

 

 

11,850

 

 

-

 

 

54,580

 

 

2,266,004

Who provided consulting services to the group

 

-

 

 

-

 

 

-

 

 

-

 

 

803,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

International Capital Partners S.A.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consulting fees

 

-

 

 

-

 

 

-

 

 

-

 

 

675,000

Commissions payable regarding private placements

 

-

 

 

-

 

 

-

 

 

-

 

 

2,636,558

 

$

177,569

 

$

218,907

 

$

355,935

 

$

449,412

 

$

10,349,820

**Deferred Compensation due to certain Related Parties**

In view of the cash constraints upon the Company and to assist the Company; PCF, ARM, Mr. Hudson and Mr. McRae agreed with the Company to defer receipt of certain amounts of unpaid compensation due to them as set out in the table below.

In the case of PCF and ARM these amounts related to payments due under contract with PCF and ARM respectively for the services of Mr. Padgett and Mr. Thorp; and also to other payments due to PCF and ARM for the services of other PCF employees and, in the case of ARM, Mr. Galvin; as described above.

18

The amounts of the deferred compensation payable to related parties (officers and directors and entities related to them), excluding accrued interest payable, which is detailed separately below the table, are summarized in the table set out below.

 

 

 

 

 

 

 

**April 30,**

**2011**

 

**October 31,**

**2010**

Mr. S Padgett

$

66,141

 

$

66,141

PCF Solutions Limited (excluding Mr. Padgett)

 

40,401

 

 

40,401

ARM consulting fees (Mr. Thorp)

 

58,500

 

 

58,500

ARM consulting fees (Mr. Galvin)

 

18,900

 

 

18,900

Mr. Gary Hudson

 

38,532

 

 

38,532

Mr. Neil McRae

 

8,400

 

 

8,400

Under the terms of the agreements governing the deferred amounts payable, repayment will be made (a) once an investment or a series of investments is made into the Company which involves a cash receipt (or aggregate cumulative cash receipts) of at least $2 million, which includes some element of equity issuance (including warrants, options or shares of any class or type). Payment will be made immediately or against a payment plan to be approved by the board of directors , but not to exceed (at least as regards an amount equal to 10% of the invested amount) one year from the date that aggregate investments reach $2 million (the ‘Due Date’). Interest at 4% per annum shall accrue on the unpaid balance from July 31, 2010 until the Due Date and then at 8% per annum after the Due Date and any repayment plan must treat each creditor equally; or (b) in the event that the creditor’s contract is terminated by the Company or the Company ceases to be actively engaged in its waste-to-energy development plan or becomes insolvent, in which cases the amount becomes payable immediately. 

The aggregate amount of accrued unpaid interest payable on the deferred compensation payable at April 30, 2011 and October 31, 2010 was $6,926 and $2,309, respectively, which is included in Accounts Payable and Accrued Liabilities in the Condensed Consolidated Balance Sheets at those period end dates. 

**Note 9: Stockholders’ Equity**

The Company is authorized to issue 100,000,000 shares of preferred stock, with par value of $0.001 per share, of which no shares were outstanding at April 30, 2011 and October 31, 2010.

The Company is authorized to issue 500,000,000 shares of common stock, with par value of $.001 per share.  As of April 30, 2011 and October 31, 2010, there were 8,629,687 and 8,329,687 shares of common stock issued, respectively, of which 300,000 shares are held in escrow as contingent consideration for the acquisition of the Kreido assets that are not accounted for as outstanding at April 30, 2011 and October 31, 2010. Accordingly, there are 8,329,687 and 8,029,687 shares of common stock outstanding at April 30, 2011 and October 31, 2010, respectively.

On November 17, 2010, the Company approved the grant of warrants to subscribe for 905,659 shares of common stock. Warrants to purchase 200,000 shares of common stock were issued to certain officers and employees and warrants to purchase 705,659 shares of common stock were issued to consultants for services (including warrants to purchase 495,659 shares of common stock issued to consultants acting as directors). The warrants have an exercise price of $0.40 per share and 20% vested upon grant and the balance will vest based on attainment of various performance conditions. The warrants will expire 7 years from the date of grant. Compensation expense related to employee warrants will be recorded over the vesting periods, based on the grant date fair value of $79,380. Employee compensation expense of $16,917 and $50,402 was recognized during the three and six months ended April 30, 2011, respectively. Compensation expense related to consultant warrants will be recorded over the vesting periods, based upon the fair value of the warrants at each vesting period. The grant date fair value of those warrants was calculated to be $280,076. During the three and six months ended April 30, 2011 the Company has recorded an expense of $64,859 and $147,223, respectively, related to the fair value of the consultant warrants vesting during those periods, using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 2.25% - 2.63%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 199% - 205%; and (4) an average expected life of the warrants of 6.5 - 7 years.

19

On November 17, 2010, the Company approved the modification of existing warrants to purchase an aggregate of 662,535 shares of the Company’s common stock to certain executive officers, directors and employees of the Company. Warrants to purchase 25,001 shares of common stock were issued to certain executive officers and the remaining warrants were issued to consultants (including warrants to purchase 550,027 shares of common stock issued to consultants acting as directors). The modified warrants are exercisable at an exercise price of $0.40 per share and will expire 7 years from the date of grant. The warrants vest based on attainment of certain performance conditions. Compensation expense related to employee warrants will be recorded over the vesting periods, based on the grant date fair value of $9,923. Employee compensation expense of $2,644 and $5,396 was recognized during the three and six months ended April 30, 2011, respectively. Compensation expense related to consultant warrants will be recorded over the vesting periods, based upon the fair value of the warrants at each vesting period. During the three and six months ended April 30, 2011 the Company has recorded an expense of $73,246 and $103,001, respectively,  related to the fair value of the consultant warrants vesting during those periods, using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 2.63%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 205%; and (4) an average expected life of the warrants of 6.5 years.

On November 30, 2010, the Company approved the grant of warrants to purchase an aggregate of 125,000 shares of the Company’s common stock to PR Financial Marketing LLC as compensation for consulting services to be provided. The warrants vested upon grant, are exercisable at an exercise price of $0.35 per share and will expire on November 30, 2015. The Company has recorded an expense of $42,864 related to the fair value of the warrants that vested, using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 1.38%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 207%; and (4) an expected life of the warrants of 5 years.

On March 10, 2011, the Company received notice from BlueCrest Strategic Limited (“BlueCrest”) that, pursuant to a Put Option, dated April 6, 2009, by and between the Company and BlueCrest (the “Put Option”), BlueCrest exercised its option (the “Option”) to sell to the Company its 6,875 ordinary shares of £0.10 each (the “Shares”) in BF Group Holdings Limited (“BF Group”). Under the terms of the Put Option, BlueCrest was entitled to receive $1,600,000 from the Company in consideration for the Shares. Also, in connection with the exercise of its Option, BlueCrest exercised a warrant (the “Warrant”) to purchase 200,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) for an aggregate exercise price of $1,600,000. The Warrant was issued by the Company to BlueCrest on April 6, 2009 in connection with the Put Option. Accordingly, upon exercise of the Option, the Company owed BlueCrest $1,600,000 and upon exercise of the Warrant, BlueCrest owed the Company $1,600,000, which the Company and BlueCrest agreed to set-off against each other. In addition, in connection with acquisition of the Shares, the Company issued another 100,000 shares of its Common Stock (with a value of $30,000) to BlueCrest.

**Note 10: Notes Payable**

**Land purchase note**

On December 31, 2009, the Company was obligated to make payment of $600,000 under the terms of a promissory note issued to a vendor of part of the Kentucky land that it acquired in 2007 and 2008. At that time the Company made a partial payment of $60,000 against the amount due and reached an informal and non-binding agreement with the note holder to defer payment of the balance. Since then, and until January 21, 2011, the Company was in default under the term of the promissory note. The note is silent as to an interest rate and therefore no interest has been paid or accrued from the inception of the note. On January 21, 2011 the Company reached agreement with the note holder whereby the terms of the Note were modified by way of an Addendum and, as explained in Note 12 (“Subsequent Events”), this note was repaid in its entirety on May 5, 2011.

The following are the principal terms of the Addendum:

·

The Company made an immediate payment to the holder of $100,000, reducing the amount of the principal payable thereunder to $440,000.

·

The maturity date of the promissory note was extended to June 30, 2011, although the Company shall have the right to make partial or complete repayments of principal at any time before June 30, 2011 at its option and without further charge or penalty.

·

Interest shall become payable from the date of the Addendum on the remaining principal amount outstanding at the rate of 8% per annum, payable monthly, starting on February 21, 2011.

