##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended January 31, 2006
 Commission File No. 001-32695
 
 BPI Energy Holdings, Inc.
  British Columbia, Canada
(State or Other Jurisdiction of
Incorporation or Organization)
    
    75-3183021
(I.R.S. Employer Identification No.)30775 Bainbridge Road, Suite 280, Solon, Ohio
    
    44139(Address of Principal Executive Offices)
    
    (Zip Code)
 (440) 248-4200
 ý  ̈
   Large accelerated filer  ̈
    
    Accelerated filer  ̈
    
    Non-accelerated filer ý
  ̈ ý




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##### 



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 BPI Energy Holdings, Inc.
Consolidated Balance Sheets
 ASSETS
 January 31, 2006
    
    
    July 31, 2005(Unaudited)Current Assets:Cash and cash equivalents
    
    $
    26,623,707
    
    
    $
    7,251,503Accounts receivable
    
    
    159,634
    
    
    
    34,671Other current assets
    
    
    270,445
    
    
    
    23,534Total current assets
    
    
    27,053,786
    
    
    
    7,309,708Property and equipment, at cost:Oil and gas properties, full cost method
of accounting:Proved, net of accumulated
depreciation, depletion and
amortization of $142,023 and $58,523
    
    
    15,970,561
    
    
    
    10,190,929Unproved
    
    
    3,244,807
    
    
    
    3,149,372Net oil and gas properties
    
    
    19,215,368
    
    
    
    13,340,301Other property and equipment, net of
accumulated depreciation and amortization
of $462,530 and $398,988
    
    
    4,434,311
    
    
    
    1,769,812Net property and equipment
    
    
    23,649,679
    
    
    
    15,110,113Investment in Hite Coalbed Methane, L.L.C.
    
    
    
    
    
    
    846,766Restricted cash
    
    
    134,000
    
    
    
    100,000Other non-current assets
    
    
    161,125
    
    
    
    161,125$
    50,998,590
    
    
    $
    23,527,712LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,486,767
    
    
    $
    2,144,066Current maturity of long-term notes payable
    
    
    239,071
    
    
    
    42,227Accrued liabilities and other
    
    
    72,145
    
    
    
    31,405Total current liabilities
    
    
    1,797,983
    
    
    
    2,217,698Long-term notes payable, less current portion
    
    
    94,768
    
    
    
    507,595Other non-current liabilities
    
    
    45,949
    
    
    
    Total liabilities
    
    
    1,938,700
    
    
    
    2,725,293Shareholders equity:Common shares, no par value, authorized
100,000,000 shares, 64,378,087 and
43,912,961 outstanding
    
    
    64,573,394
    
    
    
    34,666,022Additional paid-in capital
    
    
    4,891,266
    
    
    
    4,493,680Accumulated deficit
    
    
    (20,404,770
    )
    
    
    (18,357,283
    )Total shareholders equity
    
    
    49,059,890
    
    
    
    20,802,419$
    50,998,590
    
    
    $
    23,527,712




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##### 



BPI Energy Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)
 Three Months Ended January 31
    
    
    Six Months Ended January 312006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Gas sales
    
    $
    327,811
    
    
    $
    6,341
    
    
    $
    537,505
    
    
    $
    6,341Expenses:Lease operating
expense
    
    
    300,806
    
    
    
    
    
    
    
    461,610
    
    
    
    General and
administrative
expenses
    
    
    1,165,483
    
    
    
    2,752,852
    
    
    
    2,437,239
    
    
    
    3,165,087Depreciation,
depletion and
amortization
    
    
    117,890
    
    
    
    34,086
    
    
    
    212,692
    
    
    
    57,6721,584,179
    
    
    
    2,786,938
    
    
    
    3,111,541
    
    
    
    3,222,759Other income (expenses):Interest income
    
    
    270,186
    
    
    
    4,353
    
    
    
    402,804
    
    
    
    4,847Interest expense
    
    
    (6,234
    )
    
    
    (5,407
    )
    
    
    (13,778
    )
    
    
    (10,582
    )Other income
(expense)
    
    
    138,191
    
    
    
    3,246
    
    
    
    137,523
    
    
    
    3,246402,143
    
    
    
    2,192
    
    
    
    526,549
    
    
    
    (2,489
    )Loss before income taxes
    
    
    (854,225
    )
    
    
    (2,778,405
    )
    
    
    (2,047,487
    )
    
    
    (3,218,907
    )Deferred income tax benefit
    
    
    
    
    
    
    292,562
    
    
    
    
    
    
    
    344,717Net loss
    
    $
    (854,225
    )
    
    $
    (2,485,843
    )
    
    $
    (2,047,487
    )
    
    $
    (2,874,190
    )Basic and diluted loss per
share
    
    $
    (0.01
    )
    
    $
    (0.07
    )
    
    $
    (0.04
    )
    
    $
    (0.09
    )Weighted average common
shares outstanding
    
    
    63,654,794
    
    
    
    34,790,336
    
    
    
