##### 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, 2009
 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
    
    92211(Address of Principal Executive Offices)
    
    (Zip Code)
 (760) 772-9080
 þ o
 Yes o No 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 StatementsConsolidated Balance Sheets as of December 31, 2008 and March 31, 2009 (unaudited)
    
    
    3-4Unaudited Consolidated Statements of Operations for the three months ended March 31, 2008 and 2009
    
    
    5Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2009
    
    
    6-7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8-272.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28-373.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    384T.
    
    Controls and Procedures
    
    
    38PART II OTHER INFORMATION1.
    
    Legal Proceedings
    
    
    391A.
    
    Risk Factors
    
    
    392.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    393.
    
    Defaults Upon Senior Securities
    
    
    394.
    
    Submission of Matters to a Vote of Security Holders
    
    
    395.
    
    Other Information
    
    
    396.
    
    Exhibits
    
    
    39Signatures
    
    
    40Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1.
  Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED BALANCE SHEETS
 ASSETS
 December 31,
    
    
    March 31,2008
    
    
    2009(Unaudited)Current AssetsCash
    
    $
    376,000
    
    
    $
    793,000Restricted cash
    
    
    1,316,000
    
    
    
    277,000Trade accounts receivable (less allowance for
doubtful accounts of $60,000 and $60,000 at
December 31, 2008 and March 31, 2009,
respectively)
    
    
    1,662,000
    
    
    
    1,250,000Income tax receivable
    
    
    608,000
    
    
    
    85,000Deferred tax asset
    
    
    99,000
    
    
    
    99,000Prepaid expenses and other current assets
    
    
    725,000
    
    
    
    759,000Total current assets
    
    
    4,786,000
    
    
    
    3,263,000Oil and gas properties and related equipment
(successful efforts method)  net
    
    
    28,243,000
    
    
    
    28,024,000Property, plant and equipment  net
    
    
    12,690,000
    
    
    
    12,441,000Other non-current assets
    
    
    31,000
    
    
    
    32,000Goodwill
    
    
    8,290,000
    
    
    
    8,290,000Total assets
    
    $
    54,040,000
    
    
    $
    52,050,000
   3




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 CONSOLIDATED BALANCE SHEETS  CONTINUED
 LIABILITIES AND EQUITY
 December 31,
    
    
    March 31,2008
    
    
    2009(Unaudited)Current LiabilitiesCurrent maturities of long-term debt
    
    $
    25,731,000
    
    
    $
    25,587,000Short-term debt
    
    
    5,575,000
    
    
    
    4,875,000Accounts payable
    
    
    3,315,000
    
    
    
    2,632,000Taxes payable
    
    
    921,000
    
    
    
    1,125,000Accrued liabilities
    
    
    5,200,000
    
    
    
    6,005,000Total current liabilities
    
    
    40,742,000
    
    
    
    40,224,000Commitments and contingencies
    
    
    
    
    
    
    Long-term debt, less current maturities, net of discount
    
    
    150,000
    
    
    
    Deferred income tax
    
    
    2,909,000
    
    
    
    2,909,000EquityPenn Octane Corporation stockholders equitySeries A  Preferred stock-$.01 par value, 5,000,000
shares authorized; No shares issued and outstanding at
December 31, 2008 and March 31, 2009
    
    
    
    
    
    
    Series B  Senior preferred stock-$.01 par value, $10
liquidation value, 5,000,000 shares authorized; No
shares issued and outstanding at December 31, 2008 and
March 31, 2009
    
    
    
    
    
    
    Common stock  $.01 par value, 25,000,000 shares
authorized; 15,416,187 and 15,416,187 shares issued and
outstanding at December 31, 2008 and March 31, 2009
    
    
    154,000
    
    
    
    154,000Additional paid-in capital
    
    
    30,189,000
    
    
    
    30,196,000Accumulated deficit
    
    
    (27,199,000
    )
    
    
    (27,518,000
    )Total Penn Octane Corporation stockholders equity
    
    
    3,144,000
    
    
    
