##### Table of Contents



United
States Securities and Exchange Commission
 WASHINGTON, D.C. 20549
 
 Form
10 - Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended October 31, 2005
 Commission File No. 001-32695
 
 BPI Industries Inc.
  British Columbia, Canada
    
    75-3183021(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)30775 Bainbridge Road, Suite 280, Solon, Ohio
    
    44139(Address of Principal Executive Offices)
    
    (Zip Code)
 (440) 248-4200
 o þ
 o þ
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-31.1 CertificationEX-31.2 CertificationEX-32.1 Certification    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 BPI Industries Inc.
Consolidated Balance Sheets
 October 31, 2005
    
    July 31, 2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    30,898,944
    
    
    $
    7,251,503Accounts receivable
    
    
    121,784
    
    
    
    34,671Marketable securities
    
    
    
    
    
    
    Other current assets
    
    
    34,350
    
    
    
    23,534Total current assets
    
    
    31,055,078
    
    
    
    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 $97,140 and $58,523
    
    
    12,812,780
    
    
    
    10,190,929Unproved
    
    
    3,148,373
    
    
    
    3,149,372Net oil and gas properties
    
    
    15,961,153
    
    
    
    13,340,301Other property and equipment, net of accumulated
depreciation and amortization of $455,073 and $398,888
    
    
    2,397,348
    
    
    
    1,769,812Net property and equipment
    
    
    18,358,501
    
    
    
    15,110,113Equity investment in joint venture
    
    
    
    
    
    
    Investment in Hite Coalbed Methane, L.L.C.
    
    
    846,766
    
    
    
    846,766Restricted cash
    
    
    100,000
    
    
    
    100,000Other non-current assets
    
    
    161,125
    
    
    
    161,125Deferred income taxes
    
    
    
    
    
    
    $
    50,521,470
    
    
    $
    23,527,712LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
$

    1,058,528
    
    
$

    2,144,066Current maturity of long-term notes payable
    
    
    42,822
    
    
    
    42,227Accrued liabilities and other
    
    
    178,327
    
    
    
    31,405Total current liabilities
    
    
    1,279,677
    
    
    
    2,217,698Long-term
notes payable, less current portion
    
    
    497,902
    
    
    
    507,595Other non-current liabilities
    
    
    34,669
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    Total liabilities
    
    
    1,812,248
    
    
    
    2,725,293Shareholders equity:Common shares, no par value, authorizing 100,000,000
shares, 62,940,237 and 43,912,961 outstanding
    
    
    63,368,500
    
    
    
    34,666,022Additional paid-in capital
    
    
    4,891,266
    
    
    
    4,493,680Common shares issuable
    
    
    
    
    
    
    Accumulated deficit
    
    
    (19,550,544
    )
    
    
    (18,357,283
    )Total shareholders equity
    
    
    48,709,222
    
    
    
    20,802,419$
    50,521,470
    
    
    $
    23,527,712
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BPI Industries Inc.
Consolidated Statements of Operations
(Unaudited)
 Three Months Ended October 312005
    
    2004Revenues:Gas sales
    
    $
    209,694
    
    
    $
    Expenses:Lease operating expense
    
    
    160,804
    
    
    
    General and administrative expense
    
    
    1,272,424
    
    
    
    412,235Depreciation, depletion and amortization
    
    
    94,802
    
    
    
    23,5861,528,030
    
    
    
    435,821Other income (expenses):Interest income
    
    
    132,619
    
    
    
    494Interest expense
    
    
    (7,544
    )
    
    
    (5,175
    )125,075
    
    
    
    (4,681
    )Loss before income taxes
    
    
    (1,193,261
    )
    
    
    (440,502
    )Deferred income tax benefit
    
    
    
    
    
    
    52,155Net loss
    
    $
    (1,193,261
    )
    
    $
    (388,347
    )Basic and diluted loss per share
    
    ($
    0.03
    )
    