    57,889,094
    
    
    
    32,018,325




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##### 



BPI Energy Holdings, Inc.
Consolidated Statements of Shareholders Equity
(Unaudited)
 Additional
    
    
    
    
    
    
    TotalCommon Shares
    
    
    Paid-in
    
    
    Accumulated
    
    
    ShareholderShares
    
    
    Amounts
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance, July 31, 2005
    
    
    43,912,961
    
    
    $
    34,666,022
    
    
    $
    4,493,680
    
    
    $
    (18,357,283
    )
    
    $
    20,802,419Proceeds from stock
options exercised
    
    
    391,667
    
    
    
    379,379
    
    
    
    
    
    
    
    
    
    
    
    379,379Proceeds from
warrants exercised
    
    
    2,073,459
    
    
    
    1,644,039
    
    
    
    
    
    
    
    
    
    
    
    1,644,039Net proceeds from
shares issued in
private placement
 September 23,
2005(1)
    
    
    18,000,000
    
    
    
    27,883,954
    
    
    
    
    
    
    
    
    
    
    
    27,883,954Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    397,586
    
    
    
    
    
    
    
    397,586Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,047,487
    )
    
    
    (2,047,487
    )Balance, January 31, 2006
    
    
    64,378,087
    
    
    $
    64,573,394
    
    
    $
    4,891,266
    
    
    $
    (20,404,770
    )
    
    $
    49,059,890
 
 (1)
    
    Net of share issuance costs of $2,619,953




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##### 



BPI Energy Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 Six Months Ended January 312006
    
    
    2005Operating activities:Net loss
    
    $
    (2,047,487
    )
    
    $
    (2,874,190
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation, depletion and amortization
    
    
    212,692
    
    
    
    57,672Stock-based compensation expense
    
    
    397,586
    
    
    
    2,200,777Gain on sale of investment
    
    
    (127,416
    )
    
    
    (3,246
    )Deferred income tax benefit
    
    
    
    
    
    
    (344,717
    )Other
    
    
    
    
    
    
    14,881Changes in assets and liabilities:Accounts receivable
    
    
    (124,963
    )
    
    
    (6,341
    )Other current assets
    
    
    (246,911
    )
    
    
    (17,714
    )Accounts payable
    
    
    (657,299
    )
    
    
    (99,039
    )Accrued liabilities and other
    
    
    71,922
    
    
    
    496Other non-current liabilities
    
    
    45,949
    
    
    
    Net cash used in operating activities
    
    
    (2,475,927
    )
    
    
    (1,071,421
    )Investing activities:Proceeds from sale of investment
    
    
    551,000
    
    
    
    43,956Additions to oil and gas properties
    
    
    (5,958,567
    )
    
    
    (1,907,403
    )Additions to other property and equipment
    
    
    (2,560,216
    )
    
    
    (371,736
    )Acquisition of equity interest in joint venture
    
    
    
    
    
    
    (78,112
    )Increase in restricted cash
    
    
    (34,000
    )
    
    
    Net cash used in investment activities
    
    
    (8,001,783
    )
    
    
    (2,313,295
    )Financing activities:Payments on long-term notes payable
    
    
    (57,458
    )
    
    
    (14,828
    )Net proceeds from issuance of common shares
    
    
    29,907,372
    
    
    
    14,140,215Net cash provided by financing activities
    
    
    29,849,914
    
    
    
    14,125,387Net increase in cash and cash equivalents
    
    
    19,372,204
    
    
    
    10,740,671Cash and cash equivalents at the beginning of the
period
    
    
    7,251,503
    
    
    
    970,795Cash and cash equivalents at the end of the period
    
    $
    26,623,707
    
    
    $
    11,711,466Supplementary disclosure of cash flow information:Non-cash investing and financing activity:Acquisition of equipment by issuance of notes
payable
    
