##### 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, 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
(Address of Principal Executive Offices)
    
    44139
(Zip Code)
 (440) 248-4200
 þ o
  o o þ
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial Statements.BPI Energy Holdings, Inc. Consolidated Balance SheetsBPI Energy Holdings, Inc. Consolidated Statements of Operations (Unaudited)BPI Energy Holdings, Inc. Consolidated Statements of Shareholders Equity (Unaudited)BPI Energy Holdings, Inc. Consolidated Statements of Cash Flows (Unaudited)BPI Energy Holdings, Inc. Notes to Consolidated Financial Statements (Unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.Item 3. Quantitative and Qualitative Disclosures About Market Risk.Item 4. Controls and Procedures.PART II. OTHER INFORMATIONItem 1. Legal Proceedings.Item 1A. Risk Factors.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Item 3. Defaults Upon Senior Securities.Item 4. Submission of Matters to a Vote of Security Holders.Item 5. Other Information.Item 6. Exhibits.SIGNATURESEX-31.1EX-31.2EX-32.1    Table of Contents  
 PART
I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 BPI Energy Holdings, Inc.
Consolidated Balance Sheets
 October 31, 2006
    
    July 31, 2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,697,615
    
    
    $
    19,279,015Accounts receivable
    
    
    53,125
    
    
    
    105,711Other current assets
    
    
    405,168
    
    
    
    164,764Total current assets
    
    
    15,155,908
    
    
    
    19,549,490Property and equipment, at cost:Gas properties, full cost method of accounting:Proved, net of accumulated
depreciation, depletion and
amortization of $434,833 and $331,150
    
    
    20,683,383
    
    
    
    20,766,898Unproved
    
    
    5,558,243
    
    
    
    3,368,231Net gas properties
    
    
    26,241,626
    
    
    
    24,135,129Other property and equipment, net of
accumulated depreciation and amortization of
$711,330 and $631,015
    
    
    5,348,946
    
    
    
    5,106,236Net property and equipment
    
    
    31,590,572
    
    
    
    29,241,365Restricted cash
    
    
    100,000
    
    
    
    100,000Other non-current assets
    
    
    418,940
    
    
    
    161,125Total assets
    
    $
    47,265,420
    
    
    $
    49,051,980LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,125,212
    
    
    $
    1,492,239Current maturity of long-term notes payable
    
    
    77,527
    
    
    
    140,866Accrued liabilities and other
    
    
    1,080,108
    
    
    
    649,237Total current liabilities
    
    
    2,282,847
    
    
    
    2,282,342Long-term notes payable, less current portion
    
    
    68,315
    
    
    
    75,149Asset retirement obligation
    
    
    62,167
    
    
    
    70,754Other non-current liabilities
    
    
    100,000
    
    
    
    Total liabilities
    
    
    2,513,329
    
    
    
    2,428,245Shareholders equity:Common shares, no par value, authorized
200,000,000 shares, 72,608,423 and 70,812,540
outstanding
    
    
    67,946,143
    
    
    
    67,946,143Additional paid-in capital
    
    
    6,744,403
    
    
    
    5,871,120Accumulated deficit
    
    
    (29,938,455
    )
    
    
    (27,193,528
    )Total shareholders equity
    
    
    44,752,091
    
    
    
    46,623,735Total liabilities and shareholders equity
    
    $
    47,265,420
    
    
    $
    49,051,980
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BPI Energy Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)
 Three Months Ended October 312006
    
    2005Revenues:Gas sales
    
    $
    294,002
    
    
    $
    209,694Expenses:Lease operating expense
    
    
    335,974
    
    
    
    160,804General and administrative expense
    
    
    2,734,710
    
    
    
    1,272,424Depreciation, depletion and amortization
    
    
    183,998
    
    
    
    94,8023,254,682
    
    
    
    1,528,030Operating loss
    
    
    (2,960,860
    )
    
    
    (1,318,336
    )Other income (expense):Interest income
    
    
    218,906
    
    
    
    132,619Interest expense
    
    
    (3,153
    )
    
    
    (7,544
    )215,753
    
    
    