    ($
    0.01
    )Weighted average common shares outstanding
    
    
    45,982,440
    
    
    
    29,144,279
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BPI Industries Inc.
Consolidated Statements of Shareholders Equity
(Unaudited)
 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
    
    
    341,667
    
    
    
    337,556
    
    
    
    
    
    
    
    
    
    
    
    337,556Proceeds from warrants
exercised
    
    
    685,609
    
    
    
    464,712
    
    
    
    
    
    
    
    
    
    
    
    464,712Net proceeds from shares
issued in private
placement  September
23, 2005 (1)
    
    
    18,000,000
    
    
    
    27,900,210
    
    
    
    
    
    
    
    
    
    
    
    27,900,210Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    397,586
    
    
    
    
    
    
    
    397,586Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,193,261
    )
    
    
    (1,193,261
    )Balance, October 31, 2005
    
    
    62,940,237
    
    
    $
    63,368,500
    
    
    $
    4,891,266
    
    
    $
    (19,550,544
    )
    
    $
    48,709,222
 
 (1)
    
    Net of share issuance costs of $2,603,697  3




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BPI Industries Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended October 312005
    
    2004Operating activities:Net loss
    
    $
    (1,193,261
    )
    
    $
    (388,347
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation, depletion and amortization
    
    
    94,802
    
    
    
    23,586Stock-based compensation expense
    
    
    397,586
    
    
    
    Deferred income tax benefit
    
    
    
    
    
    
    (52,155
    )Other
    
    
    669
    
    
    
    12,152Changes in assets and liabilities:Accounts receivable
    
    
    (87,113
    )
    
    
    Other current assets
    
    
    (10,816
    )
    
    
    (60,482
    )Accounts payable
    
    
    (1,085,538
    )
    
    
    127,562Accrued liabilities and other
    
    
    146,922
    
    
    
    (2,638
    )Other non-current liabilities
    
    
    34,000
    
    
    
    Net cash used in operating activities
    
    
    (1,702,749
    )
    
    
    (340,322
    )Investing activities:Additions to oil and gas properties
    
    
    (2,659,469
    )
    
    
    (1,051,071
    )Additions to other property and equipment
    
    
    (683,721
    )
    
    
    (178,666
    )Net cash used in investment activities
    
    
    (3,343,190
    )
    
    
    (1,229,737
    )Financing activities:Payments on long-term notes payable
    
    
    (9,098
    )
    
    
    (8,632
    )Net proceeds from issuance of common shares
    
    
    28,702,478
    
    
    
    939,185Net cash provided by financing activities
    
    
    28,693,380
    
    
    
    930,553Net increase (decrease) in cash and cash equivalents
    
    
    23,647,441
    
    
    
    (639,506
    )Cash and cash equivalents at the beginning of the year
    
    
    7,251,503
    
    
    
    970,795Cash and cash equivalents at the end of the year
    
    $
    30,898,944
    
    
    $
    331,289Supplementary disclosure of cash flow information:Interest paid
    
    $
    3,646
    
    
    $
    1,871Non-cash investing and financing activity:Acquisition of equipment by issuance of notes payable
    
    
    
    
    
    $
    105,847
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BPI Industries Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThe Company is incorporated in British Columbia, Canada and 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.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 ended October 31, 2005 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
(Commission File No. 333-130122). 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. 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.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.
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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.
 No impairment existed as of October 31, 2005 or July 31, 2005.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 five years. Major classes of property and equipment consisted of
the following:
 October 31
    
    
    July 312005
    
    
    2005Other Property and Equipment:Gas collection equipment
    
    $
    1,924,976
    
    
    $
    1,332,012Support equipment
    
    
    827,271
    
    
    
    760,467Other
    
    
    100,174
    
    
    
    76,321Less: Accumulated depreciation and amortization
    
    
    (455,073
    )
    