    $
    233,475
    
    
    $
    




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##### 



BPI Energy Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThese unaudited consolidated interim financial statements include the accounts of BPI Energy
Holdings, Inc. and its wholly owned U.S. subsidiary, BPI Energy, Inc. (collectively, the
Company). All inter-company transactions and balances have been eliminated upon
consolidation.BPI Energy Holdings, Inc. is incorporated in British Columbia, Canada and, through its wholly
owned U.S. subsidiary, BPI Energy, Inc., is involved in the acquisition, exploration and
development of coalbed methane properties located in the United States of America. The
Company conducts its operations in one reportable segment, which is oil and gas exploration
and production. On December 13, 2005, the Companys common shares began trading on the
American Stock Exchange (AMEX) under the symbol BPG. As a result of the shares being listed
on the AMEX, the Company voluntarily de-listed from trading its shares on the TSX Venture
Exchange. Amounts shown are in U.S. Dollars unless otherwise indicated.The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter and six months ended January 31, 2006 are not necessarily
indicative of the results that may be expected for the full fiscal year. For further
information, refer to the consolidated financial statements and notes thereto included in the
Companys Form S-1 filed with the Securities and Exchange Commission on December 5, 2005.
Certain prior period amounts have been reclassified to conform to current period presentation.Use of EstimatesThe preparation of these unaudited consolidated financial statements requires the use of
certain estimates by management in determining the Companys assets, liabilities, revenues and
expenses. Actual results could differ from such estimates. Depreciation, depletion and
amortization of oil and gas properties and the impairment of oil and gas properties are
determined using estimates of oil and gas reserves. There are numerous uncertainties in
estimating the quantity of reserves and in projecting the future rates of production and
timing of development expenditures, including future costs to dismantle, dispose of, and
restore the Companys properties. Oil and gas reserve engineering must be recognized as a
subjective process of estimating underground accumulations of oil and gas that cannot be
measured in an exact way. Proved reserves of oil and natural gas are estimated quantities that
geological and engineering data demonstrate with reasonable certainty to be recoverable in the
future from known reservoirs under existing conditions.Oil and Gas PropertiesThe Company follows the full cost method of accounting for oil and gas properties. Under this
method, all costs associated with the acquisition of, exploration for and development of oil
and gas reserves are capitalized in cost centers on a country-by-country basis (currently the
Company has one cost center, the United States). Such costs include lease acquisition costs,
geological and geophysical studies, carrying charges on non-producing properties, costs of
drilling both productive and non-productive wells, and overhead expenses directly related to
these activities. Internal costs associated with oil and gas activities that are not directly
attributable to acquisition, exploration or development activities are expensed as incurred.




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##### 



Unevaluated oil and gas properties and major development projects are excluded from
amortization until a determination of whether proved reserves can be assigned to the
properties or impairment occurs. Unevaluated properties are assessed at least annually to
ascertain whether an impairment has occurred. Sales or dispositions of properties are credited
to their respective cost centers and a gain or loss is recognized when all the properties in a
cost center have been disposed of, unless such sale or disposition significantly alters the
relationship between capitalized costs and proved reserves attributable to the cost center.Capitalized costs of proved oil and gas properties, including estimated future costs to
develop the reserves and estimated abandonment cost, net of salvage, are amortized on the
units-of-production method using estimates of proved reserves.A ceiling test is applied to each cost center by comparing the net capitalized costs, less
related deferred income taxes, to the estimated future net revenues from production of proved
reserves, discounted at 10%, plus the costs of unproved properties net of impairment. Any
excess capitalized costs are written off in the current year. The calculation of future net
revenues is based upon prices, costs and regulations in effect at each year end.In general, the Company determines if a property is impaired if one or more of the following
conditions exist:i)      there are no firm plans for further drilling on the unproved property;ii)     negative results were obtained from studies of the unproved property;iii)    negative results were obtained from studies conducted in the vicinity of the unproved property; oriv)    the remaining term of the unproved property does not allow sufficient time for further studies or drilling.Other Property and EquipmentProperty and equipment are stated at cost. Gas collection equipment is depreciated on the
units-of-production method based on proved reserves. Support equipment and other property and
equipment are depreciated using the straight-line method over the estimated useful lives of
the assets, ranging from three to ten years. Major classes of property and equipment
consisted of the following:
 January 31
    
    
    July 312006
    
    
    2005Other Property and Equipment:Gas collection equipment
    
    $
    3,758,264
    
    
    $
    1,332,012Support equipment
    
    
    1,058,731
    
    
    
    760,467Other
    
    
    79,846
    
    
    
    76,321Less: Accumulated depreciation and amortization
    
    
    (462,530
    )
    
    
    (398,988
    )$
    4,434,311
    
    
    $
    1,769,812
 Asset Retirement ObligationsThe Company follows Statement of Financial Accounting Standards (SFAS) No. 143, Accounting
for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value
of an asset retirement obligation as a liability in the period in which it is incurred, if a
reasonable estimate of fair value can be made. The present value of the estimated asset
retirement costs is capitalized as part of the carrying amount of the associated long-lived
asset. Amortization of the capitalized asset retirement cost is determined on a
units-of-production method. Accretion of the asset retirement obligation is recognized over
time until the obligation is settled. The Companys asset retirement obligations relate to
the plugging of wells upon exhaustion of gas reserves. The Company assessed its asset
retirement obligation in prior periods and deemed it to be immaterial. The initial liability
for our asset retirement obligations was recorded as of August 1, 2005 in the amount of
$19,778.