20

·

The Company made an immediate payment of $25,000 to the holder as a fee for agreeing to restructure the Promissory Note.

·

The Company has recognized the holder’s claim to be able to enforce a vendor’s lien over the land for the amounts due under the promissory note

·

The Company shall make a contribution to the Holder’s legal costs incurred in connection with the default and rectification thereof in the amount of $10,000. This amount shall become payable when the Principal amount due is repaid in full.

·

In the event that (a) the Company does not honor its obligations under the Addendum to make payments to the holder and (b) as a consequence the holder forecloses on its vendor’s lien and forces a judicial the sale of the land; and (c) a shortfall arises between the amounts received on such sale and the total amounts due to the Holder under the note; the Company has agreed to guarantee payment of such shortfall, if any, to the holder.

**Note payable**

On September 7, 2010 the Company received proceeds of $500,000 pursuant to a promissory note (the “Note”) which was repaid in full, without penalty, in January 2011 from the proceeds of the land sale described in Note 6.

**Note 11: Commitments and Contingencies**

**Litigation**

From time to time, the Company may be a party to one or more claims or disputes which may result in litigation. The Company’s management do not, however, presently expect that any such matters will have a material adverse effect on the Company’s business, financial condition or results of operations.

N**ote 12: Subsequent Events**

**Issuance of Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”)**

On May 5, 2011, pursuant to a securities purchase agreement between the Company and GCP VIII, LLC (the “Purchaser”) (the “Purchase Agreement”), the Company agreed to sell, and the Purchaser agreed to purchase, up to $5,000,000 of the “Debentures” on two separate closing dates.

On the first closing date (May 5,  2011), the Company (a) sold to the Purchaser a Debenture having a principal amount of $2,133,333, in respect of which it received gross proceeds of $1,600,000 (fees and expenses incurred by the Purchaser of approximately $125,000 have been deducted from the proceeds) and (b) issued to the Purchaser a five-year Common Stock purchase warrant to purchase 730,689 shares of our Common Stock at an exercise price of $.40 per share.

The second closing may take place only after the Company satisfies the Purchaser that it has met certain operational milestones which are described in the Purchase Agreement. The principal amount of the Debenture to be issued at the second closing is $2,866,667, of which the gross proceeds to be received by the Company would be $2,150,000. In the event of a second closing, the Company will be obligated to issue a five-year Common Stock purchase warrant to the Purchaser to purchase 981,863 shares of Common Stock, on similar terms and conditions as the First Closing Warrant at an exercise price of $.40 per share.

The Company and its subsidiaries have entered into certain security agreements, deeds of priority and mortgages, which give the Purchaser a first security interest in all of the assets of the Company and its subsidiaries existing now and at any future date whilst the Debentures remain outstanding.

The Debentures are due for repayment on the two year anniversary of their issuance in an amount equal to 118% of their principal amount. No regularly scheduled interest payments are to be made on the Debentures. The Company may prepay any portion of the principal amount of the  Debentures at its option at any time for an amount equal to 118% of the principal amount being prepaid, subject to the Purchaser being given the right to convert its Debenture prior to any early redemption becoming effective. The  Debentures are convertible at any time, in whole or in part, into shares of the Company’s Common Stock at the option of the Purchaser.  The conversion price of the Debentures shall not, in any circumstance, be less than $1.50 per share; and, subject to this floor, shall be the lesser of (i) $3.00 or (ii) 80% of the average of the volume weighted average price of the Company’s Common Stock for the 30 consecutive trading days ending on the trading day that is immediately prior to the applicable date of conversion. 

21

The warrants referred to above (the “Warrants”) entitle the Purchaser, at any time on or after each Warrant’s applicable date of issuance and on or prior to the close of business on the five year anniversary of their issuance (the “Termination Date”), to subscribe for and purchase from the Company, shares of Common Stock, with an exercise price of $0.40 (subject to adjustment as provided in the Warrants). The holder may exercise up to two thirds of the shares issuable upon the exercise of each Warrant by means of a “cashless exercise”. In the event, however, that (a) after the first year anniversary of the relevant warrant issue date there is no effective registration statement (or equivalent) registering the shares underlying the Warrants, or (b) at the applicable Termination Date, if any part of the applicable Warrant remains unexercised and there is at that time no effective registration statement or equivalent, then the Warrant (or any part that is not exercised) may be exercised in its entirety on a cashless basis.

**Repayment of Land Purchase Note**

The proceeds from the sale of the first closing of the Debentures described above were applied in part to repay a previous Land Purchase Note obligation in the amount of $440,000 (plus costs, accrued unpaid interest and expenses amounting in aggregate to $14,600).

**Entry into a Conditional Contract to Acquire a Waste Oil Company**

On May 24, 2011, Four Rivers BioEnergy Inc.’s wholly owned subsidiary, Verta Energy Trading Limited (“VETL”), entered into a share purchase agreement  (“the Agreement”) with the shareholders of ML Oils Limited (“ML”) whereby VETL has agree to buy, and the ML shareholders have agreed to sell, all of the issued share capital of ML to VETL in exchange for consideration payable on completion of the sale (“Completion Consideration”) and a possible earn-out payment based on the financial performance of ML (“Deferred Consideration”).

ML is incorporated under the laws of England and Wales. It owns an established business which collects, purchases, aggregates, treats and sells waste used cooking oils in the United Kingdom. Its processing and storage facility is based in North Wales (“the ML Premises”).

The Completion Consideration comprises (a) the payment of £500,000 (approximately $800,000) to the ML shareholders, (b) the issuance to the ML shareholders of shares in VETL such that after the acquisition of ML the ML shareholders will own 12.5% of the issued share capital of VETL and (c) the issuance by Four Rivers BioEnergy Inc. (“the Company”) of warrants to purchase 100,000 shares of its common stock at an exercise price of $0.50 per share, which will vest upon attainment of certain to be agreed to performance targets.

The Deferred Consideration is based upon the earnings before interest, tax and depreciation (“EBITDA”) reported in ML’s audited financial statements for each of its financial years ended April 30, 2012 and 2013 (adjusted as set out in the Agreement) and shall be calculated at the rate of 1.2 times the amount by which the EBITDA in each year exceeds £260,000 (approximately $420,000), up to an aggregate maximum of £700,000 (approximately $1,120,000) of Deferred Consideration. The ML shareholders have the right to elect to receive any Deferred Consideration payable to them in the form of cash or further shares in VETL (although such additional shares shall not in any circumstance result in their aggregate shareholding in VETL exceeding 25% of the then issued share capital of VETL). Such number of additional shares will be determined based upon the then value of VETL, calculated as 3.5 times VETL’s current year annualized earnings before interest, tax, depreciation and amortization.

Under the terms of the Agreement, to the extent that ML shall have less than £150,000 (approximately $250,000) in net working capital at closing, the difference shall be subtracted from the cash component of the Completion Consideration. To the extent that the net working capital at closing is greater than £150,000, the difference shall be payable in cash to the ML shareholders following the preparation and agreement of the Completion Accounts (as that term is defined in the Agreement). 

Completion of the Agreement is subject to certain conditions being met by the parties prior to September 7, 2011. The primary conditions relate to completion of certain agreements relating to the post acquisition business of ML and VETL, being: (a) a waste oil supply agreement between ML Oil Collections Limited (“Small Collections”) (an affiliated company Martin Corbett, one of the ML shareholders) and VETL governing the exclusive supply of product by Small Collections to VETL and ML; (b) certain contracts between ML and (i) a supplier and (ii) the landlord of the ML Premises; (c) a service contract between ML and VETL and Mr. Corbett, and (d) a shareholders’ agreement between the future shareholders of VETL. The Agreement also includes comprehensive warranties provided by the ML shareholders. 

22

**Item 2.  Management’s Discussion and Analysis or Plan of Operations.**

**Formation and Initial Financing**

The Company was incorporated under the name Med-Tech Solutions, Inc. (“MTSI”) in the State of Nevada on May 28, 2004, and its name was changed on January 25, 2008 to Four Rivers BioEnergy Inc. (“Four Rivers” or the “Company”). Reference herein to Four Rivers and the Company includes where the context requires, the Company and its subsidiaries.  

On March 26, 2007, the Company entered into an Acquisition Agreement (the “Agreement”) with The Four Rivers BioEnergy Company Inc., a Kentucky corporation (which we refer to as 4Rivers), and all of its shareholders to acquire 4Rivers by share purchase and share exchange. Pursuant to the Agreement, MTSI acquired the entire issued and outstanding shares of common stock of 4Rivers in two stages: (a) on March 26, 2007, 15% was acquired in exchange for an investment by MTSI in cash into 4Rivers of $2,000,000; and (b) on December 4, 2007, the remaining 85% was acquired by the issuance of 2,392,059 shares of MSTI’s common stock to the shareholders of 4Rivers.  