    2,832,000Noncontrolling interest
    
    
    7,095,000
    
    
    
    6,085,000Total equity
    
    
    10,239,000
    
    
    
    8,917,000Total liabilities and equity
    
    $
    54,040,000
    
    
    $
    52,050,000
   4




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months endedMarch 31,2008
    
    
    2009Revenues
    
    $
    33,403,000
    
    
    $
    2,908,000Cost of goods sold
    
    
    32,521,000
    
    
    
    1,974,000Gross profit
    
    
    882,000
    
    
    
    934,000Selling, general and administrative expenses and otherLegal and professional fees
    
    
    721,000
    
    
    
    394,000Salaries and payroll related expenses
    
    
    1,058,000
    
    
    
    407,000Other
    
    
    983,000
    
    
    
    438,0002,762,000
    
    
    
    1,239,000Operating loss from operations
    
    
    (1,880,000
    )
    
    
    (305,000
    )Other income (expense)Interest and Fuel Products financing expense
    
    
    (956,000
    )
    
    
    (957,000
    )Interest income
    
    
    10,000
    
    
    
    14,000Loss before taxes
    
    
    (2,826,000
    )
    
    
    (1,248,000
    )(Benefit) provision for income taxes
    
    
    5,000
    
    
    
    110,000Net loss
    
    $
    (2,831,000
    )
    
    $
    (1,358,000
    )Net loss attributable to noncontrolling interest
    
    
    2,051,000
    
    
    
    1,039,000Net loss attributable to Penn Octane
Corporation
    
    $
    (780,000
    )
    
    $
    (319,000
    )Net loss per common share
    
    $
    (0.05
    )
    
    $
    (0.02
    )Weighted average common shares outstanding
    
    
    15,406,187
    
    
    
    15,416,187
   5




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three months ended March 31,2008
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (780,000
    )
    
    $
    (319,000
    )Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation, depletion and amortization
    
    
    495,000
    
    
    
    528,000Amortization of loan discount
    
    
    19,000
    
    
    
    6,000Share-based compensation
    
    
    276,000
    
    
    
    7,000Unit-based compensation
    
    
    145,000
    
    
    
    29,000Minority interest
    
    
    (1,975,000
    )
    
    
    (1,039,000
    )Beneficial conversion amortization
    
    
    14,000
    
    
    
    Changes in current assets and liabilities:Trade accounts receivable
    
    
    (3,417,000
    )
    
    
    411,000Inventories
    
    
    (64,000
    )
    
    
    Prepaid expenses and other current assets
    
    
    141,000
    
    
    
    488,000LPG and Fuel Products trade accounts payable
    
    
    (2,893,000
    )
    
    
    Other accounts payable and accrued liabilities
    
    
    2,105,000
    
    
    
    122,000U.S. and foreign taxes payable
    
    
    (50,000
    )
    
    
    205,000Net cash (used in) provided by operating activities
    
    
    (5,984,000
    )
    
    
    438,000Cash flows from investing activities:Capital expenditures
    
    
    (827,000
    )
    
    
    (60,000
    )Decrease in other non-current assets
    
    
    
    
    
    
    (1,000
    )Net cash used in investing activities
    
    
    (827,000
    )
    
    
    (61,000
    )Cash flows from financing activities:Decrease in restricted cash
    
    
    1,656,000
    
    
    
    1,040,000Revolving credit facilities
    
    
    3,591,000
    
    
    
    Distributions paid to minority interests
    
    
    (607,000
    )
    
    
    Reduction in debt
    
    
    (250,000
    )
    
    
    (1,000,000
    )Exercise of options of Rio Vista
    
    
    774,000
    
    
    
    Costs of registration
    
    
    (202,000
    )
    
    
    Other
    
    
    155,000
    
    
    
    Net cash provided by financing activities
    
    
    5,117,000
    
    
    
    40,000Net change in cash
    
    
    (1,694,000
    )
    
    
    417,000Cash at beginning of period
    
    
    4,339,000
    
    
    