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##### 



The following table summarizes the activity for the Companys asset retirement obligations for
the six months ended January 31, 2006 and 2005:
 Six Months Ended January 312006
    
    
    2005Asset retirement obligation at beginning of period
    
    $
    19,778
    
    
    $
    Accretion expense
    
    
    1,335
    
    
    
    Liabilities incurred
    
    
    24,836
    
    
    
    Asset retirement obligation at end of period
    
    $
    45,949
    
    
    $
    
 Loss Per ShareLoss per share is calculated using the weighted average number of common shares outstanding
during the year. Diluted loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into common
stock. Diluted loss per share is not disclosed as all common share equivalents were
anti-dilutive for the quarter and six months ended January 31, 2006. Outstanding options and
warrants that were excluded from the computation of diluted loss per share, as the effect of
their assumed exercises would be anti-dilutive, totaled 14,844,215 at October 31, 2005 and
13,150,828 at January 31, 2006.Share-Based PaymentPrior to December 13, 2005 the Company had a stock-based compensation plan (the Incentive
Stock Option Plan) under which stock options were issued to directors, officers, employees
and consultants as determined by the Board of Directors and subject to the provisions of the
Incentive Stock Option Plan. The Incentive Stock Option Plan permitted options to be issued
with exercise prices at a discount to the market price of the Companys common stock on the
day prior to the date of grant. However, the majority of all stock options issued under the
Incentive Stock Option Plan were issued with exercise prices equal to the quoted market price
of the stock on the date of grant. Options granted under the Incentive Stock Option Plan
vested immediately and were exercisable over a period not exceeding five years. The Company
had options to purchase 4,030,612 shares of common stock outstanding under the Incentive Stock
Option Plan at January 31, 2006.On December 13, 2005, the shareholders of the Company approved the BPI Industries Inc. 2005
Omnibus Stock Plan (the Omnibus Stock Plan) and it became effective on that date. The
Omnibus Stock Plan replaces the Incentive Stock Option Plan under which stock options were
previously granted. The Omnibus Stock Plan will be administered by the Compensation Committee
of the Board of Directors (the Committee) and will remain in effect for five years. All
employees and Directors of the Company and its subsidiaries, and all consultants or agents of
the Company designated by the Committee, are eligible to participate in the Omnibus Stock
Plan. The Committee has authority to: grant awards, select the participants who will receive
awards, determine the terms, conditions, vesting periods and restrictions applicable to the
awards, determine how the exercise price is to be paid, modify or replace outstanding awards
within the limits of the Omnibus Stock Plan, accelerate the date on which awards become
exercisable, waive the restrictions and conditions applicable to awards, and establish rules
governing the Omnibus Stock Plan. No options have been issued under the Omnibus Stock Plan as
of January 31, 2006.In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. This Statement revises
SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) focuses primarily
on the accounting for transactions in which an entity obtains employee services in share-based
payment transactions. The key provision of SFAS No. 123(R) requires companies to record
share-based payment transactions as compensation expense at fair market value based on the
grant-date fair value of those awards. Previously under SFAS 123, companies had the option of
either recording expense based on the fair value of stock options granted or continuing to
account for stock-based compensation using the intrinsic value method prescribed by APB No.
25.




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##### 



The Company adopted SFAS No. 123(R), using the modified-prospective method, effective August
1, 2005. Since August 1, 2001, the Company followed the fair value provisions of SFAS 123 and
recorded all share-based payment transactions as compensation expense at fair market value
based on the grant-date fair value of those awards. In addition, all stock options previously
granted by the Company vested immediately on the date of grant, and
thus there was
no unvested portion of previous stock option grants which vested during the
quarter or six months ended January 31, 2006. Therefore, SFAS 123(R) had no impact on the
Companys consolidated financial position or results of operations for the quarter and six
months ended January 31, 2006. The Company continues to use the Black-Scholes formula to
estimate the fair value of stock options previously granted under the Incentive Stock Option
Plan.2.
    
    STOCK-BASED COMPENSATIONThe tables below summarize stock options activity for the six months ended January 31, 2006
and 2005, respectively. All stock options were granted with exercise prices denominated in
Canadian Dollars. U.S. Dollar amounts shown in the tables below were derived using published
exchange rates on the date of the transaction for grants, cancellations, exercises and
expirations and at period-end exchange rates for options outstanding as of July 31, 2005 and
2004 and January 31, 2006 and 2005.
 Weighted-AverageSix Months Ended January 31, 2006:
    
    
    
    
    
    Exercise PriceNumber of options
    
    
    CAD$
    
    
    USD$Outstanding at July 31, 2005
    
    
    4,227,279
    
    
    $
    1.82
    
    
    $
    1.49Granted  exercise price equal
to market price of stock on date
of grant
    
    
    495,000
    
    
    
    2.05
    
    
    
    1.75Exercised
    
    
    (341,667
    )
    
    
    1.19
    
    
    
    1.00Cancelled
    
    
    (300,000
    )
    
    
    1.82
    
    
    
    1.52Outstanding at October 31, 2005
    
    
    4,080,612
    
    
    $
    1.88
    
    
    $
    1.60Exercised
    
    
    (50,000
    )
    
    
    1.43
    
    
    
    1.22Outstanding at January 31, 2006
    
    
    4,030,612
    
    
    $
    1.88
    
    
    $
    1.64
 Weighted-AverageSix Months Ended January 31, 2005:
    
    
    
    
    