On December 4, 2007, as a condition of the acquisition, the Company raised $22,829,022, net of expenses, through a private placement of 1,657,881 shares of common stock (the “Initial Private Placing”). As a further condition of the Agreement, the Company received 3,655,087 shares of common stock for cancellation held by certain former stockholders and former management of MTSI.  In addition, at that time a former director agreed to waive his prior loans extended to MTSI amounting to $296,714.  Upon consummation of the acquisition, 4Rivers became a wholly-owned subsidiary of the Company.

The acquisition of 4Rivers was accounted for as a “reverse merger”, since the stockholders of 4Rivers owned a majority of the Company’s common stock immediately following the transaction and their management has assumed operational, management and governance control. The reverse acquisition transaction is recorded as a recapitalization of 4Rivers pursuant to which 4Rivers is treated as the surviving and continuing entity.  The Company did not recognize goodwill or any intangible assets in connection with this transaction.  Accordingly, the Company’s historical consolidated financial statements are those of 4Rivers and 4Rivers UK.

**Current Plan of Operations**

Our objective is to build and operate a network of ‘Waste-to-Energy’ plants through:

(a) The acquisition of distressed plants, technologies and assets and their subsequent improvement, conversion, development and expansion into ‘Integrated Waste-to-Energy Plants’; and

(b) Specializing in the procurement and processing of liquid waste biomass feedstocks for use in our Waste-to-Energy plants to produce sustainable fuels and/or energy. Where appropriate, we plan to vertically integrate into the supply chain for these feedstocks in order to have better control over the quantity, quality and price of the feedstock.

We use the term ‘Integrated Waste-to-Energy Plant’ to describe our business model which involves conducting many of the processes involved in the generation of sustainable energy and/or bio-fuel from waste liquid biomass feedstocks at one integrated industrial site. This involves, where appropriate:

·

The procurement, processing, storage, mixing and pre-treatment of waste liquid biomass feedstocks; an area in which we have considerable know-how;

·

The generation and sale of sustainable energy (electricity) and/or the production and sale of sustainable bio-fuels from our processed feedstocks; and

·

The further processing and treatment of the various by-products, co-products and waste products from the aforementioned processes for sale and recycling into the fuel, food or animal feed chains.

We believe that our Waste-to-Energy strategy differentiates us in the market in several ways:

·

The careful identification, negotiation, structuring and purchasing of distressed assets and technologies and their subsequent development and improvement into purpose built Waste-to-Energy plants (a) substantially reduces the overall capital cost and (b) accelerates the build, testing and permitting timelines; when compared to similar sized ‘green field’ developments;

23

·

The emphasis on vertical integration of feedstock procurement, processing and pre-treatment substantially reduces risk and uncertainty in the areas of cost, availability, quality and proof of source (for verification of sustainability) of our feedstock; and

·

The integration of several key processes on one industrial site, within a natural captive ‘closed loop’, results in substantial cost savings and efficiencies compared to operations that are separated geographically, operationally, logistically and/or legally.

I.

Our business model has variety and choice built into it, for example:

§

We plan to use various waste and sustainable source feedstocks in our feedstock processing and pre-treatment facilities thereby increasing choice and reducing risks associated with  producers who typically use a single feedstock source; and

§

We plan to develop several potential or actual sources of revenue, for example revenue from fuel, energy, co-products, by-products and waste-products; and also to build choice into our revenue cycle such that we are able to focus production on sustainable energy or bio-fuels dependent upon market conditions and available government support for sustainable energy and/or bio-fuels, thereby optimizing revenue and profitability dependent upon market conditions.  We will consider broadening our mix of renewable energy revenue streams in the future (e.g. solar and wind), as appropriate, particularly where we acquire land assets that are surplus to our immediate requirements and have development potential and where we have access to adequate power grid capacity.

We are currently at a relatively advanced stage in the development of our first Waste-to Energy plant on an industrial site in the north east of England that we acquired in 2009, which, at the time of our acquisition included a complete operational biodiesel plant and a substantial waste liquid biomass processing plant. We have largely completed the redevelopment of the industrial site into our first Integrated Waste-to-Energy plant; and we now are now seeking to raise the further capital that we need to enable us complete this project in stages. 

On May 5, 2011, we raised $1,600,000 through the issuance of a debenture, under the terms of a securities purchase agreement. After (i) deducting the fees and expenses of the purchaser of the debenture (of $124,997) and (ii) repaying an existing loan directly out of the proceeds of the debenture (of $454,600), we received net cash of $1,020,403. Under the terms of this securities purchase agreement we will be entitled to draw down a further $2,000,000 (net of costs and expenses) upon achieving certain pre-production milestones which are set out in the securities purchase agreement. 

On May 24, 2011, we entered into a conditional share purchase agreement to acquire all of the share capital of an established UK waste oil collection and handling business in exchange for the payment, upon completion of £500,000 (approximately $800,000) in cash, that number of shares equal to 12.5% of the issued share capital of Verta Energy Trading Limited (which is presently a wholly owned subsidiary of ours, which will own and operate the waste oil processing part of our planned UK Waste-to-Energy business) and warrants to purchase 100,000 shares of our common stock at $0.50 per share (with performance based vesting). In addition up to a further £700,000 (approximately $1,120,000)  of deferred consideration may be paid which is linked to and conditional upon future performance thresholds being exceeded. The managing director of the company to be acquired is to join our management team under the terms of a service contract to be agreed with him. He and his company bring to us extensive experience in the market for the collection, sourcing and handling of waste oils. This acquisition will mark an important base element to our supply chain vertical integration strategy. 

In addition to the financing required to complete and commence operations at the UK Waste-to-Energy plant, we will also need to raise additional capital to consummate and finance this proposed acquisition.

This proposed Waste-to-Energy Plant will include the following key elements:

1.

Processing of waste liquid biomass into a viable feedstock to use in the production of renewable electricity and/or bio-fuel, deploying the substantial liquid waste biomass processing plant, infrastructure and know-how which we acquired when we purchased the industrial site and which we have expanded and ‘reclaimed’ during our re-development of the site;

24

2.

Gaining access to waste liquid biomass for use in the aforementioned processing plant through implementing various strategies which enable us to vertically integrate into the feedstock supply chain, thereby enabling us to obtain a desirable degree of control over the waste liquid biomass that we require to feed into our processing plant;

3.

Generating renewable electricity by using the processed feedstock referred to above in diesel engines to produce heat and power and selling the generated electricity directly into the power grid using the on-site electricity sub-stations which are already on our site; and/or using the on-site biodiesel processing plant to produce bio-diesel using the same base feedstock for use in the bio-diesel plant; and

4.

We plan to establish a virgin oil crush and refinery plant on the site; our strategic rationale being (i) we may use virgin oil as a top up feedstock to produce electricity or bio-diesel and our cost of production should be below market cost of oil; and (ii) our market research suggests that we will be able to secure captive supply of ‘back-hauled’ waste cooking oils from food processing customers for our refined rape seed oil.

In addition to our partially complete Waste-to Energy plant we also own surplus land in and around the industrial site in the UK. The industrial site itself extends to 41 acres and is set within a secure parameter fence. Our Waste-to-Energy plant occupies about half of this acreage. We are exploring alternative uses for the rest of the site, including the potential to use it to develop a solar energy facility, making further use of the on-site electricity sub-stations to sell electricity directly into the power grid. We also own approximately 100 acres of land mainly surrounding the UK industrial site which is zoned for possible future industrial development and therefore provides substantial potential for expansion and development. 

In addition we own some 217 acres of land in Kentucky. At the time of the initial private placement in 2007 we acquired some 437 acres of land in Kentucky, which we intended to use as a site for a substantial new-build integrated Biofuels and Waste-to-Energy complex. The subsequent collapse of the global capital markets made it impossible to raise the substantial additional capital (approximately $350 million) that we required for this proposed project and, consequently, we turned our attention to acquiring distressed assets (such as the UK industrial site) to use as an alternative base to develop our Integrated Waste-to-Energy plans. In December 2010 we sold approximately half of the Kentucky land for $1.5m, primarily to release cash for re-investment in the UK plant; and we retained the balance, since it offers the potential for development into a second Waste-to-Energy plant once the UK plant is established, enabling us to deploy the know-how that we have gained in the UK plant development project.

