##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-24394
 Penn Octane Corporation
  Delaware
    
    52-1790357(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)77-530 Enfield Lane, Bldg. D, Palm Desert, California
(Address of Principal Executive Offices)
    
    92211
(Zip Code)
 (760) 772-9080
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company þ
 Yes o No þ




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##### 



PENN OCTANE CORPORATION
TABLE OF CONTENTS
 ITEM
    
    
    
    PAGE NO.PART I FINANCIAL INFORMATION1.
    
    Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    3Consolidated Balance Sheets as of December 31, 2007 and
March 31, 2008 (unaudited)
    
    
    4-5Unaudited Consolidated Statements of Operations for the three
months ended March 31, 2007 and 2008
    
    
    6Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 2007 and 2008
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8-292.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    30-393.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    394T.
    
    Controls and Procedures
    
    
    39PART II OTHER INFORMATION1.
    
    Legal Proceedings
    
    
    401A.
    
    Risk Factors
    
    
    402.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    403.
    
    Defaults Upon Senior Securities
    
    
    404.
    
    Submission of Matters to a Vote of Security Holders
    
    
    405.
    
    Other Information
    
    
    406.
    
    Exhibits
    
    
    41Signatures
    
    
    42Exhibit 15Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1.
 
 Report of Independent Registered Public Accounting Firm
 
       
  3




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED BALANCE SHEETS
 ASSETS
 December 31,
    
    
    March 31,2007
    
    
    2008(Unaudited)Current AssetsCash
    
    $
    4,339,000
    
    
    $
    2,645,000Restricted cash
    
    
    2,500,000
    
    
    
    843,000Trade accounts receivable (less allowance for
doubtful accounts of $255,000 and $0 at December 31, 2007 and March 31, 2008, respectively)
    
    
    4,261,000
    
    
    
    7,678,000Inventories
    
    
    2,563,000
    
    
    
    2,627,000Deferred tax asset
    
    
    608,000
    
    
    
    608,000Prepaid expenses and other current assets
    
    
    744,000
    
    
    
    507,000Total current assets
    
    
    15,015,000
    
    
    
    14,908,000Oil and gas properties and related equipment
(successful efforts method)  net
    
    
    26,197,000
    
    
    
    26,430,000Property, plant and equipment  net
    
    
    12,983,000
    
    
    
    13,083,000Other non-current assets
    
    
    11,000
    
    
    
    11,000Goodwill
    
    
    6,463,000
    
    
    
    6,463,000Total assets
    
    $
    60,669,000
    
    
    $
    60,895,000
   4




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 CONSOLIDATED BALANCE SHEETS  CONTINUED
 LIABILITIES AND STOCKHOLDERS EQUITY
 December 31,
    
    
    March 31,2007
    
    
    2008(Unaudited)Current LiabilitiesCurrent maturities of long-term debt
    
    $
    3,498,000
    
    
    $
    4,451,000Short-term debt
    
    
    5,493,000
    
    
    
    5,499,000Revolving line of credit
    
    
    
    
    
    
    3,591,000Fuel Products trade accounts payable
    
    
    4,526,000
    
    
    
    1,634,000Other accounts payable
    
    
    2,879,000
    
    
    
    3,617,000Taxes payable
    
    
    618,000
    
    
    
    582,000Accrued liabilities
    
    
    2,266,000
    
    
    
    3,256,000Total current liabilities
    
    
    19,280,000
    
    
    
    22,630,000Commitments and contingencies
    
    
    
    
    
    
    Long-term debt, less current maturities, net of discount
    
    
    21,250,000
    
    
    
    20,075,000Deferred income tax  non-current
    
    
    3,238,000
    
    
    
    3,238,000Minority interest
    
    
    11,467,000
    
    
    
    9,975,000Stockholders EquitySeries A  Preferred stock-$.01 par value,
5,000,000 shares authorized; No shares issued and
outstanding at December 31, 2007 and March 31, 2008
    
    
    
    
    
    
    Series B  Senior preferred stock-$.01 par value,
$10 liquidation value, 5,000,000 shares authorized;
No shares issued and outstanding at December 31,
2007 and March 31, 2008
    
    
    
    
    
    
    Common stock  $.01 par value, 25,000,000 shares
authorized; 15,386,187 and 15,406,187 shares issued and
outstanding at December 31, 2007 and March 31, 2008
    
    
    154,000
    
    
    
    154,000Additional paid-in capital
    
    
    29,271,000
    
    
    