    125,075Net loss
    
    $
    (2,744,927
    )
    
    $
    (1,193,261
    )Basic and diluted loss per share
    
    
    ($0.04
    )
    
    
    ($0.03
    )Weighted average common shares outstanding
    
    
    68,796,522
    
    
    
    45,982,440
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BPI Energy Holdings, Inc.
Consolidated Statements of Shareholders Equity
(Unaudited)
 Common Shares
    
    Additional Paid-in
    
    Accumulated
    
    TotalShares
    
    Amounts
    
    Capital
    
    Deficit
    
    Shareholders EquityBalance, July 31, 2006
    
    
    70,812,540
    
    
    $
    67,946,143
    
    
    $
    5,871,120
    
    
    $
    (27,193,528
    )
    
    $
    46,623,735Share-based payments 
common shares, including
vesting of restricted
shares
    
    
    979,381
    
    
    
    
    
    
    
    873,283
    
    
    
    
    
    
    
    873,283Nonvested portion of
restricted shares issued
    
    
    816,502
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,744,927
    )
    
    
    (2,744,927
    )Balance, October 31, 2006
    
    
    72,608,423
    
    
    $
    67,946,143
    
    
    $
    6,744,403
    
    
    $
    (29,938,455
    )
    
    $
    44,752,091
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BPI Energy Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended October 312006
    
    2005Operating activities:Net loss
    
    $
    (2,744,927
    )
    
    $
    (1,193,261
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation, depletion and amortization
    
    
    183,998
    
    
    
    94,802Share-based payments
    
    
    873,283
    
    
    
    397,586Accretion of asset retirement obligation
    
    
    952
    
    
    
    669Changes in assets and liabilities:Accounts receivable
    
    
    52,586
    
    
    
    (87,113
    )Other current assets
    
    
    (240,404
    )
    
    
    (10,816
    )Accounts payable
    
    
    282,802
    
    
    
    167,274Accrued liabilities and other
    
    
    430,871
    
    
    
    146,922Other assets and liabilities
    
    
    (157,815
    )
    
    
    Net cash used in operating activities
    
    
    (1,318,654
    )
    
    
    (483,937
    )Investing activities:Additions to gas properties
    
    
    (2,777,749
    )
    
    
    (3,878,281
    )Additions to other property and equipment
    
    
    (414,824
    )
    
    
    (683,721
    )Net cash used in investment activities
    
    
    (3,192,573
    )
    
    
    (4,562,002
    )Financing activities:Payments on long-term notes payable
    
    
    (70,173
    )
    
    
    (9,098
    )Net proceeds from issuance of common shares
    
    
    
    
    
    
    28,702,478Net cash (used in) provided by financing activities
    
    
    (70,173
    )
    
    
    28,693,380Net (decrease) increase in cash and cash equivalents
    
    
    (4,581,400
    )
    
    
    23,647,441Cash and cash equivalents at the beginning of the period
    
    
    19,279,015
    
    
    
    7,251,503Cash and cash equivalents at the end of the period
    
    $
    14,697,615
    
    
    $
    30,898,944Supplementary disclosure of cash flow information:Cash payments:Interest paid
    
    $
    3,153
    
    
    $
    3,646
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BPI Energy Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
     Use of Estimates
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Gas Properties
      i)
    
    there are no firm plans for further drilling on the unproved property;ii)
    
    negative results were obtained from studies of the unproved property;iii)
    
    negative results were obtained from studies conducted in the vicinity of the
unproved property; oriv)
    
    the remaining term of the unproved property does not allow sufficient time
for further studies or drilling.
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Other Property and Equipment
  October 31,
    
    
    July 31,2006
    
    
    2006Other property and equipment:Gas collection equipment
    
    $
    4,342,400
    
    
    $
    4,342,400Support equipment
    
    
    1,245,188
    
    
    
    1,046,989Other
    
    
    472,688
    
    
    
    347,862Less: Accumulated depreciation and
amortization
    
    
    (711,330
    )
    
    
    (631,015
    )$
    5,348,946
    
    
    $
    5,106,236
 Loss Per Share
  October 31,
    
    
    October 31,2006
    
    
    2005Outstanding warrants
    
    
    5,311,600
    
    
    
    10,763,603Outstanding stock options
    
    
    1,823,265
    
    
    
    4,080,612Nonvested portion of restricted shares issued
    
    
    3,057,338
    
    
    
    10,192,203
    
    
    
    14,844,215
 2.
    