We also own patented technology known as “STT”, which we acquired in 2009, and which we plan to use within our liquid biomass processing plant as we expand its capacity and range of liquid biomass and renewable oil core feedstocks for processing into biofuels and renewable electricity.

**Comparison of the three month periods ended January 31, 2011 and 2010 and for the period from March 9, 2007 (date of inception) through April 30, 2011**

**Results of Operations**

We have incurred a net loss of $753,705 and $1,192,412 for the three and six month periods ended April 30, 2011 and a net loss of $734,922 and $1,826,753 for the three and six month periods ended April 30, 2010. We have incurred a net loss of $28,191,689 for the period from March 9, 2007 (date of inception) through April 30, 2011.

The principal components of the net losses referred to above were (a) operating expenses, (b) loss arising on the sale of land and (c) other income, each of which is discussed below:

*(a) Operating Expenses:*

Operating expenses in the three and six month periods ended April 31, 2011 amounted to $882,153 and $1,613,554, respectively, compared to $1,419,346 and $3,004,880 in the three and six month periods ended April 30, 2010, respectively. The general level of costs incurred in the three and six month periods ended April 30, 2011 was at a significantly lower level than in the three and six month periods ended April 30, 2010, due to two primary factors associated with the maturing of our development stage activities:

1.

As we increasingly focused our activity in 2010 and into 2011 on the development of our planned UK Waste-to-Energy plant we reduced or eliminated expenditures on other areas to enable our limited resources to be focused on the UK plant; and

25

2.

In the latter part of 2010 and into 2011, with the UK Waste-to-Energy project becoming more mature, our UK plant development activity became increasingly focused on lower cost, but more strategically and commercially important work streams, compared to the relatively labor intensive and costly construction, pilot testing and re-zoning activities which marked the earlier stages of the project. 

In addition in the three and six month periods ended April 30, 2011, certain credits were recorded which reduced aggregate operating costs and which did not arise in the three and six month periods ended April 30, 2010. These credits arose as follows:

1.

Accruals, previously made in respect of disputed liabilities (which included a reduction in real estate taxes) were settled in our favor during the three and six month periods ended April 30, 2011, resulting in credits to operating expenses of $59,210 and $431,129, respectively, in those periods; and

2.

The reversal of a provision of $151,250, which had been established to cover the possible costs of selling our Kentucky land, based upon an earlier decision to sell it. In January 2011 we reconsidered this earlier decision and decided to retain that part of the land that we did not sell at that time and retain it for possible future development.

*(b) Loss arising on the sale of Land*

A loss of $423,573 arose on the sale of certain of our land holdings in Kentucky in January 2011, which is included within net loss for the six month periods ended April 30, 2011. No such loss was reported in the three month period ended April 30, 2011 or in the three and six month periods ended April 30, 2010.

*(c) Other Income*

We recorded total other income (primarily arising from the sale of surplus infrastructure at our UK industrial site which we isolated and sold as we worked on re-zoning the site) of $85,709 and $370,344 in the three and six month periods ended April 30, 2011, respectively, compared to $632,119 and $992,453 in the three and six month periods ended April 30, 2010, respectively. The lower amounts arise primarily because the levels of surplus asset being realised as we reconfigure the site, in preparation for its use as a Waste-to-Energy plant, are reducing as we near completion of the reconfiguration of the site.

*Losses from inception*

In the period from inception (March 9, 2007) to April 30, 2011 we reported net losses of $28,191,689. These losses arose in the following areas of activity. 

·

The costs incurred for the proposed Kentucky project prior to its curtailment, including (a) the costs of consultants, employees, feasibility work and early stage construction and ground work and (b) the impairment charges expensed and losses incurred as a result of the decline in land values; which amounted in total to approximately $10.4  million;

·

The net costs and losses which arose in connection with our STT technology, which amounted to approximately $3.8 million;

·

Costs incurred in designing, testing and re-configuring the UK industrial plant in the post acquisition period (since April 2009) and preparing it for production and for commercial activity, which amounted in total to approximately $6.3 million;

·

Costs incurred in corporate finance and merger and acquisition search and evaluation activity, which culminated in the identification and acquisition of the UK industrial plant in 2009, amounted in aggregate to approximately $3.5 million;

·

Warrants and shares issued to contractors, directors, executive officers and employees have been expensed in the period. The aggregate amount expensed is approximately $2.7 million. No cash is involved in these items of expenditure, which represent estimates of the value of the warrants and shares issued, calculated in accordance with GAAP; 

·

Compliance costs amounted to approximately $1.5 million and group executive costs to approximately $0.6 million; and

·

Interest income amounted to $0.6 million

26

The amounts shown in the bulleted list above represent direct costs incurred in each area of activity together with an appropriate allocation of indirect costs so as to show where expenditure and investment has been made since inception.

**Revenues**

We generated revenues, for the first time, of $3,201,412 in the year ended October 31, 2009. These arose primarily from the sale of bio-diesel produced in our UK plant during the testing and commissioning process that we carried out subsequent to our acquisition of the plant in April 2009. We completed the satisfactory commissioning and testing of the bio-diesel plant in the year ended October 31, 2009; and we concluded at that time that we would not produce any more bio-diesel until we had developed our liquid waste biomass feedstock supply strategy to the point where we consider that we have access to such feedstock in the volume required and at costs which underpin a healthy gross margin. Consequently we recorded no revenues in the three and six month periods ended April 30 2011 and April 30, 2010

**Operating Loss**

The main components of the recorded operating loss during the three month periods ended April 30, 2011 and 2010, and for the period from March 9, 2007 (date of inception) through April 30, 2011 are set out in the table below:

 

 

 

**Three months ended**

**April 30,**

 

**Six months ended**

**April 30,**

 

**Period from**

**Inception**

**(March 9, 2007)**

**to April 30,**

 

**Note**

 

**2011**

 

**2010**

 

**2011**

 

**2010**

 

**2011**

**Losses in UK Plant**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loss in UK plant

1

 

$

-

 

$

-

 

$

- 

 

$

-

 

$

995,275 

Overhead costs at UK Plant:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect Plant overhead costs

2

 

 

136,056

 

 

159,946

 

 

233,450 

 

 

442,288

 

 

2,100,701 

Indirect labour and administrative expenses at UK plant

2

 

 

159,405

 

 

655,536

 

 

37,719 

 

 

1,242,604

 

 

4,211,724 

Total overheads incurred at the UK plant 

 

 

$

295,461

 

$

815,482

 

$

271,169 

 

$

1,684,892

 

$

6,312,425 

**Operating Costs and Expenses (excluding UK Plant)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional fees

3

 

$

199,789

 

$

160,094

 

$

288,796 

 

$

326,503

 

$

2,354,096 

Contractors, payroll and administrative expenses 

4

 

 

177,569

 

 

129,108

 

 

355,935 

 

 

488,595

 

 

6,930,782 

Consulting expenses

5

 

 

-

 

 

-

 

 

- 

 

 

77,446

 

 

1,990,000 

STT overhead costs

6

 

 

15,901

 

 

82,686

 

 

29,341 

 

 

106,686

 

 

438,518 

Travel and accomodation expenses

7

 

 

9,844

 

 

62,402

 

 

25,211 

 

 

100,678

 

 

1,226,418 

Occupancy, communications and other central group overheads

8

 

 

7,715

 

 

55,679

 

 

(9,840)

 

 

106,185

 

 

692,312 

 

 

 

$

410,818

 

$

489,969

 

$

689,443 

 

$

1,206,093

 

$

13,632,126 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Non Cash Items charged**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of warrants issued to director, employee   and contractors for services

9

 

$

157,666

 

$

113,895

 

$

348,886 

 

$

113,895

 

$

2,413,873 

Fair value of shares issued for professional services

9

 

 

18,208

 

 

-

 

 

31,733 

 

 

-

 

 

253,567 

Asset impairment loss

10

 

 

-

 

 

-

 

 

- 

 

 

-

 

 

4,457,103 

Reversal of land sale costs provision

10

 

 

-

 

 

 

 

 

(151,250)

 

 

-

 

 

(151,250)

 

 

 

$

175,874

 

$

113,895

 

$

229,369 

 

$

113,895

 

$

6,973,293 

**Other operating income and expenses/losses**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on sale of STT assets

11

 

$

-

 

$

-

 

$

- 

 

$

-

 

$

3,400,382 

Loss on sale of land

12

 

 

-

 

 

-

 

 

423,573 

 

 

-

 

 

423,573 

Subsidy received

13

 

 

-

 

 

-

 

 

- 

 

 

-

 

 

(279,085)

 

 

 

$

-

 

$

-

 

$

423,573 

 

$

-

 

$

3,544,870 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Loss from Operations**

 

 

$

**882,153**

 

$

**1,419,346**

 

$

**1,613,554 **

 

$

**3,004,880**

 

$

**31,457,989 **

27

Footnotes to ‘Operating Loss’ table:

1.