    29,594,000Accumulated deficit
    
    
    (23,991,000
    )
    
    
    (24,771,000
    )Total stockholders equity
    
    
    5,434,000
    
    
    
    4,977,000Total liabilities and stockholders equity
    
    $
    60,669,000
    
    
    $
    60,895,000
   5




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2008Revenues
    
    $
    39,382,000
    
    
    $
    33,403,000Cost of goods sold
    
    
    38,438,000
    
    
    
    32,521,000Gross profit
    
    
    944,000
    
    
    
    882,000Selling, general and administrative expenses and
otherLegal and professional fees
    
    
    476,000
    
    
    
    721,000Salaries and payroll related expenses
    
    
    407,000
    
    
    
    1,058,000Other
    
    
    521,000
    
    
    
    983,0001,404,000
    
    
    
    2,762,000Operating loss from operations
    
    
    (460,000
    )
    
    
    (1,880,000
    )Other income (expense)Interest and Fuel Products financing expense
    
    
    (152,000
    )
    
    
    (956,000
    )Interest income
    
    
    13,000
    
    
    
    10,000Minority interest in loss
    
    
    460,000
    
    
    
    2,051,000Loss from operations before taxes
    
    
    (139,000
    )
    
    
    (775,000
    )(Benefit) provision for income taxes
    
    
    (27,000
    )
    
    
    5,000Net loss
    
    $
    (112,000
    )
    
    $
    (780,000
    )Net loss per common share
    
    $
    (0.01
    )
    
    $
    (0.05
    )Weighted average common shares outstanding
    
    
    15,386,187
    
    
    
    15,406,187
   6




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months Ended March 31,2007
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (112,000
    )
    
    $
    (780,000
    )Adjustments to reconcile net income to net cash used in operating activities:Depreciation, depletion and amortization
    
    
    167,000
    
    
    
    495,000Amortization of loan discount
    
    
    
    
    
    
    19,000Share-based payment expense
    
    
    95,000
    
    
    
    276,000Unit-based compensation
    
    
    
    
    
    
    145,000Minority interest
    
    
    (460,000
    )
    
    
    (1,975,000
    )Beneficial conversion
    
    
    
    
    
    
    14,000Changes in current assets and liabilities:Trade accounts receivable
    
    
    (6,392,000
    )
    
    
    (3,417,000
    )Inventories
    
    
    96,000
    
    
    
    (64,000
    )Prepaid expenses and other current assets
    
    
    (19,000
    )
    
    
    141,000Deferred tax asset
    
    
    (42,000
    )
    
    
    LPG and Fuel Products trade accounts payable
    
    
    2,524,000
    
    
    
    (2,893,000
    )Other accounts payable and accrued liabilities
    
    
    656,000
    
    
    
    2,105,000U.S. and Foreign taxes payable
    
    
    (61,000
    )
    
    
    (50,000
    )Net cash used in operating activities
    
    
    (3,548,000
    )
    
    
    (5,984,000
    )Cash flows from investing activities:Capital expenditures
    
    
    (165,000
    )
    
    
    (827,000
    )Decrease in other non-current assets
    
    
    (102,000
    )
    
    
    Net cash used in investing activities
    
    
    (267,000
    )
    
    
    (827,000
    )Cash flows from financing activities:Decrease (increase) in restricted cash
    
    
    (318,000
    )
    
    
    1,656,000Revolving credit facilities
    
    
    3,119,000
    
    
    
    3,591,000Distributions paid to minority interests
    
    
    (478,000
    )
    
    
    (607,000
    )Distributions paid to the minority owners of the general partner
    
    
    (10,000
    )
    
    
    Stockholders note
    
    
    41,000
    
    
    
    Reduction in debt
    
    
    
    
    
    
    (250,000
    )Exercise of options of Rio Vista
    
    
    
    
    
    
    774,000Costs of registration
    
    
    
    
    
    
    (202,000
    )Other
    
    
    
    
    
    
    155,000Net cash provided by financing activities
    
    
    2,354,000
    
    
    
    5,117,000Net decrease in cash
    
    
    (1,461,000
    )
    
    
    (1,694,000
    )Cash at beginning of period
    
    
    8,766,000
    
    
    
    4,339,000Cash at end of period
    
    $
    7,305,000
    
    
    $
    2,645,000Supplemental disclosures of cash flow information:Cash paid for:Interest
    