    
    (398,988
    )$
    2,397,348
    
    
    $
    1,769,812
 Asset Retirement ObligationsThe Company follows Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). 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. Depreciation 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 Company recorded a $19,800 increase in oil and gas properties and asset retirement
obligations at August 1, 2005 to reflect the present value of the plugging liability on
existing wells and an additional $14,200 increase in oil and gas properties and asset
retirement obligations during the three months ended October 31, 2005 to reflect the present
value of the plugging liability on new wells drilled during the quarter. The Company recorded
$669 of accretion expense on the liability during the quarter.
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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 it is anti-dilutive. 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.Share-Based PaymentThe Company has a stock-based compensation plan (the Incentive Stock Option Plan) under which
stock options are 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 vest immediately and are exercisable
over a period not exceeding five years. The maximum number of shares that may be reserved for
issuance under the Incentive Stock Option Plan is a rolling number not to exceed 10% of the
issued and outstanding shares of the Company at the time of the stock option grant. The
Company had 4,080,612 options outstanding at October 31, 2005. An additional 2,213,411 options
were available for issuance under the Incentive Stock Option Plan. However, these options are
no longer available for issuance, as the Incentive Stock Option Plan has been replaced by the
BPI Industries Inc. 2005 Omnibus Stock Plan  see Note 7.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.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 that vested during the first quarter
of fiscal 2006. Therefore, SFAS 123(R) had no impact on the Companys consolidated financial
position or results of operations for the quarter ended October 31, 2005. The Company
continues to use the Black-Scholes formula to estimate the fair value of stock options granted
under the Incentive Stock Option Plan.2.
    
    STOCK-BASED COMPENSATIONThe table below summarizes stock option activity for the quarter ended October 31, 2005. All
stock options granted during the three months ended October 31, 2005 were granted with an
exercise price equal to the market price of the Companys common stock on the date of grant
with exercise prices denominated in Canadian Dollars. U.S. Dollar amounts shown in the table
below were derived using published exchange rates on the date of the transaction for grants,
cancellations, exercises and expirations and at year-end exchange rates for options outstanding
as of July 31, 2005 and October 31, 2005.
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Weighted-AverageExercise PriceNumber of options
    
    CAD$
    
    USD$Outstanding at July 31, 2005
    
    
    4,227,279
    
    
    $
    1.82
    
    
    $
    1.49Granted
    
    
    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
    
    
    $
    1.60
 The Company recorded stock-based compensation expense of $397,586 and $0 in the three months
ended October 31, 2005 and 2004, respectively. The fair value of stock options granted was
estimated using the Black-Scholes Option Pricing Model with the following assumptions:
 Risk-free interest rate
    
    
    3.3
    %Expected dividend yield
    
    NilExpected stock price volatility
    
    
    66
    %Expected option life
    
    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 October 31, 2005:
 ExercisePrice

    
    Number

    
    Remaining

    
    ExpiryCAD$

    
    Outstanding

    
    Life (Years)

    
    Date$
    0.65
    
    
    
    350,000
    
    
    
    3.0
    
    
    November 3, 20080.90
    
    
    
    143,334
    
    
    
    1.2
    
    
    January 10, 20070.90
    
    
    
    100,000
    
    
    
    1.4
    
    
    April 10, 20070.90
    
    
    
    20,000
    
    
    
    3.9
    
    
    September 22, 20091.20
    
    
    
    50,000
    
    
    
    1.2
    
    
    January 10, 20071.49
    
    
    
    755,666
    
    
    
    4.1
    
    
    November 29, 20092.05
    
    
    
    495,000
    
    
    
    4.9
    
    
    September 22, 20102.19
    
    
    
    911,000
    
    
    
    4.4
    
    
    March 27, 20102.36
    
    
    
    115,000
    
    
    
    4.6
    
    
    May 23, 20102.40
    
    
    
    1,140,612
    
    
    
    4.2
    
    
    January 20, 2010$
    1.88
    
    
    
    4,080,612
    
    
    
    4.0
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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 October 31, 2005.We recorded a tax benefit in the United States for the three months ended October 31, 2004 to
partially offset a net deferred tax liability at October 31, 2004; however, no tax benefit was
recognized for the three months ended October 31, 2005, as the Company had no net deferred tax
liability to offset.4.
    