    Exercise PriceNumber of options
    
    
    CAD$
    
    
    USD$Outstanding at July 31, 2004
    
    
    2,230,556
    
    
    $
    .78
    
    
    $
    0.59Cancelled
    
    
    (13,889
    )
    
    
    1.20
    
    
    
    0.98Outstanding at October 31, 2004
    
    
    2,216,667
    
    
    $
    0.77
    
    
    $
    0.63Granted  exercise price equal
to market price of stock on date
of grant
    
    
    2,097,278
    
    
    
    1.93
    
    
    
    1.55Granted  exercise price less
than market price of stock on
date of grant
    
    
    852,778
    
    
    
    1.19
    
    
    
    .96Exercised
    
    
    (1,040,000
    )
    
    
    0.69
    
    
    
    0.57Cancelled
    
    
    (11,111
    )
    
    
    1.20
    
    
    
    0.98Outstanding at January 31, 2005
    
    
    4,115,612
    
    
    $
    1.47
    
    
    $
    1.19




---



##### 



The Company recorded stock-based compensation expense of $397,586 and $2,200,777 in the six
months ended January 31, 2006, and 2005, respectively. The fair value of stock options
granted was estimated using the Black-Scholes Option Pricing Model with the following
assumptions:
 Six Months Ended January 31,2006
    
    
    2005Risk-free interest rate
    
    
    3.3%
    
    
    
    3.0 - 3.5%Expected dividend yield
    
    Nil
    
    NilExpected stock price volatility
    
    
    66%
    
    
    
    74 - 81%Expected option life
    
    3 years
    
    3 years
 Option pricing models require the input of highly subjective assumptions, particularly as to
the expected price volatility of the stock. Changes in these assumptions can materially
affect the fair value estimate, and therefore it is managements view that the existing models
do not necessarily provide a single reliable measure of the fair value of the Companys stock
option grants.The following table summarizes information about options outstanding as of January 31, 2006:
 ExercisePrice
    
    
    Number
    
    
    Remaining
    
    
    ExpiryCAD$
    
    
    Outstanding
    
    
    Life (Years)
    
    
    Date$
    0.65
    
    
    
    350,000
    
    
    
    2.8
    
    
    November 3, 20080.90
    
    
    
    143,334
    
    
    
    0.9
    
    
    January 10, 20070.90
    
    
    
    100,000
    
    
    
    1.2
    
    
    April 10, 20070.90
    
    
    
    15,000
    
    
    
    3.6
    
    
    September 22, 20091.20
    
    
    
    50,000
    
    
    
    0.9
    
    
    January 10, 20071.49
    
    
    
    710,666
    
    
    
    3.8
    
    
    November 29, 20092.05
    
    
    
    495,000
    
    
    
    4.6
    
    
    September 22, 20102.19
    
    
    
    911,000
    
    
    
    4.2
    
    
    March 27, 20102.36
    
    
    
    115,000
    
    
    
    4.3
    
    
    May 23, 20102.40
    
    
    
    1,140,612
    
    
    
    4.0
    
    
    January 20, 2010$
    1.88
    
    
    
    4,030,612
    
    
    
    3.8
 3.
    
    INCOME TAXESWe operate in two tax jurisdictions, the United States and Canada. Primarily as a result
of the net operating losses that we have generated (NOL Carryforwards) in both Canada and
the United States, we have generated deferred tax benefits available for tax purposes to
offset net income in future periods. SFAS No. 109, Accounting for Income Taxes, requires that
we record a valuation allowance when it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of sufficient future taxable income before the expiration of
the NOL Carryforwards. Because of the Companys limited operating history, limited financial
performance and cumulative tax loss from inception, it is managements judgment that SFAS No.
109 requires the recording of a full valuation allowance for net deferred tax assets in both
Canada and the United States as of January 31, 2006.We recorded a tax benefit in the United States for the six months ended January 31, 2005 to
partially offset a net deferred tax liability at January 31, 2005; however, no tax benefit was
recognized for the six months ended January 31, 2006 as the Company had no net deferred
tax liability to offset.




---



##### 



4.
    
    LONG-TERM NOTES PAYABLEThe Company has outstanding notes payable as follows:
 January 31,
    
    
    July 31,2006
    
    
    2005Case Credit term note due in fiscal year 2006, 6.50%
    
    $
    28,582
    
    
    $
    32,833GMAC term notes due in fiscal year 2009, 6.50%
    
    
    25,163
    
    
    
    26,633GMAC term notes due in fiscal year 2010, 6.1% to 6.50%
    
    
    94,979
    
    
    
    98,356Convertible note due in fiscal year 2008, 3.25%
    
    
    
    
    
    
    392,000Caterpillar Financial Services Corp
    
    
    195,568
    
    
    
    333,839
    
    
    
    549,822Less current maturities
    
    
    (239,071
    )
    