    STOCK-BASED COMPENSATION
 SFAS No. 123 (R)
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Incentive Stock Option Plan
  Exercise
    
    
    Number
    
    
    RemainingPrice CAD$
    
    
    Outstanding
    
    
    Life (Years)
    
    
    Expiry Date$
    0.65
    
    
    
    345,000
    
    
    
    2.0
    
    
    November 3, 20080.90
    
    
    
    243,334
    
    
    
    0.2
    
    
    January 10, 20070.90
    
    
    
    10,000
    
    
    
    2.9
    
    
    September 22, 20091.20
    
    
    
    50,000
    
    
    
    0.2
    
    
    January 10, 20071.49
    
    
    
    695,666
    
    
    
    3.1
    
    
    November 29, 20092.05
    
    
    
    10,000
    
    
    
    3.9
    
    
    September 22, 20102.19
    
    
    
    136,000
    
    
    
    3.4
    
    
    March 27, 20102.40
    
    
    
    333,265
    
    
    
    3.2
    
    
    January 20, 2010$
    1.46
    
    
    
    1,823,265
    
    
    
    2.5
 Omnibus Stock Plan
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Share-Based Transactions
  
    
    Granted 248,661 fully vested common shares and 507,338 restricted shares under the
Omnibus Stock Plan, all at a market price of $0.58 per share, to certain executive
officers, employees and non-employee directors of the Company. The restricted shares
vest one-half on November 6, 2007 and one-half on November 6, 2008.
    
    Granted 350,000 fully vested common shares at a weighted average market price of
$0.93 per share and 700,000 restricted shares at a weighted average market price of
$0.93 per share in connection with the hiring of a geologist and three engineers.
These grants were made outside of the Omnibus Stock Plan pursuant to American Stock
Exchange rules that allow the Company to make equity grants to newly hired employees
outside of a shareholder-approved plan. These restricted shares vest
on various dates over a weighted average period of 1.4 years.
    
    Accelerated vesting of 475,000 restricted shares held by a former officer and
director of the Company in connection with a separation agreement entered into with
the former officer and director. See note 10 for further explanation of the
separation agreement.
  Weighted Avg.Grant DateShares
    
    
    Fair ValueNonvested at July 31, 2006
    
    
    2,325,000
    
    
    $
    0.61Granted
    
    
    1,207,338
    
    
    
    0.78Vested
    
    
    (475,000
    )
    
    
    0.49Forfeited
    
    
    
    
    
    
    Nonvested at October 31, 2006
    
    
    3,057,338
    
    
    
    0.70
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3.
    
    OTHER ASSETS
 Other Current Assets
  October 31,
    
    
    July 31,2006
    
    
    2006Separation agreement
    
    $
    357,309
    
    
    $
    Prepaid expenses and other
    
    
    47,859
    
    
    
    164,764$
    405,168
    
    
    $
    164,764
 Other Non-current Assets
  October 31,
    
    
    July 31,2006
    
    
    2006Separation agreement
    
    $
    257,815
    
    
    $
    Advance royalties
    
    
    161,125
    
    
    
    161,125$
    418,940
    
    
    $
    161,125
  4.
    
    ACCRUED LIABILITIES AND OTHER
  October 31,
    
    
    July 31,2006
    
    
    2006Employee compensation
    
    $
    595,000
    
    
    $
    467,869Separation agreement
    
    
    200,000
    
    
    
    Professional and regulatory
    
    
    180,000
    
    
    
    111,805Directors fees
    
    
    100,000
    
    
    
    31,000Other
    
    
    5,108
    
    
    
    38,563$
    1,080,108
    
    
    $
    649,237
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5.
    