    LONG-TERM NOTES PAYABLEThe Company has outstanding notes payable as follows:
 October 31,
    
    
    July 31,2005
    
    
    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%
    
    
    392,000
    
    
    
    392,000540,724
    
    
    
    549,822Less current maturities
    
    
    42,822
    
    
    
    42,227Long-term notes payable
    
    $
    497,902
    
    
    $
    507,595
 The Case Credit and GMAC notes are collateralized by the related vehicles and equipment. The
convertible note payable outstanding was issued in June 2003 with a face value of $392,000 and
maturing on June 10, 2008, bearing interest at 3.25%. The note is 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  see Note 7.The annual maturities of all notes for the remaining nine months of fiscal year 2006 and the
four fiscal years thereafter are as follows:
 Principal
    
    
    Interest
    
    
    Total2006
    
    $
    31,862
    
    
    $
    6,300
    
    
    $
    38,1622007
    
    
    41,712
    
    
    
    5,995
    
    
    
    47,7072008
    
    
    419,981
    
    
    
    71,832
    
    
    
    491,8132009
    
    
    29,766
    
    
    
    2,070
    
    
    
    31,8362010
    
    
    17,403
    
    
    
    440
    
    
    
    17,843$
    540,724
    
    
    $
    86,637
    
    
    $
    627,361
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5.
    
    SHAREHOLDERS EQUITYIn September 2005, the Company sold 18,000,000 common shares in a private placement. The
proceeds from this private placement of $27,900,210, net of $2,603,697 of share issuance costs,
will be used to fund the Companys plan of operations and for working capital and general
corporate purposes. In connection with this private placement, the Company entered into an
agreement with the investors that subjects the Company to cash penalties if the Company fails to
file a registration statement and cause that registration statement to become effective within
90 days (or 150 days if the Securities and Exchange Commission decides to review the
registration statement) after the September 26, 2005 closing date. In addition, the Company is
subject to penalties if the investors covered by this agreement are
prohibited from selling shares under the registration statement for a
period exceeding 90 days during any 12-month
period as a result of suspensions effected by the Company. The aggregate amount of payments to
the investors under these provisions together may not exceed 13% of the aggregate purchase price
paid by the investors. Based on this 13% cap, the Company will not be required to make payments
to the investors under these provisions in excess of $3,965,508. On December 5, 2005, the SEC
declared the Companys Form S-1 Registration Statement covering all 18,000,000 shares related to
this private placement effective  see Note 7.The Company has warrants to purchase the following number of
common shares outstanding at October 31, 2005 as follows:
 Number
    
    Exercise
    
    ExpiryOutstanding
    
    Price
    
    Date875,000
    

    
    CAD $0.80
    
    December 10, 20053,274,866
    

    
    CAD $1.00
    
    April 29, 20065,186,000
    

    
    USD $1.50
    
    December 13, 20071,037,200
    

    
    USD $1.25
    
    January 15, 201010,373,066
 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 coalbed methane. Beginning in 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, received 80% of the revenue
generated from the operations of the facility as reimbursement of the Companys expenses. The
Company received approximately $12,352 and $0 in expense reimbursement related to this
arrangement during the three months ended October 31, 2005 and
2004, respectively.
Mr. Ostreichs brother owns Dependable Service Company, a company that provides general labor
services to the Company. The Company paid Dependable Services Company $79,419 and 19,641 during the
three months ended October 31, 2005 and 2004, respectively.
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##### Table of Contents



7.
    
    SUBSEQUENT EVENTS
 
    
    On December 2, 2005, the SEC declared the Companys Form S-1 Registration
Statement effective, covering all 16,595,200 shares related to a
private placement completed in January 2005.
    