The direct cost of sales from the sale of biodiesel in the period from March 9, 2007 (date of inception) to January 31, 2011 exceeded the related sales revenue generated, giving rise to a gross loss of $995,275. This gross loss arose during a short period of testing and commissioning the plant in 2009 and should not be taken as being indicative of the potential gross margin to be produced by the completed Waste-to-Energy plant. Activity during this period was intended to observe, test and prove the technical performance of the plant, rather than to operate it on a commercially viable basis. As explained under the paragraph *“Revenues”* above we have not and do not expect to re-commence production at the Waste-to-Energy plant until the plant is complete and consequently no gross margin (negative or positive) arose in either the three or six month periods ended April 30, 2011 or the three or six month period ended April 30, 2010.

2.

In the three and six month periods ended April 30, 2011 we incurred expenses in the development of our UK Waste-to-Energy plant of $295,461 and $271,169 ,respectively. These expenses were calculated after accounting for the reversal of accruals previously made in respect of disputed liabilities which were settled in our favor during the three and six month periods ended April 30, 2011, which amounted to $59,210 and $395,129, respectively. When adjusted for the write back of these accruals the overhead and indirect labor costs at the UK Plant in the three and six months period ended April 30, 2011 amounted to $354,671 and $666,298, which compares with $815,482 and $1,684,892 incurred in the three and six month periods ended April 30, 2010, respectively, and $6,312,425 in the period from March 9, 2007 (date of inception) to April 30, 2011. The reduction in the level of costs is due to the relatively high cost activity (such as production testing, development and re-zoning activity), which was incurred in the post acquisition period, being replaced with less costly, but strategically and commercially important activity, as the project reaches its final stages. 

3.

‘Professional fees’ incurred in the three and six month period ended April 30, 2011 amounted to $199,789 and $288,796, respectively, compared to $160,094 and $326,503 in the three and six month periods ended April 30, 2010, respectively. The reduction between the comparable six month periods arises as a result of our focus on the UK plant and a consequent reduction in the level of professional fees incurred across the Group. The increase in the three month period ended April 30, 2011 was caused by prior under-accruals of audit fees. Professional fees incurred in the period from March 9, 2007 (date of inception) to April 30, 2011 amounted to $2,354,096 which is comprised primarily of compliance, legal, audit and financial and acquisition related advisory fees.

4.

‘Contractors, payroll and administrative expenses’ (excluding those incurred in the UK plant, which are included within the *“Losses in UK Plant”* numbers in the table) amounted to $177,569 and $355,935 in the three and six month periods ended April 30, 2011, respectively. In the three and six month periods ended April 30, 2010 the amounts recorded under this expense caption amounted to $129,108 and $488,595, respectively, both of which included a credit of $126,372, which arose as a result of the release of certain accruals that had been previously set up in respect of unpaid compensation which was cancelled. After eliminating this credit, to provide a more meaningful comparison, the amounts for the three and six month periods ended April 30, 2010 were $255,480 and $614,967, respectively. The reduction between 2010 and 2011 reflects a lower headcount arising from focus on the UK plant and a reduction in compensation levels. ‘Contractors, payroll and administrative expenses’ in the period from March 9, 2007 (date of inception) to January 31, 2010 amounted to $6,930,782.

 

5.

We did not incur any ‘Consulting expenses’ in the three and six month periods ended April 30 2011, or in the three month period ended April 30, 2010. We incurred consulting expenses of $77,446 in the six month period ended April 30, 2010 and $1,990,000 in the period from March 9, 2007 (date of inception) to April 30, 2011, which included significant one-off consulting costs incurred in 2009 associated with aborted financing activity. The downward trend and recent elimination of consulting expenses reflects the general reduction in the use of consultants as we focus our activities around the UK plant project.

6.

‘STT overhead costs’ relate to the maintenance costs of the STT technology and patents acquired in March 2009, including patent protection and storage of the acquired reactors. In the three and six month periods ended April 30, 2011 these costs amounted to $15,901 and $29,341, respectively, compared to $82,686 and $106,686 in the three and six month periods ended April 30, 2010, respectively, and $438,518 in the period from inception (March 9, 2007) to April 30, 2011. The reduction in costs arises as a result of the sale in September 2010 of a substantial number of STT reactors that were surplus to our requirements, resulting in a reduction in storage costs. We are currently not using the STT technology in our activities, although we anticipate introducing this technology into our Waste-to-Energy plant strategy in due course.

28

7.

‘Travel and accommodation expenses’ in the three and six month periods ended April 30, 2011 amounted to $9,844 and $25,211, respectively, compared to  $62,402 and $100,678 in the three and six month periods ended April 30, 2010. This reduction is due to a lower volume of travel expensed as our efforts are focused on the UK Plant. In the period from inception (March 9, 2007) to April30, 2011 travel and accommodation expenses accumulated to $1,226,418.

8.

‘Occupancy, communications and other central group overheads (excluding UK plant)’ in the three and six month periods ended April 30, 2011 amounted to $7,715 and $(9,840), respectively. The credit in the six month period arises because of the reversal during the three month period ended January 31, 2011 of an accrual for $36,000 made in respect of disputed liabilities which were settled in our favour. The adjusted charges in the three and six month periods ended April  30, 2011 of $7,715 and $26,160 , respectively, compares to comparable charges of $55,679 and $106,185 for the three and six month periods ended April 30, 2010, respectively. In the period from March 9, 2007 (date of inception) to January 31, 2011 these costs amounted to $692,312. The general downward trend in due to the focus of our activity on the UK plant.

9.

We have incurred certain costs and expenses which have been defrayed by the issuance of shares and share warrants rather than cash. In the three and six month periods ended April  30, 2011 these comprised :

a)

An accrual made on account of obligations to issue shares of our Common Stock under contracts with third parties for services which resulted in a charge of $18,208 and $31,733 in the three and six month periods ended April 30, 2011, respectively. No such charge arose in the three and six month periods ended April 30, 2010. The charge related to the issuance of shares for services in the period from inception (March 9, 2007) to April 30, 2011 amounted to $253,567.

b)

As part of our approach to compensating our senior staff, management and officers we issue stock purchase warrants to selected individuals from time to time. The charge in the three and six month periods ended April 30, 2011 arising in respect of the issuance of such warrants amounted to $157,666 and $348,886, respectively. The comparable charge in the both the three and six month periods ended April 30, 2010 was $113,895. The increase arose as a result of a significant number of stock purchase warrants being issued to senior staff, management and officers in April and November 2010, resulting in an increased warrant expense charge arising in periods subsequent to April 30, 2010.We have compensated certain third party service providers from time to time in the form of awarding to them warrants to purchase shares of our Common Stock. The charge associated with the issuance of such warrants in the three and six month periods ended April 30, 2011amounted to $- 0- and $42,864, respectively. No such charge arose in the three and six month periods ended April 30, 2010. The aggregate charge related to the issuance of all warrants issued for services in the period from inception (March 9, 2007) to April 30, 2011 amounted to $2,413,873.

10.

Impairment charges arise in connection with the periodic reappraisal of our assets and, in particular:

(i)

In the period from March 9, 2007 (date of inception) and April 30, 2011, we recorded aggregate impairment charges of:

a.

$1,538,640 as a result of the elimination of the capitalized costs that we incurred in the Kentucky project upon the cessation of that project; and.

b.

$2,918,463 (prior to the provision reversal of $151,250 described in (ii) below) in connection with decrease in valuation of our Kentucky land in line with the general decline in property values across the USA.

(ii)   In January 31, 2011 we determined that the land that we continued to own in Kentucky (approximately 217 acres), after the sale in January 2011 of 220 acres of the original 437 acres,  should be retained for possible future development as a Waste-to-Energy Plant. Previously, in 2010 we had decided to aim to sell the entire 437 acres of land and we had consequently reclassified the entire Kentucky land as *‘Land held for sale’* on our consolidated balance sheet. At that time we provided an amount against the recorded book value of the land to cover estimated sales costs and commissions. Upon making the subsequent decision to retain the 217 acres of land, we reclassified that land back to *‘Property, Plant and Equipment’* in our Consolidated Balance Sheet and we reversed the provision for estimated selling costs ($151,250) that had related to this land.

29

11.