    $
    182,000
    
    
    $
    1,084,000Taxes
    
    $
    110,000
    
    
    $
    Supplemental disclosures of noncash transactions:Equity  common stock and warrants issued and other
    
    $
    95,000
    
    
    $
    Unit based compensation
    
    $
    
    
    
    $
    145,000Share based compensation
    
    $
    
    
    
    $
    276,000
   7




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE A  ORGANIZATION
       8




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE A  ORGANIZATION   Continued
   Basis of Presentation
      9




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE B  LOSS PER COMMON SHARE
  For the three months March 31, 2007Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss
    
    $
    (112,000
    )Basic EPSNet loss available to common stockholders
    
    
    (112,000
    )
    
    
    15,386,189
    
    
    $
    (0.01
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 For the three months March 31, 2008Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss
    
    $
    (780,000
    )Basic EPSNet loss available to common stockholders
    
    
    (780,000
    )
    
    
    15,406,187
    
    
    $
    (0.05
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  10




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE C  SHARE-BASED PAYMENT
 Share-Based Payment
  NOTE D  A FORMER OFFICER OF THE COMPANY NOTES
 Note Receivable
   11




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE
D  A FORMER OFFICER OF THE COMPANY NOTES  Continued
 Note Payable
  NOTE E  PROPERTY, PLANT AND EQUIPMENT
  December 31,
    
    
    March 31,2007
    
    
    2008Oklahoma:Pipelines and equipment
    
    $
    6,756,000
    
    
    $
    7,048,000Regional:Land
    
    
    237,000
    
    
    
    237,000Terminal and improvements
    
    
    3,825,000
    
    
    
    3,957,000Automotive equipment
    
    
    2,438,000
    
    
    
    2,438,0006,500,000
    
    
    
    6,632,00013,256,000
    
    
    
    13,680,000Other
    
    
    338,000
    
    
    
    370,00013,594,000
    
    
    
    14,050,000Less: accumulated depreciation and amortization
    
    
    (611,000
    )
    
    
    (967,000
    )$
    12,983,000
    
    
    $
    13,083,000
  NOTE F  INVENTORIES
 December 31, 2007
    
    
    March 31, 2008Gallons
    
    
    LCM
    
    
    Gallons
    
    
    LCMFuel Products
    
    
    1,043,000
    
    
    $
    2,563,000
    
    
    
    545,000
    
    
    $
    2,627,000
  12




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE G  DEBT OBLIGATIONS
  December 31,
    
    
    March 31,2007
    
    
    2008RZB Note
    
    $
    5,000,000
    
    
    $
    5,000,000Moores Note (net of discount of $7,000 and $1,000,
respectively)
    
    
    493,000
    
    
    
    499,000$
    5,493,000
    
    
    $
    5,499,000
  TCW Credit Facility (net of discount of $11,000 and
$2,000, respectively)
    
    $
    23,689,000
    
    
    $
    23,698,000Sellers Note  Regional (net of discount of
$78,000 and $59,000, respectively)
    
    
    922,000
    
    
    
    691,000Other
    
    
    137,000
    
    
    
    137,00024,748,000
    
    
    
    24,526,000Less current portion
    
    
    3,498,000
    
    
    
    4,451,000$
    21,250,000
    
    
    $
    20,075,000
 Sellers Note  Regional
   13




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE G  DEBT OBLIGATIONS  Continued
 TCW Credit Facility
    Other
  Beneficial Conversion Features
   14




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  STOCK WARRANTS
 2001 Warrant Plan
  NOTE I  COMMON UNITS AND OPTIONS OF RIO VISTA
 Common Units
  Private Placement of Common Units
   15




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE I  COMMON UNITS AND OPTIONS OF RIO VISTA   Continued
 Private Placement of Common Units  Continued
     16




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE I  COMMON UNITS AND OPTIONS OF RIO VISTA   Continued
 Private Placement of Common Units  Continued
   Distributions of Available Cash
    17




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE I  COMMON UNITS AND OPTIONS OF RIO VISTA   Continued
 Distributions of Available Cash  Continued
  Amounts PaidQuarter
    
    Payment
    
    
    Distribution
    
    
    Common
    
    
    GeneralEnded
    
    Date
    
    
    Per Unit
    
    
    Units
    
    
    PartnerDecember 2007
    
    
    02/14/08
    
    
    $
    0.25
    
    
    $
    607,000
    
    
    $
    12,000March 2008
    
    
    05/16/08
    
    
    $
    0.25
    
    
    $
    629,000
    
    
    $
    13,000
 Common Unit Options
  NOTE J  COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
    18