    LONG-TERM NOTES PAYABLE
  October 31,
    
    
    July 31,2006
    
    
    2006Case Credit term note due in fiscal year 2006, 6.50%
    
    $
    10,874
    
    
    $
    15,410GMAC term note due in fiscal year 2009, 6.50%
    
    
    19,039
    
    
    
    20,608GMAC term notes due in fiscal year 2010, 6.1% to 6.50%
    
    
    75,992
    
    
    
    80,849Caterpillar Financial Services term note due in
fiscal year 2007, 7.0%
    
    
    39,937
    
    
    
    99,148145,842
    
    
    
    216,015Less current maturities
    
    
    (77,527
    )
    
    
    (140,866
    )Long-term notes payable
    
    $
    68,315
    
    
    $
    75,149
  6.
    
    ASSET RETIREMENT OBLIGATIONS
   Three Months EndedOctober 31,2006
    
    2005Beginning asset retirement obligation
    
    $
    70,754
    
    
    $
    13,531Additional liability incurred
    
    
    3,261
    
    
    
    19,800Accretion expense
    
    
    952
    
    
    
    669Asset retirement costs incurred
    
    
    (26,681
    )
    
    
    Loss on settlement of liability
    
    
    13,881
    
    
    
    Ending asset retirement obligation
    
    $
    62,167
    
    
    $
    34,000
 7.
    
    CONCENTRATIONS
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8.
    
    INCOME TAXES
  9.
    
    SHAREHOLDERS EQUITY
 Common
shares 
 Additional paid-in capital 
  Number
    
    ExerciseOutstanding
    
    Price
    
    Expiry Date4,274,400
    
    
    $
    1.50
    
    
    December 13, 2007643,200
    
    
    $
    1.25
    
    
    December 31, 2009394,000
    
    
    $
    1.25
    
    
    January 12, 20105,311,600
 10.
    
    SEPARATION AGREEMENT
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
    
    In connection with Mr. Zilichs existing employment agreement, the Company agreed
to make a cash payment to Mr. Zilich in the amount of $250,000 and provide medical
and dental insurance coverage for two years. Such amounts were paid and recorded as
expense during the current quarter.
    
    In connection with a continuing services clause of the
Separation Agreement, the Company agreed to issue
40,000 unrestricted common shares to Mr. Zilich and make cash payments totaling $50,000 to
be paid in semi-monthly equal installments from October 15, 2006 through December 31,
2006. In return, Mr. Zilich agreed to provide the Company with consulting services as may
be reasonably requested by the Company from time to time through January 2, 2008.
The Company is amortizing the expense associated with Mr. Zilichs continuing
services ratably through January 2, 2008. In connection with these continuing
services, the Company expensed $3,247 during the current quarter and recorded other
assets for prepaid amounts of $39,819 at October 31, 2006.
    
    In connection with a non-compete and non-solicitation clause of the Separation
Agreement, the Company agreed to make cash payments of $100,000 on each of three
dates from January 2, 2007 through January 2, 2008 and provide immediate vesting of
475,000 restricted shares held by Mr. Zilich. In return, Mr. Zilich agreed
not to compete with the Company or solicit any of its employees for a period of two
years. The Company capitalized the value of the non-compete and non-solicitation
clause and is amortizing the related expense ratably through
October 12, 2008. The amount capitalized includes $228,432 of
share-based payments representing the remaining unrecognized portion
of expense related to the vesting of the 475,000 restricted shares. In
connection with this clause, the Company expensed $15,352 during the current quarter
and recorded other assets of $575,305 and other liabilities of $300,000 at October
31, 2006.
 11.
    