    On December 19, 2005, the SEC declared the Companys Form S-1 Registration Statement
effective covering all 18,000,000 shares related to a private placement completed in
September 2005  see Note 5.
    
    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.
    
    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.
    
    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 will be recognized as other
income in the Companys statement of operations during the second quarter of the fiscal
year ending July 31, 2006.
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##### Table of Contents



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
    
    maintaining 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.
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##### Table of Contents



Results of Operations
 Three Months Ended October 31, 2005 Compared to Three Months Ended October 31, 2004
  Three Months Ended October 31
    
    Dollar
    
    %2005
    
    2004
    
    Variance
    
    ChangeRevenues:Gas sales
    
    $
    209,694
    
    
    $
    
    
    
    $
    209,694
    
    
    
    100
    %Expenses:Lease operating expense
    
    
    160,804
    
    
    
    
    
    
    
    160,804
    
    
    
    100
    %General and administrative expense
    
    
    1,272,424
    
    
    
    412,235
    
    
    
    860,189
    
    
    
    209
    %Depreciation, depletion and
amortization
    
    
    94,802
    
    
    
    23,586
    
    
    
    71,216
    
    
    
    302
    %1,528,030
    
    
    
    435,821
    
    
    
    1,092,209
    
    
    
    251
    %Other income (expenses):Interest income
    
    
    132,619
    
    
    
    494
    
    
    
    132,125
    
    
    
    26,746
    %Interest expense
    
    
    (7,544
    )
    
    
    (5,175
    )
    
    
    (2,369
    )
    
    
    (46
    %)125,075
    
    
    
    (4,681
    )
    
    
    129,756
    
    
    
    n/aLoss before income taxes
    
    
    (1,193,261
    )
    
    
    (440,502
    )
    
    
    (752,759
    )
    
    
    (171
    %)Deferred income tax benefit
    
    
    
    
    
    
    52,155
    
    
    
    (52,155
    )
    
    
    (100
    %)Net loss
    
    $
    (1,193,261
    )
    
    $
    (388,347
    )
    
    
    (804,914
    )
    
    
    (207
    %)
 Revenue
 Lease operating expense 
 General and administrative expense 
 Three Months ended October 31
    
    Dollar
    
    %2005
    
    2004
    
    Variance
    
    ChangeSalaries and benefits
    
    $
    223,871
    
    
    $
    134,293
    
    
    $
    89,578
    
    
    
    67
    %Stock-based compensation
    
    
    397,586
    
    
    
    
    
    
    
    397,586
    
    
    
    100
    %Professional fees
    
    
    457,011
    
    
    
    131,605
    
    
    
    325,406
    
    
    
    247
    %Other
    
    
    193,956
    
    
    
    146,337
    
    
    
    47,619
    
    
    
    33
    %Total general and
administrative expense
    
    $
    1,272,424
    
    
    $
    412,235
    
    
    $
    860,189
    
    
    
    209
    %
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##### Table of Contents



Depreciation,
depletion and amortization expense
 Interest
income
 Deferred
income tax benefit
 Financial Condition
    14




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##### Table of Contents




    
    the price of, and demand for, natural gas;
    
    availability of drilling equipment;
    
    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
  15




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##### Table of Contents



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
  17




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Aggregate OfferingDate of sale
    
    Title and Amount of Securities Sold
    
    Offering Price
    
    Price9/26/05
    
    18,000,000 shares of common stock
    

    USD$1.69
    
       
    USD$30,500,000  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 4.1
    
    BPI Industries Inc. 2005 Omnibus Stock Plan (Filed as Exhibit 99.1 to the
Companys Form 8-K filed with the Securities and Exchange Commission on December
15, 2005 and incorporated herein by reference)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
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##### Table of Contents



SIGNATURES
  BPI INDUSTRIES INC.DATE: January 9, 2006
    
    /s/ James G. AzleinJames G. Azlein,President and Chief Executive Officer/s/ George J. ZilichGeorge J. Zilich,Chief Financial Officer and General Counsel
 19