In September 2010 we sold our non-core STT plant and equipment to certain companies owned by Mr. Jack Dunigan (jointly referred to as the “Purchaser”), a former employee and a founding shareholder of the Company, as part of a series of connected transactions with the Purchaser. Under these transactions we sold to the Purchaser our non-core STT assets while retaining the ownership of the patents and technology and certain STT reactors for potential use at our UK Waste-to-Energy Plant. We granted to the Purchaser a license to use and/or sell the STT technology in the USA and we have retained an ongoing interest in the form of a share of future STT based revenues and/or profits of the Purchaser. We recorded a book loss on the sale of STT assets of $3,400,382.

12.

In the six month period ended April 30, 2011 we sold 220 acres of our land in Kentucky (as described in footnote 10 above) and incurred a loss of $423,573 on the sale transaction.

13.

On May 24, 2010 the Company’s UK subsidiary which is conducting the development of the UK plant and site was awarded a Research and Development Tax Credit by the UK Government in the amount of $279,085, which is classified as *“Subsidy Received”*in our Consolidated Statements of Operations for the period from inception (March 9, 2007) to April 30, 2011. Such credits are awarded to businesses which incur labor costs in carrying our research and development work and we satisfied the UK Government that our activities on the UK site in the year ended October 31, 2009 qualified us to receive such credit. Research and Development credits are off-settable against payroll withholding taxes. We have concluded that it is inappropriate to record such credits until they are awarded and then to record them on the date of award. We intend to make a further application for this type of grant (and others that may be available from time to time) and, accordingly will prepare and submit a Research and Development Grant application for the year ended October 31, 2010. The amount, if any, of the grants to be awarded cannot be judged with reasonable certainty at this time and is therefore not recorded in the consolidated financial statements.

**Other Income (Expense)**

The operating loss was offset partially by other income which arose as follows:

 

 

 

**Three months ended**

**April 30,**

 

**Six months ended**

**April 30,**

 

**Period from**

**Inception**

**(March 9, 2007)**

**to April 30,**

 

**Note**

 

**2011**

 

**2010**

 

**2011**

 

**2010**

 

**2011**

**Other income (expense)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

1

 

$

- 

 

$

247 

 

$

2,349 

 

$

1,312 

 

$

563,859 

Interest expense and similar charges

2

 

 

(16,383)

 

 

- 

 

 

(56,814)

 

 

- 

 

 

(75,424)

Miscellaneous income (net of related costs)

3

 

 

8,585 

 

 

31,315 

 

 

13,062 

 

 

57,162 

 

 

149,689 

Forgiveness of debt

4

 

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

296,714 

 

 

 

$

(7,798)

 

$

31,562 

 

$

(41,403)

 

$

58,474 

 

$

934,838 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of scrap and surplus assets

 

 

$

226,707 

 

$

777,396 

 

$

690,625 

 

$

1,481,616 

 

$

3,254,012 

Cost associated with the sale of scrap

 

 

 

(133,200)

 

 

(146,199)

 

 

(278,878)

 

 

(305,682)

 

 

(947,991)

Cost basis of other assets

 

 

 

- 

 

 

(35,302)

 

 

- 

 

 

(90,499)

 

 

(210,058)

Book value of assets sold

 

 

 

- 

 

 

4,662 

 

 

- 

 

 

(151,456)

 

 

(208,198)

Net profit from sale of redundant scrap assets

5

 

$

93,507 

 

$

600,557 

 

$

411,747 

 

$

933,979 

 

$

1,887,765 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

 

$

**85,709 **

 

$

**632,119 **

 

$

**370,344 **

 

$

**992,453 **

 

$

**2,822,603 **

Footnotes to ‘Other Income (Expense)’ table:

1.

We earned interest income on cash deposits of $563,859 in the period from inception (March 9, 2007) to April 30, 201l. Since the majority of our surplus cash funds had been expended by October 31, 2009 we recorded only modest interest income in the three and six month periods ended April 30, 2011 ($- 0 - and $2,349), respectively) and in the three and six month periods ended April 30, 2010 ($247 and $1,312, respectively). 

30

2.

We have incurred only limited amounts of interest expense ($75,424) in the period from inception (March 9, 2007) to April 30, 2011, since, for the majority of this period, we were cash positive and had no interest bearing indebtedness. However, recently we have raised funds through secured indebtedness and the interest charges on such indebtedness amounted to $16,383 and $56,814 in the three and six month periods ended April 30, 2011, respectively. The amount charged for the six month period ended April 30, 2011 included a fee of $25,000 paid to the holder of a promissory note in exchange for the holder’s agreement to restructure the promissory note. No interest charges arose in the three and six month periods ended April 30, 2010.

3.

We have recorded various small miscellaneous items of income and related costs, as shown in the table above, which primarily arose from (a) certain licensing and rental income derived from our STT assets, (b) the sale of residual stock and work-in-progress amounts held at the UK site after the period of test and commissioning production activity ceased and (c) other miscellaneous receipts associated with the UK plant.

4.

We benefited in a credit arising on the forgiveness by a former director, who served prior to the reverse merger completing in December 2007, of loans made to the Company from him which is shown as a credit of $296,714 in the period from inception (March 9, 2007) to April 30, 2011.

5.

On acquisition of the UK plant and industrial site in March 2009 we identified considerable surplus infrastructure on the site. This included surplus stainless steel, copper wire and other valuable materials embedded in surplus infrastructure as well as certain items of plant which were embedded into the plant infrastructure and were surplus to our requirements. Since the acquisition of the site we have conducted an ongoing program of isolating and extracting such surplus materials, as we re-zoned the plant site and prepared it for our own intended application, and then selling this surplus material on the open market. We earned gross cash receipts from this activity amounting to $226,707 and $690,625 in the three and six month periods ended April 30, 2011, respectively, and $777,396 and $1,481,616 in the three and six month periods ended April 30, 2010, respectively; and we have generated total gross cash receipts from this activity in the period from inception (March 9, 2007) to April 30, 2011 of $3,254,012. While there is still some further value to be extracted, as we move towards completing the re-zoning of the UK plant site, the amount of scrap sales have and will continue to become increasingly less material as we complete the re-zoning and move towards production. We have offset the direct cost of labor and materials involved in extracting and selling the surplus materials and any carrying value recorded in the financial statements relative to the scrapped materials, against the gross sales proceeds in calculating *‘Gain on the sale of scrap and surplus assets’* included in *‘Other Income and Expense’*in the *‘Consolidated Statements of Operations’*, resulting in a gain arising from sale of scrap and surplus assets in the three and six month period ended April 30, 2011 of $93,507 and $411,747, respectively, compared to $600,557 and $933,979 in the three and six month periods ended April 30, 2010, respectively and $1,887,765 in the period from inception (March 9, 2007) to April 30, 2011.  

**Assets, Liabilities and Working Capital Adequacy**

**Property Plant and Equipment**

During the three and six month periods ended April 30, 2011 and April 30, 2010, the Company made no significant purchases of property and equipment.  

31

During the period from March 9, 2007 (date of inception) through April 30, 2011, the Company purchased property and equipment, comprised of the following main categories:

*(i)*

*Acquisition of STT Assets*: On January 28, 2009, the Company, entered into an asset purchase and other related agreements with Kreido Biofuels, Inc., a Nevada corporation (“Kreido”), to acquire identified assets owned by Kreido, including certain machinery, patents and intellectual property rights relating to the STT® technology developed by Kreido. The Company plans to use the STT® technology in its UK plant for the production of bio-diesel fuel and other by-products. The transaction closed on March 5, 2009. The aggregate cost of the assets was $4,681,269. Consideration paid included $2,797,210 in cash and the assumption of certain payables, issuance of 1,200,000 shares of the Company’s common stock (of which 300,000 shares are held in escrow as contingent consideration) and a warrant to purchase 200,000 shares of the Company’s common stock at an exercise price of $8.00 per share with an expiration date of March 5, 2014. The warrant provides for anti-dilution adjustment in limited circumstances and piggyback registration rights with respect to the underlying shares of common stock. The Company also incurred direct acquisition costs of $744,724, related to finders’ fees and legal fees. On September 7, 2010 we sold a the majority of the acquired STT machinery, since we considered that it was surplus to our immediate requirements; and we retained the STT intellectual property and patents together with certain reactors which we plan to use in our UK Waste-to-Energy plant. This transaction is described in footnote 11 to the *Operating Loss* table set out above. 