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMITMENTS AND CONTINGENCIES  Continued
 Legal Proceedings  Continued
 Lesly Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane
International LLC, et al th
 Faustino Izaguirre Gonzalez, et al. vs. Penn Octane Corporation, et
al. th
     19




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMITMENTS AND CONTINGENCIES
 Legal Proceedings  Continued
   Credit Facility and Letters of Credit
      20




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMITMENTS AND CONTINGENCIES  Continued
 Credit Facility and Letters of Credit  Continued
   Leases
 Norfolk Southern Leases
    21




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMITMENTS AND CONTINGENCIES  Continued
 Leases  Continued
 Norfolk Southern Leases
  Consulting Agreement
  CEOcast
   22




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMITMENTS AND CONTINGENCIES  Continued
 Partnership Tax Treatment and Regional and MV Income Taxes
        23




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  OIL AND GAS HEDGING ACTIVITIES
   Date
    
    Terms- April 2008  October 2008:
    
    1.0 MMcf/d @ $6.35/Mcf (MV Pipeline production)- April 2008  October 2008:
    
    0.5 MMcf/d @ $7.97/Mcf (Brooken Pipeline production)- November 2008  March 2009:
    
    1.0 MMcf/d @ $8.61/Mcf (MV Pipeline production)- November 2008  March 2009:
    
    0.5 MMcf/d @ $8.61/Mcf (Brooken Pipeline production)
  NOTE L  RELATED PARTY TRANSACTIONS
   Omnibus Agreement
     24




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE L  RELATED PARTY TRANSACTIONS  Continued
 Guarantees
 Debt Guarantee .
 Tax Guarantee.
 NOTE M  401K
  NOTE N  REALIZATION OF ASSETS
    25




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE N  REALIZATION OF ASSETS   Continued
    NOTE O  SEGMENT INFORMATION
    26




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE O  SEGMENT INFORMATION  Continued
 Three months ended March 31, 2007:
    
    LPG Transportation
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    679,000
    
    
    $
    38,703,000
    
    
    $
    39,382,000Interest expense
    
    
    26,000
    
    
    
    123,000
    
    
    
    149,000Interest income
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    165,000
    
    
    
    
    
    
    
    165,000Segment gross profit
    
    
    285,000
    
    
    
    659,000
    
    
    
    944,000Segment assets
    
    
    16,317,000
    
    
    
    13,247,000
    
    
    
    29,564,000Segment liabilities
    
    
    2,094,000
    
    
    
    12,162,000
    
    
    
    14,256,000Expenditure for segment assets
    
    
    
    
    
    
    2,000
    
    
    
    2,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    $
    39,382,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    $
    39,382,000Profit (loss)Total gross profit for reportable
segments
    
    
    
    
    
    
    
    
    
    $
    944,000Selling, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,404,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    (152,000
    )Interest income
    
    
    
    
    
    
    
    
    
    
    13,000Minority interest in loss
    
    
    
    
    
    
    
    
    
    
    460,000Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    Unallocated amountsCorporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    Consolidated loss from operations before taxes
    
    
    
    
    
    
    
    
    
    $
    (139,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    $
    29,564,000Other assets
    
    
    
    
    
    
    
    
    
    
    3,371,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    $
    32,935,000
  27




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE O  SEGMENT INFORMATION  Continued
 TransportationandThree months ended March 31, 2008:
    
    Terminalling
    
    
    Oil and Gas
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    2,107,000
    
    
    $
    1,937,000
    
    
    $
    30,308,000
    
    
    $
    34,352,000Interest expense
    
    
    222,000
    
    
    
    638,000
    
    
    
    77,000
    
    
    
    937,000Interest income
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    7,000Depreciation and amortization
    
    
    282,000
    
    
    
    211,000
    
    
    
    
    
    
    
    493,000Segment gross profit
    
    
    345,000
    
    
    
    325,000
    
    
    
    202,000
    
    
    
    872,000Segment assets
    
    
    12,519,000
    
    
    
    35,929,000
    
    
    
    9,234,000
    
    
    
    57,682,000Segment liabilities
    
    
    4,472,000
    
    
    
    26,515,000
    
    
    
    6,168,000
    
    
    
    37,155,000Expenditure for segment assets
    
    
    168,000
    
    
    
    683,000
    
    
    