    RELATED PARTY TRANSACTIONS
    13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  Overview and Outlook
      14




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
    
    obtain test data and initiate pilot projects that demonstrate the commercial
potential of CBM at our various acreage blocks and projects in the Basin;
    
    reduce well drilling and completion costs;
    
    increase total company reserves; and
    
    grow total production.
     
    
    negotiating to obtain leases that grant us the broadest possible rights to CBM for
any given tract of land;
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
    
    conducting ongoing title reviews of existing mineral interests;
    
    where possible, negotiating and utilizing multiple service companies to increase
competition and minimize the risk of disruptions caused by the loss of any one service
provider; and
    
    attempting to create a low cost structure in order to reduce our vulnerability to
many of these factors.
 Results of Operations
 Three Months Ended October 31, 2006 Compared to Three Months Ended October 31, 2005
  Three Months Ended October 31,
    
    Dollar
    
    %2006
    
    2005
    
    Variance
    
    ChangeRevenues:Gas sales
    
    $
    294,002
    
    
    $
    209,694
    
    
    $
    84,308
    
    
    
    40
    %Expenses:Lease operating expense
    
    
    335,974
    
    
    
    160,804
    
    
    
    175,170
    
    
    
    109
    %General and
administrative expense
    
    
    2,734,710
    
    
    
    1,272,424
    
    
    
    1,462,286
    
    
    
    115
    %Depreciation,
depletion and
amortization
    
    
    183,998
    
    
    
    94,802
    
    
    
    89,196
    
    
    
    94
    %3,254,682
    
    
    
    1,528,030
    
    
    
    1,726,652
    
    
    
    113
    %Other income (expense):Interest income
    
    
    218,906
    
    
    
    132,619
    
    
    
    86,287
    
    
    
    65
    %Interest expense
    
    
    (3,153
    )
    
    
    (7,544
    )
    
    
    4,391
    
    
    
    58
    %215,753
    
    
    
    125,075
    
    
    
    91,347
    
    
    
    73
    %Net loss
    
    $
    (2,744,927
    )
    
    $
    (1,193,261
    )
    
    $
    (1,551,666
    )
    
    
    (130
    %)
 Revenue
 Lease operating expense
 17




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General and administrative expense
 Three Months endedOctober 31,
    
    Dollar
    
    %2006
    
    2005
    
    Variance
    
    ChangeSalaries and benefits
    
    $
    1,210,746
    
    
    $
    223,871
    
    
    $
    986,875
    
    
    
    441
    %Stock-based compensation
    
    
    644,851
    
    
    
    397,586
    
    
    
    247,265
    
    
    
    62
    %Professional and regulatory
    
    
    586,913
    
    
    
    542,123
    
    
    
    44,790
    
    
    
    8
    %Other
    
    
    292,200
    
    
    
    108,844
    
    
    
    183,356
    
    
    
    168
    %Total general and
administrative expense
    
    $
    2,734,710
    
    
    $
    1,272,424
    
    
    $
    1,462,286
    
    
    
    115
    %
   Depreciation, depletion and amortization expense
 Interest income
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Critical Accounting Policies and Estimates
   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.
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Cautionary Statement Concerning Forward-Looking Statements
  20




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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.
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
    
    a grant of 350,000 fully vested common shares at a weighted average market price
of $0.93 per share; and
    
    a grant of 700,000 restricted shares at a weighted average market price of $0.93
per share.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 10.1
    
    Separation Agreement and Waiver and Release by and between BPI Energy Holdings,
Inc. and George J. Zilich, dated October 12, 2006 (Filed as Exhibit 10.1 to Form 8-K of
BPI Energy Holdings, Inc. filed with the SEC on October 16, 2006 and incorporated
herein by reference).10.2
    
    Mineral Lease, dated as of September 9, 2006, by and between BPI Energy, Inc.
and the County of Washington, Illinois (Western Illinois Basin Project) (Filed as
Exhibit 10.12 to Form 10-K of BPI Energy Holdings, Inc. filed on October 30, 2006 and incorporated
hereinby reference).
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31.1
    
    Section 302 Certification of
the Chief Executive Officer (Principal Executive Officer).31.2
    
    Section 302 Certification of the Acting Chief Financial Officer (Principal Financial
Officer).32.1
    
    Section 906 Certification of the Principal Executive Officer and Principal Financial
Officer.
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SIGNATURES
  BPI ENERGY HOLDINGS, INC.DATE: December 15, 2006
    /s/ James G. AzleinBy: James G. AzleinTitle:
    President and Chief Executive Officer /s/ Randy L. ElkinsBy: Randy L. ElkinsTitle:
    Controller and Acting Chief Financial Officer