*(ii)*

*Acquisition of UK Industrial Site to develop into our First Waste-to-Energy Plant*: On April 6, 2009, the Company signed a series of related agreements under which we acquired an industrial site and plant infrastructure which included a 22mgpy operational bio-diesel plant, a substantial waste liquid biomass processing plant, three electricity sub-stations, substantial unused industrial infrastructure (industrial buildings and structures), a 41 acre industrially developed site (upon which all of the foregoing was based) and approximately 100 acres of industrially zoned (but presently undeveloped) land, all located near Blyth, Northumberland, in North East England. The acquisition was made from an administrator appointed over the previous owner and developer of the acquired assets, under the terms of a “pre-packaged” acquisition agreement out of said insolvency. The total cost of the acquisition of the assets was $804,623, which was allocated to plant and equipment based on relative fair values. Aggregate cost comprised cash paid of $399,627 plus direct acquisition costs of $404,996. 

*(iii)*

*Kentucky Land Acquisition and Related Project Capital Expenditure:* Our original business plan was to purchase land in Kentucky and construct a differentiated integrated BioEnergy and Waste-to-Energy plant on that land. This original project had a projected capital cost of approximately $400 million. In early 2008 we acquired 437 acres of Kentucky land for approximately $6.2 million and we commenced activity on the site to develop the planned plant. However with the advent of the capital markets crash in mid 2008 it became apparent that we could not raise the substantial amounts of capital required to complete the plant and we subsequently decided to abandon the original plans, put the Kentucky land up for sale and concentrate our resources on seeking to find distressed assets at a deep discount to cost, which we could then develop, with a more modest capital outlay, into Waste-to-Energy plants. This strategy led to the asset acquisitions referred to under (i) and (ii) above. Following the decision to curtail the Kentucky project and attempt to sell the Kentucky land, we recorded aggregate impairment losses amounting to $4,305,853 as a result of (a) the loss arising on the previously capitalized Kentucky project costs and (b) value impairment losses recognized in connection with the decline in value of the Kentucky land in line with the general decline in US property values. In January 2011 we sold 220 acres of our Kentucky land for $1.5 million in cash and recorded a book loss on that transaction of $423,573. At April 30, 2011 we continue to own approximately 217 acres of the original Kentucky land which is recorded at a book value of approximately $2,016,663 million in our *‘Consolidated Balance Sheet’.* We currently intend to retain this land since it offers the potential to use as a base for a future Waste-to-Energy plant. The original consideration paid for part of this retained land was in the form of a promissory note issued to the vendor of the land, originally in the amount of $600,000. At April 30, 2011 the amount due under the original promissory note had been reduced to $440,000 as part of a restructuring of the note, which is described in *“Liquidity and Capital Resources”* below.

**Liquidity and Capital Resources**

At April 30, 2011 the Company had cash balances of $19,004 and working capital deficit of $1,865,196, compared to cash balances at October 31, 2010 of $86,609 and a working capital deficit of $2,204,176. The reduction in the working capital deficit between October 31, 2010 and April 30, 2011, was due to the sale of land and other non-core assets to finance the ongoing development of our UK plant and provide working capital to support our activities. We reported total stockholders’ equity at April 30, 2011 of $1,900,632, compared to $2,804,939 at October 31, 2010.

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At April 30, 2011 we had current liabilities of $2,186,270, compared to $2,450,618 at October 31, 2010. Current liabilities at April 30, 2011 mainly comprised (a) $796,625 in our UK plant subsidiary, (b) $440,000 being the remaining principal amount due, under a Land  Promissory Note, which has been repaid in full out of the proceeds of the debenture issuance in May 2011 described below  (c) $339,985, which is the principal amount due to contractors, officers and directors in respect of unpaid amounts due to them, under contracts for services, the payment of which has been deferred by agreement until such future time as the Company has raised further finance and is able to make payment and (d) $609,660 that is mainly due to contractors and professional advisers. Most of these creditors have agreed formally or informally to defer receipt of payment either, as in the case of (b) and (c) by way of a formal postponement of payment, or by agreement to repayment plans over time. We are, however, reliant on the ongoing goodwill and support of our creditors ahead of planned finance raisings referred to below.

**Cash Inflows in the Six Month Period Ended April 30, 2011 and Subsequently**

a. Sale of Kentucky land

In January 2011, the Company realized cash of $1.5 million, in the form of the gross proceeds received from the partial sale of its Kentucky land, which has been mainly used to reduce liabilities and to invest into the UK plant development project. 

b. Issuance of Original Issue Discount Senior Secured Convertible Debentures (“Debentures”)

On May 5, 2011, pursuant to a securities purchase agreement between the Company and GCP VIII, LLC (the “Purchaser”) (the “Purchase Agreement”), the Company agreed to sell, and the Purchaser agreed to purchase, up to $5,000,000 of the “Debentures” on two separate closing dates.

On the first closing date (May 5, 2011), the Company sold to the Purchaser a Debenture having a principal amount of $2,133,333, in respect of which it received gross proceeds of $1,600,000 (fees and expenses incurred by the Purchaser of  $124,997 have been deducted from the proceeds). We used part of the net proceeds to repay the Land Purchase Note (for a total redemption amount of $454,600, which included accrued interest and costs), releasing net cash to the Company of $1,020,403, which is to be used for working capital purposes and to invest in the final stages of the Waste-to-Energy plant project.

The second closing may take place only after the Company satisfies the Purchaser that it has met certain operational milestones which are described in the Purchase Agreement. The principal amount of the Debenture to be issued at the second closing is $2,866,667, of which the gross proceeds to be received by the Company would be $2,150,000.

The Debentures are due for repayment on the two year anniversary of their issuance in an amount equal to 118% of their principal amount and no regularly scheduled interest payments are to be made on them. 

Although these cash inflows have allowed us, and will allow us, to continue with the development of our UK Waste-to-Energy plant towards completing the project and commencing production, we continue to require significant new capital to enable us to achieve this and we are actively exploring various sources of such additional capital. If we are unable to raise necessary capital we will have to materially change our business plan, which could involve modifying, delaying and/or abandoning further work on the UK plant and/or the sale of our remaining assets. The Company is a highly speculative investment and investors may lose some or all of their investment in the Company.  

**Sources and Use of Funds**

*Summary Overview of Sources and Uses of Funds from Inception*

Since inception, the Company has financed itself primarily by the sale of equity securities. The Company raised $2.2 million on March 26, 2007, approximately $22.8 million (net of issuance costs) on December 4, 2007, and approximately $1.6 million (net of issuance costs) on July 30, 2008, by way of three separate private placements of shares of common stock. In addition the Company has raised $1.10 million in the form of loans secured against its Kentucky land, of which $660,000 had been repaid in the period up to April 30, 2011; and the balance was repaid out of the issuance of the Debentures in May 2011, which, as explained above, introduced a net cash inflow of $1,020,403 to the Company in May 2011.

33

Therefore in the period from inception (March 9, 2007) to April 30, 2011, aggregate cash funds raised by the issuance of equity and debt financing (net of loan repayments) have amounted to approximately of $27.0 million. An analysis showing how these funds have been invested (including group payroll and overhead allocated by caption based on activity) is set out below:

(a) The acquisition of the land in Kentucky and various costs associated with improvements made to the land for its initial proposed purpose, together with initial costs associated with the planned construction of a bio energy plant on that land and direct contractors costs allocable to the proposed Kentucky project, as reduced by the sale of part of the land in January 2011, amounted in total to approximately $10.7 million in cash outflow.

(b) The acquisition of the STT related assets from Kreido Biofuels, together with subsequent costs incurrent in protecting the acquired STT assets has incurred cash outlay of approximately $3.5 million.

(c) The acquisition, of the UK industrial site, which comprised various assets including 147 acres of land, a biomass processing plant and a bio-diesel plant together with substantial industrial site infrastructure and buildings; together with the subsequent re-development of the site (currently work in progress) into a proposed integrated waste to energy plant, has involved cash investment of approximately $8.0 million.

(d) Corporate Finance and Merger and Acquisition activity has involved approximately $3.5 million of cash investment, including significant costs incurred on third party consultants.

(e) Compliance, legal and audit costs amounted to approximately $1.4 million; and corporate executive costs aggregated to approximately $0.5 million.

(f) Interest income received amounted to of $0.6 million.

*Current assets and liabilities*

At April 30, 2011, we had current assets of $321,074, comprised of (a) cash of $19,004, (b) inventory of $12,667 comprised of materials located at our UK plant and (c) various prepaid expenses and sundry receivables of $289,403, of which $278,208 was in respect of amounts paid in relation to fees and expenses directly associated with capital raising projects (one of which was partially completed after April 30, 2011 (the debentures issued in May 2011 described above) and others are in still in progress), which will be matched with and written off against the transaction costs of those future capital raises when they are completed. Our current liabilities at April 30, 2011 amounted to $2,186,270, the composition of which is detailed in the section *“Liquidity and Capital Resources”*above. At October 31, 2010, we had current assets of $246,442, represented by cash of $86,609 and other current assets of $159,833; and we had current liabilities of $2,450,618.