    
    
    
    
    851,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    34,352,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (949,000
    )Other revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    33,403,000Profit (loss)Total gross profit for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    872,000Total other gross profit (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Selling, general and administrative expense
and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,762,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (956,000
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Minority interest in loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,051,000Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unallocated amountsCorporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated
loss from operations before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (775,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    57,682,000Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,213,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    60,895,000
  28




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE P  INCOME TAXES
    29




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##### Table of Contents



Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Penn Octane Corporation (Penn Octane) and its consolidated subsidiaries which includes Rio Vista
Energy Partners L.P. and its subsidiaries (Rio Vista) are collectively hereinafter referred to as
the Company.
 The following discussion of the Companys results of operations and liquidity and capital
resources should be read in conjunction with the unaudited consolidated financial statements of the
Company and related notes thereto appearing elsewhere herein. References to specific years
preceded by fiscal (e.g. fiscal 2008) refer to the Companys fiscal year ended December 31.
 Cautionary Statement Regarding Forward-Looking Statements
  
    
    the volatility of realized natural gas prices;
    
    the discovery, estimation, development and replacement of oil and natural gas reserves;
    
    our business and financial strategy;
    
    our drilling locations;
    
    technology;
    
    our cash flow, liquidity and financial position;
    
    our production volumes;
    
    our lease operating expenses, general and administrative costs and finding and
development costs;
    
    the availability of drilling and production equipment, labor and other services;
    
    our future operating results;
    
    our prospect development and property acquisitions;
    
    the marketing of oil and natural gas;
    
    competition in the oil and natural gas industry and the transportation and terminalling
business;
    
    the impact of weather and the occurrence of natural disasters such as fires, floods,
hurricanes, earthquakes and other catastrophic events and natural disasters;
    
    governmental regulation of the oil and natural gas industry and the transportation and
terminalling business;
    
    required capital expenditures;
    
    cash distributions and qualified income;
    
    developments in oil producing and natural gas producing countries; and
    
    our strategic plans, objectives, expectations and intentions for future operations.
    30




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##### Table of Contents



Overview
 Historical Assets and Operations
   Current Assets and Operations
    Fuel Sales Business
    31




---



##### Table of Contents



Three months
    
    
    Three monthsended
    
    
    endedMarch 31,
    
    
    March 31,2007
    
    
    2008Volume SoldFuel Products (millions of gallons)
    
    
    19.5
    
    
    
    10.9Average sales priceFuel Products (per gallon)
    
    $
    1.99
    
    
    $
    2.79
 Liquidity and Capital Resources
 General
   32




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##### Table of Contents



Credit Arrangements
  Debt Obligations
 RZB Loan Agreement
   33




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##### Table of Contents



TCW Credit Facility
  RZB Credit Facility Guarantee
  Moores Note
  Regional Note
  Distributions of Available Cash.
  34




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##### Table of Contents



Amounts PaidQuarter
    
    Payment
    
    
    Distribution
    
    
    Common
    
    
    GeneralEnded
    
    Date
    
    
    Per Unit
    
    
    Units
    
    
    PartnerDecember 2007
    
    
    02/14/08
    
    
    $
    0.25
    
    
    $
    607,000
    
    
    $
    12,000March 2008
    
    
    05/16/08
    
    
    $
    0.25
    
    
    $
    629,000
    
    
    $
    13,000
 Leases
 Norfolk Southern Leases.
   CEOcast Agreement
   35




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##### Table of Contents



Realization of Assets
         36




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##### Table of Contents



Results of Operations
  Continuing Operations
 Three months ended March 31, 2008 Compared with Three Months ended March 31, 2007
 THREE MONTHS ENDED MARCH 31, 2008
 Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    30,308,000
    
    
    
    988,000
    
    
    
    2,107,000
    
    
    
    
    
    
    
    
    
    
    
    33,403,000Cost Of Goods Sold
    
    
    30,106,000
    
    
    
    663,000
    
    
    
    1,762,000
    
    
    
    
    
    
    
    (10,000
    )
    
    
    32,521,000Gross Profit
    
    
    202,000
    
    
    
    325,000
    
    
    
    345,000
    
    
    
    
    
    
    
    10,000
    
    
    
    882,000Selling, General And
Administrative Expenses
    
    
    191,000
    
    
    
    29,000
    
    
    
    245,000
    
    
    
    
    
    
    
    2,297,000
    
    
    