    
    (42,227
    )Long-term notes payable
    
    $
    94,768
    
    
    $
    507,595
 The notes are collateralized by the related vehicles and equipment. The convertible note
payable outstanding at July 31, 2005 was issued in June 2003 with a face value of $392,000 and
maturing on June 10, 2008, bearing interest at 3.25%, convertible at the option of the
holder, prior to June 10, 2008, into 390,537 common shares of the Company. The convertible
note payable was cancelled on January 4, 2005 pursuant to the sale of the Companys interest
in Hite Coalbed Methane, L.L.C.  see Note 7.The annual maturities of all notes for the remaining six months of fiscal year 2006 and the
four fiscal years thereafter are as follows:
 Principal
    
    
    Interest
    
    
    Total2006
    
    $
    137,451
    
    
    $
    9,201
    
    
    $
    146,6522007
    
    
    121,239
    
    
    
    7,160
    
    
    
    128,3992008
    
    
    27,982
    
    
    
    3,855
    
    
    
    31,8372009
    
    
    29,767
    
    
    
    2,070
    
    
    
    31,8372010
    
    
    17,400
    
    
    
    440
    
    
    
    17,840$
    333,839
    
    
    $
    22,726
    
    
    $
    356,565
 5.
    
    SHAREHOLDERS EQUITYIn September 2005, the Company sold 18,000,000 common shares in a private placement. The
proceeds from this private placement of $27,883,954 net of $2,619,953 of share issuance costs,
will be used to fund the Companys plan of operations and for working capital and general
corporate purposes.The Company has share purchase warrants outstanding at January 31, 2006 as follows:
 Number
    
    Exercise
    
    ExpiryOutstanding
    
    Price
    
    Date3,177,016
    
    CAD $1.00
    
    April 29, 20064,906,000
    
    USD $1.50
    
    December 13, 20071,037,200
    
    USD $1.25
    
    January 15, 20109,120,216




---



##### 



6.
    
    RELATED PARTY TRANSACTIONSThe Company enters into various transactions with related parties in the normal course of
business operations.Randy Oestreich, the Companys Vice President of Field Operations, owns and operates A-Strike
Consulting, a consulting company that provides, among other things, laboratory testing
related to CBM. Beginning in the fiscal year ended July 31, 2005, the Company owns and
maintains a lab testing facility and allows A-Strike Consulting to operate the facility. The
Company pays all expenses related to the facility and, in return, receives 80% of the revenue
generated from the operations of the facility as reimbursement of the Companys expenses.
The Company received approximately $38,451 and $0 in expense reimbursement related to this
arrangement during the six months ended January 31, 2006 and 2005, respectively.Mr. Oestreichs brother owns Dependable Service Company, a company that provides general
labor services to the Company. The Company paid Dependable Services Company $160,679 and
$54,929 during the six months ended January 31, 2006 and 2005, respectively.7.
    
    SALE OF INVESTMENT IN HITE COALBED METHANE, L.L.C.On January 4, 2006, the Company sold its 49% interest in Hite Coalbed Methane, L.L.C.
(HCM) for $551,000 in cash and cancellation of the Companys convertible note payable in
the amount of $392,000, plus accrued interest of $31,182. The note was convertible into
390,537 of the Companys common shares. The Company accounted for its investment in HCM under
the cost method of accounting. The total consideration received of $974,182 resulted in a
gain on the sale of the investment of $127,416, which is included in other income in the
Companys statement of operations for the quarter and six months ended January 31, 2006.8.
    
    LEGAL PROCEEDINGSOn April 3, 2001 the Company entered into an Oil, Gas and Coalbed Methane Gas Lease
(Lease) with American Premier Underwriters, Inc. and AFC Coal Properties, Inc.
(collectively, the Lessors).The Lease has an initial term of five years that expires on April 3, 2006; however, the term
is extended as to the 320 acre tract that surrounds each well so long as CBM is produced from
such tract providing a royalty payment of at least $1.00 per acre per month; provided,
however, after the initial five year term, if aggregate royalties do not exceed $42,000 in
any month, the Lease shall terminate.In August 2005, the original Lessors transferred, subject to the Lease, certain of their
rights under the Lease, including certain of their rights in and to the CBM to Colt, LLC and
Peabody Land Holdings, LLC (collectively, the Transferees). The Company believes that at
least one of the Transferees, Colt, LLC, has taken steps that have interfered with the
Companys ability to carry out its development plans and generate the royalties necessary to
extend the Lease (including the establishment of additional wells prior to the April 3, 2006
deadline).On March 15, 2006, the Company filed a complaint against the Lessors and Transferees alleging
(i) tortious interference with business relations and (ii) breach of contract. The Company
is seeking a preliminary and permanent injunction, declaratory judgment and
unspecified monetary damages. The complaint was filed in the United States District Court
for the Southern District of Ohio.The Company believes that it should be successful in extending the term of the lease as to
existing wells and certain other areas subject to the Lease where the Company believes the
Lessors and Transferees have interfered with its ability to establish wells prior to the
April 3, 2006 deadline. However, there exists a reasonable possibility that the Company will
be unable to extend the Lease as to either or both of the existing wells or additional areas
where the Lessors and Transferees have interfered with the Companys establishment of wells.
The effect of the loss of all of the Companys acreage under the Lease may result in a
write-down of capitalized net oil and gas and other




---



##### 



properties in an amount up to
approximately $22 million. The effect of the loss of only the Companys non-producing
acreage (those areas in which wells had not yet been established) may result in a write-down
of capitalized net oil and gas and other properties in an amount up to approximately $4
million.9.
    