*Net Cash Used in Operating Activities *

Cash utilized in operating activities was $1,255,875 for the six month period ended April 30, 2011, as compared to $2,311,190 for the six month period ended April 30, 2010. The reduction is due to our focus in the six month period ended April 30, 2011 on finalizing the development of the UK plant project and the fact that, as we reach the final stages of that project, we are able to both (a) focus our overall group costs on the UK plant and thereby reduce the overall level of group costs and (b) reduce the level of expenditures on the UK project itself as we concentrate on strategic and commercial activities which are less cost intensive than the earlier stages of the UK plant project, when we were engaged in more labour intensive and generally more expensive project activities. Total cash utilized in operating activities was $17,951,654, from March 9, 2007 (date of inception) through April 30, 2011.  

34

*Net Cash Provided by / Used in Investing Activities *

During the six month period ended April 30, 2011 cash provided by investing activities was $1,797,763 compared with $1,321,714 in the six month period ended April 30, 2010. The increase is primarily due to $1,500,000 received from the sale of part of our land in Kentucky. In both periods we received cash from the sale of scrap, redundant and surplus assets at our UK plant, which were released for sale as part of the rezoning and preparation of the industrial site in preparation for completing our Waste to Energy plant on that site, although the receipts from this source were less in the six month period ended April 30, 2011 (when they amounted to $690,626) compared to the comparable six month period ended April 30 2010 (when they amounted to $1,481,617 (since the re-zoning of the UK plant was nearing completion at April 30, 2011 and the quantity of surplus assets being released was consequently reduced). Cash used in investing activities, net of cash provided by investing activities, in the period from inception (March 9, 2007) to April 30, 2011 amounted to $8,824,071, which is mainly comprised of the acquisition of land, plant and equipment and plant construction costs, offset by proceeds from the sale on non-core assets (of $4,678,970)

*Cash Provided by /Used in Financing Activities and Capital Adequacy*

During the period from March 9, 2007 (date of inception) through April 30, 2011, the Company received net cash provided by financing activities of $26,249,750, representing primarily the net proceeds received from private placements. During the six month periods ended April 30, 2011 and April 31, 2010 the Company did not receive any cash from financing activities, but it did make (partial) repayments of loans in the amounts of $600,000 and $60,000 in the six month periods ended April 30, 2011 and April 30, 2010, respectively. 

We attributed the fact that we had been unable to raise additional equity capital in the period since July 2008 (the date of our last successful private placement of equity) to April 30, 2011 to (a) the materially adverse state of the global capital markets during the period since mid 2008 and (b) the fact that the Company is still in its development stage at a time when development stage enterprises are finding it difficult to raise equity capital due to the nature of the global capital markets. Despite this, we have managed to maintain momentum at our UK plant development project through realizing cash from the sale of surplus assets (which has aggregated to $4,905,678 in the period from inception (March 9, 2007) to April 30, 2011).

As explained above, we raised cash subsequent to April 30, 2011 through the issuance of a debenture on May 5, 2011, (the first draw down of which was for $1,600,000) which reflects the present, advanced stage of development of the UK Waste-to-Energy plant project and we anticipate further financings as we progress out of our development stage. In addition we have secured a second draw down under the same debenture facility, which is conditional upon us reaching certain milestones in the completion of the Waste-to-Energy plant project.

We need to raise further capital, in addition to the debenture finance outlined above, which is likely to be in form of equity finance, to finance the completion of the UK plant. We, together with our corporate finance advisers, are currently in discussions with various potential sources of equity finance aimed at providing adequate additional capital to finance the completion of the UK plant. There can be no certainty at this time about the success of outcome of these discussions and therefore there is no certainty about our ability to complete our planned development of the UK Waste-to-Energy Plant or to commence commercial activity.

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern will be dependent upon our ability to generate sufficient cash from our finance raising activity and/or from the further sale of assets to meet our obligations on a timely basis and to continue with the development of the UK plant. We currently have no sources of financing available, other than as set out above, and we do not expect to earn any revenues until we have either (a) completed to plant construction project and/or (b) completed a successful acquisition of a waste liquid biomass trading business (in line with our stated strategy of vertical integration into the waste liquid biomass supply chain). Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

**Critical Accounting Policies and Estimates**

Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our consolidated financial condition and results of operations, we view certain of these policies as critical.  Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.

35

We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

*General*

The Company’s Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue, if any, and expenses, and the disclosure of contingent assets and liabilities.  Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors.  Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.

*Development Stage Company*

The Company is considered to be a development stage entity as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915. The Company undertook a testing and commissioning process to establish the quality of bio-diesel product that could be made to certain specification levels, and that suitable volume quantities could be produced consistently, prior to commercial production. During the third and fourth quarters of fiscal 2009, we generated trial revenue through these operations of the plant as an initial stage to fully commercializing this plant.

Although we have now largely completed commissioning and testing the plant to our satisfaction, we will not be able to produce and therefore sell bio-diesel in commercially viable quantities until we raise extra sufficient amount of capital or lines of credit to acquire the feedstock required to produce bio-diesel in such quantities. We are currently negotiating with various parties to obtain access to such capital but there can be no certainty about the outcome of such negotiations. Until such time, if ever, as we obtain access to such capital it is uneconomic to run the plant and we are holding it in a state of readiness to commence commercial scale production at some future date. Consequently, the Company will remain as a development stage entity until it is confident that the Plant is capable of producing bio-diesel at specified certification consistently, in large volumes, across a wide distribution of customers. The Company has not generated material revenues to date and has incurred significant expenses and has sustained losses.

*Revenue recognition*

The Company recognizes revenue from product sales in accordance with ASC 605 “Revenue Recognition”. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists (through written sales documentation); (2) delivery has occurred (through delivery into customer’s tanks and acceptance); (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded, although we have not experienced any such items to date and do not expect any significant provisions in the future. We have no discount, rebate or warranty programs. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Payments received in advance are deferred until revenue recognition is appropriate. We have no post-delivery obligations related to our products.

36

*Stock-Based Compensation*

The Company accounts for its stock based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

We use the fair value method for equity instruments granted to non-employees (if any) and will use the Black-Scholes model for measuring the fair value of options, if issued. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.

*Impairment of Long-Lived Assets*

The Company follows ASC 360, "Property, Plant and Equipment" which requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted discounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived assets and certain identifiable intangibles will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  ASC 360 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less disposal costs.

*Recent accounting pronouncements*

In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-10 (ASU 2010-10), “Consolidation (Topic 810): Amendments for Certain Investment Funds.”  The amendments in this Update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009 and for interim periods within that first reporting period. The adoption of this ASU did not have a material effect on the financial position, results of operations or cash flow of the Company. 

ASU No. 2010-13 was issued in April 2010, and will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades. This ASU will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted. The adoption of this ASU did not have a material effect on the financial position, results of operations or cash flow of the Company.

Other recent accounting pronouncements issued by the FASB and the SEC did not have, or are not believed by management to have, a material impact on the Company's present or future consolidated financial statements.

**Item 3.  Quantitative and Qualitative Disclosures about Market Risk.**

Not Required 

**Item 4.  Controls and Procedures.**

***Disclosure controls and procedures***

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is accumulated and communicated to management, including  our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

37

***Evaluation of Disclosure Controls and Procedures***

As of the end of the period covered by this quarterly report, management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

***Limitations on Effectiveness of Controls and Procedures***

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.  These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

***Changes in Internal Controls over Financial Reporting***

In connection with the evaluation of our internal controls, our principal executive officer and principal financial officer have determined that during the period covered by this quarterly report, there have been no changes to our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

**PART II — OTHER INFORMATION**

**Item 1.  Legal Proceedings.**

None

**Item 1A.  Risk Factors.**

Not applicable

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

None.

**Item 3.  Defaults Upon Senior Securities.**

None.

**Item 4.  [*Reserved*]**

**Item 5.  Other Information.**

None

38

**Item 6. Exhibits.**

**Exhibit**

 

**Description**

31.1

 

Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2011.

 

 

 

31.2

 

Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2011.

 

 

 

32.1

 

Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

39

**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FOUR RIVERS BIOENERGY INC.

Date: June 07, 2011

By:

/s/ Stephen Padgett

 

 

Name:  Stephen Padgett

Title:  President and Chief Executive Officer

 

 

 

Date: June 07, 2011

By:

/s/ Martin Thorp

 

 

Name:  Martin Thorp

Title:  Chief Financial Officer

 

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