    2,762,000Operating Income (loss)
    
    
    11,000
    
    
    
    296,000
    
    
    
    100,000
    
    
    
    
    
    
    
    (2,287,000
    )
    
    
    (1,880,000
    )Other Income (Expense)Interest and Fuel
Products Financing Expense
    
    
    (77,000
    )
    
    
    (638,000
    )
    
    
    (222,000
    )
    
    
    
    
    
    
    (19,000
    )
    
    
    (956,000
    )Interest Income
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    10,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,051,000
    
    
    
    2,051,000Loss From Operations Before Taxes
    
    
    (66,000
    )
    
    
    (335,000
    )
    
    
    (122,000
    )
    
    
    
    
    
    
    (252,000
    )
    
    
    (775,000
    )Provision For Income Taxes
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000Net Loss
    
    
    (66,000
    )
    
    
    (335,000
    )
    
    
    (127,000
    )
    
    
    
    
    
    
    (252,000
    )
    
    
    (780,000
    )
  37




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##### Table of Contents



THREE MONTHS ENDED MARCH 31, 2007
 Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    38,703,000
    
    
    
    
    
    
    
    
    
    
    
    679,000
    
    
    
    
    
    
    
    39,382,000Cost Of Goods Sold
    
    
    38,044,000
    
    
    
    
    
    
    
    
    
    
    
    394,000
    
    
    
    
    
    
    
    38,438,000Gross Profit
    
    
    659,000
    
    
    
    
    
    
    
    
    
    
    
    285,000
    
    
    
    
    
    
    
    944,000Selling, General and
Administrative
Expenses
    
    
    222,000
    
    
    
    
    
    
    
    
    
    
    
    61,000
    
    
    
    1,121,000
    
    
    
    1,404,000Operating Income (Loss)
    
    
    437,000
    
    
    
    
    
    
    
    
    
    
    
    224,000
    
    
    
    (1,121,000
    )
    
    
    (460,000
    )Other Income (Expense)Interest and Fuel
Products Financing
Expense
    
    
    (123,000
    )
    
    
    
    
    
    
    
    
    
    
    (26,000
    )
    
    
    (3,000
    )
    
    
    (152,000
    )Interest Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000
    
    
    
    13,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    460,000
    
    
    
    460,000Income (Loss) From
Operations Before
Taxes
    
    
    314,000
    
    
    
    
    
    
    
    
    
    
    
    198,000
    
    
    
    (651,000
    )
    
    
    (139,000
    )Provision For Income
Taxes (Benefit)
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,000
    )
    
    
    (27,000
    )Net Income (Loss)
    
    
    299,000
    
    
    
    
    
    
    
    
    
    
    
    198,000
    
    
    
    (609,000
    )
    
    
    (112,000
    )
 (a)
    
    Acquired during November 2007(b)
    
    Acquired during July 2007(c)
    
    Business commenced in August 2006 and sold December 31, 2007(d)
    
    Business ceased in May 2008 Off-Balance Sheet Arrangements
  Recently Issued Financial Accounting Standards
   38




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##### Table of Contents



Statement by Management Concerning Review of Interim Information by An Independent Registered
Public Accounting Firm.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4T. Controls and Procedures.
           39




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   The above transactions were exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof because the issuance did not involve a public offering of
securities.  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
   40




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##### Table of Contents



Item 6 Exhibits
 The following Exhibits are filed as part of this report:
 Exhibit No.15
    
    
    Accountants Acknowledgment.31.1
    
    
    Certification Pursuant to Rule 13a  14(a) / 15d  14(a) of the Exchange Act.31.2
    
    
    Certification Pursuant to Rule 13a  14(a) / 15d  14(a) of the Exchange Act.32
    
    
    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the
Sarbanes  Oxley Act of 2002.
 www.sec.gov
  41




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##### Table of Contents



SIGNATURES
  PENN OCTANE CORPORATIONMay 20, 2008
    By:
    /s/ Ian T. BothwellIan T. BothwellActing Chief Executive Officer, Acting
President, Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
(Principal Executive, Financial and
Accounting Officer)  42




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description15
    
    
    Accountants Acknowledgment.31.1
    
    
    Certification Pursuant to Rule 13a  14(a) / 15d  14(a) of the Exchange Act.31.2
    
    
    Certification Pursuant to Rule 13a  14(a) / 15d  14(a) of the Exchange Act.32
    
    
    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the
Sarbanes  Oxley Act of 2002.
  43