    SUBSEQUENT EVENTOn February 9, 2006, at a special meeting of the Companys shareholders, the
shareholders voted to approve amendments to the Companys governing documents that:
 1.
    
    changed the name of the Company to BPI Energy Holdings, Inc.;2.
    
    increased the number of shares of common stock that the Company is authorized to
issue from 100 million shares to 200 million shares;3.
    
    increased the quorum necessary to transact business at a meeting of the Companys
shareholders to the holders of 33 1/3% of the Companys shares of common stock; and4.
    
    permit meetings of the Companys shareholders to be held outside of British
Columbia, Canada.
 Each of the amendments to the Companys governing documents was previously approved by the
unanimous vote of the Companys Board of Directors.




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview and Outlook
      
    
    negotiating leases that grant us the broadest possible rights to CBM for any given tract of land;
    
    conducting ongoing title reviews of existing mineral interests;
    
    where possible, negotiating and securing long-term service company commitments to insure availability of
equipment and services; and
    
    attempting to create a low cost structure in order to reduce our vulnerability to many of these factors.




---



##### 




    
    developing the in-house capabilities necessary to enable us to meet our
regulatory and reporting obligations to various regulatory agencies, constituencies
and our shareholders;
    
    raise the capital necessary to achieve our plans and goals; and
    
    transition BPI from a company focused primarily on acquisition of mineral
rights to a company focused on producing CBM.




---



##### 



Results of Operations
 Three Months Ended January 31, 2006 Compared to Three Months Ended January 31, 2005
  Three Months Ended January 31Dollar
    
    
    %2006
    
    
    2005
    
    
    Variance
    
    
    ChangeRevenues:Gas sales
    
    $
    327,811
    
    
    $
    6,341
    
    
    $
    321,470
    
    
    
    5,070
    %Expenses:Lease operating expense
    
    
    300,806
    
    
    
    
    
    
    
    300,806
    
    
    
    100
    %General and administrative
expense
    
    
    1,165,483
    
    
    
    2,752,852
    
    
    
    (1,587,369
    )
    
    
    (58
    )%Depreciation, depletion
and amortization
    
    
    117,890
    
    
    
    34,086
    
    
    
    83,804
    
    
    
    246
    %1,584,179
    
    
    
    2,786,938
    
    
    
    (1,202,759
    )
    
    
    (43
    %)Other income (expenses):Interest income
    
    
    270,186
    
    
    
    4,353
    
    
    
    265,833
    
    
    
    6,107
    %Interest expense
    
    
    (6,234
    )
    
    
    (5,407
    )
    
    
    (827
    )
    
    
    (15
    )%Other income
    
    
    138,191
    
    
    
    3,246
    
    
    
    134,945
    
    
    
    4,157
    %402,143
    
    
    
    2,192
    
    
    
    399,951
    
    
    
    18,246
    %Loss before income taxes
    
    
    (854,225
    )
    
    
    (2,778,405
    )
    
    
    1,924,180
    
    
    
    69
    %Deferred income tax benefit
    
    
    
    
    
    
    292,562
    
    
    
    (292,562
    )
    
    
    (100
    )%Net loss
    
    $
    (854,225
    )
    
    $
    (2,485,843
    )
    
    $
    1,631,618
    
    
    
    66
    %
 Revenue
 Lease operating expense 




---



##### 



General and administrative expense 
 Three Months ended January 31Dollar
    
    
    %2006
    
    
    2005
    
    
    Variance
    
    
    ChangeSalaries and
benefits
    
    $
    503,368
    
    
    $
    275,956
    
    
    $
    227,412
    
    
    
    82
    %Stock-based
compensation
    
    
    
    
    
    
    2,200,777
    
    
    
    (2,200,777
    )
    
    
    (100
    )%Professional fees
    
    
    400,991
    
    
    
    108,520
    
    
    
    292,471
    
    
    
    270
    %Other
    
    
    261,124
    
    
    
    167,599
    
    
    
    93,525
    
    
    
    56
    %Total general and
administrative expense
    
    $
    1,165,483
    
    
    $
    2,752,852
    
    
    $
    (1,587,369
    )
    
    
    (58
    )%
     Depreciation, depletion and amortization expense
 Interest income
 Other income
 Deferred income tax benefit




---



##### 



Six Months Ended January 31, 2006 Compared to Six Months Ended January 31, 2005
  Six Months Ended January 31Dollar
    
    
    %2006
    
    
    2005
    
    
    Variance
    
    
    ChangeRevenues:Gas sales
    
    $
    537,505
    
    
    $
    6,341
    
    
    $
    531,164
    
    
    
    8,377
    %Expenses:Lease operating expense
    
    
    461,610
    
    
    
    
    
    
    
    461,610
    
    
    
    100
    %General and administrative
expense
    
    
    2,437,239
    
    
    
    3,165,087
    
    
    
    (727,848
    )
    
    
    (23
    )%Depreciation, depletion
and amortization
    
    
    212,692
    
    
    
    57,562
    
    
    
    155,130
    
    
    
    270
    %3,111,541
    
    
    
    3,222,649
    
    
    
    (111,108
    )
    
    
    (3
    )%Other income (expenses):Interest income
    
    
    402,804
    
    
    
    4,847
    
    
    
    397,957
    
    
    
    8,210
    %Interest expense
    
    
    (13,778
    )
    
    
    (10,582
    )
    
    
    (3,196
    )
    
    
    30
    %Other income
    
    
    137,523
    
    
    
    3,246
    
    
    
    134,277
    
    
    
    4,137
    %526,549
    
    
    
    (2,489
    )
    
    
    529,038
    
    
    
    n/aLoss before income taxes
    
    
    (2,047,487
    )
    
    
    (3,218,797
    )
    
    
    1,171,310
    
    
    
    36
    %Deferred income tax benefit
    
    
    
    
    
    
    344,717
    
    
    
    (344,717
    )
    
    
    (100
    )%Net loss
    
    $
    (2,047,487
    )
    
    $
    (2,874,080
    )
    
    $
    826,593
    
    
    
    29
    %
 Revenue
 Lease operating expense 




---



##### 



General and administrative expense 
 Six Months ended January 31Dollar
    
    
    %2006
    
    
    2005
    
    
    Variance
    
    
    ChangeSalaries and benefits
    
    $
    727,240
    
    
    $
    410,249
    
    
    $
    316,991
    
    
    
    77
    %Stock-based compensation
    
    
    397,586
    
    
    
    2,200,777
    
    
    
    (1,803,191
    )
    
    
    (82
    %)Professional fees
    
    
    858,002
    
    
    
    240,125
    
    
    
    617,877
    
    
    
    257
    %Other
    
    
    454,411
    
    
    
    313,936
    
    
    
    140,475
    
    
    
    45
    %Total general and
administrative
expense
    
    $
    2,437,239
    
    
    $
    3,165,087
    
    
    $
    (727,848
    )
    
    
    (23
    %)
     Depreciation, depletion and amortization expense
 Interest income
 Other income




---



##### 



Deferred income tax benefit
 Financial Condition
    
    
    the price of, and demand for, natural gas;
    
    availability of drilling equipment;
    
    lease terms;
    
    availability of sufficient capital resources; and
    
    the accuracy of production estimates for current and future
wells.




---



##### 



Critical Accounting Policies and Estimates
   Cautionary Statement Concerning Forward-Looking Statements
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Commodity Risk




---



##### 



Interest Rate Risk
  Financial Instruments
  Inflation and Changes in Prices
  Item 4. Controls and Procedures
   PART II. OTHER INFORMATION
 Item 1. Legal Proceedings




---



##### 



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  (a)
    
    Election of Directors. The shareholders voted in favor of electing the following
persons as Directors:
 Name of Director

    Number of Shares Voted For
    
    Number of Shares WithheldJames Azlein

    
    23,400,372
    
    
    
    11,726George Zilich

    
    23,400,192
    
    
    
    11,740Costa Vrisakis

    
    23,396,396
    
    
    
    19,736William J. Centa

    
    23,395,002
    
    
    
    16,930Dennis Carlton

    
    23,398,006
    
    
    
    13,926
 (b)
    
    Approval of the BPI Industries Inc. 2005 Omnibus Stock Plan. The shareholders
approved the BPI Industries Inc. 2005 Omnibus Stock Plan.
 Votes For
    
    
    20,513,798Votes Against
    
    
    2,525,053Abstentions
    
    
    373,264Broker Non-Votes
    
    
    557,600




---



##### 



(c)
    
    Appointment of Independent Registered Public Accounting Firm. The shareholders
ratified the appointment of Meaden & Moore, Ltd. as the Companys independent registered
public accounting firm for 2006.
 Votes For
    
    
    23,380,942Votes Against
    
    
    11,841Abstentions
    
    
    19,323Broker Non-Votes
    
    
    557,600
 Item 5. Other Information
  Item 6. Exhibits
 31.1
    
    Section 302 Certification By Chief Executive Officer31.2
    
    Section 302 Certification By Chief Financial Officer (Principal Financial Officer)32.1
    
    Section 906 Certification of Principal Executive Officer and Principal Financial Officer




---



##### 



SIGNATURES
  BPI INDUSTRIES INC.DATE: March 15, 2006
    /s/ James G. AzleinJames G. Azlein,President and Chief Executive Officer /s/ George J. ZilichGeorge J. Zilich,Chief Financial Officer and General Counsel