    376,000Cash at end of period
    
    $
    2,645,000
    
    
    $
    793,000
   6




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 CONSOLIDATED STATEMENTS OF CASH FLOWS  CONTINUED
(Unaudited)
 Three months ended March 31,2008
    
    
    2009Supplemental disclosures of cash flow information:Cash paid for:Interest and LPG and Fuel Products financing expense
    
    $
    1,084,000
    
    
    $
    135,000Supplemental disclosures of noncash transactions:Units issued for compensation and penalties
    
    $
    344,000
    
    
    $
    Unit based compensation
    
    $
    145,000
    
    
    $
    29,000Share based compensation
    
    $
    276,000
    
    
    $
    7,000
   7




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##### Table of Contents



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




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE A  ORGANIZATION   Continued
      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, 2008Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (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
 For the three months March 31, 2009Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (319,000
    )Basic EPSNet loss available to common stockholders
    
    
    (319,000
    )
    
    
    15,416,187
    
    
    $
    (0.02
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 NOTE C  SHARE-BASED AND UNIT-BASED PAYMENTS
 Share-Based Payments
   10




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE C  SHARE-BASED AND UNIT-BASED PAYMENTS  Continued
 Share-Based Payments  Continued
   Unit-Based Payments
    11




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE D  SALE OF REMAINING LPG ASSETS
  NOTE E  PROPERTY, PLANT AND EQUIPMENT
  December 31,
    
    
    March 31,2008
    
    
    2009Oklahoma:Pipelines and equipment
    
    $
    7,417,000
    
    
    $
    7,417,000Regional:Land
    
    
    237,000
    
    
    
    237,000Terminal and improvements
    
    
    4,084,000
    
    
    
    4,120,000Automotive equipment
    
    
    2,644,000
    
    
    
    2,644,0006,965,000
    
    
    
    7,001,00014,382,000
    
    
    
    14,418,000Other
    
    
    290,000
    
    
    
    295,00014,672,000
    
    
    
    14,713,000Less: accumulated depreciation and amortization
    
    
    (1,982,000
    )
    
    
    (2,272,000
    )$
    12,690,000
    
    
    $
    12,441,000
    12




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE F  OIL AND GAS PROPERTIES AND RELATED EQUIPMENT, NET
 Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
    NOTE G  DEBT OBLIGATIONS
 December 31,
    
    
    March 31,2008
    
    
    2009RZB Note
    
    $
    5,000,000
    
    
    $
    4,000,000Richter Note Payable
    
    
    575,000
    
    
    
    575,000Moores Note
    
    
    
    
    
    
    300,000$
    5,575,000
    
    
    $
    4,875,000Long-term debt obligations were as follows:TCW Credit Facility
    
    $
    24,700,000
    
    
    $
    24,700,000Sellers Note  Regional
    
    
    744,000
    
    
    
    750,000Moores Note
    
    
    300,000
    
    
    
    Other
    
    
    137,000
    
    
    
    137,00025,881,000
    
    
    
    25,587,000Less current portion
    
    
    25,731,000
    
    
    
    25,587,000$
    150,000
    
    
    $
    
 RZB Note
   13




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE G  DEBT OBLIGATIONS  Continued
 RZB Note  Continued
   Moores Note
     14




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE G  DEBT OBLIGATIONS  Continued
 Richter Note Payable
  TCW Credit Facility
     15




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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  Continued
    Sellers Note  Regional
  Other
   16




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  COMMON UNITS AND OPTIONS OF RIO VISTA
  Distributions of Available Cash
      17




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  COMMON UNITS AND OPTIONS OF RIO VISTA  Continued
 TCW Warrant
  NOTE I  COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
   Lesly Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn
Octane International LLC, et al th
  18




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE I  COMMITMENTS AND CONTINGENCIES  Continued
 Legal Proceedings  Continued
       19




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE I  COMMITMENTS AND CONTINGENCIES  Continued
 Legal Proceedings  Continued
  Greco-Roman, Inc. dba Trinity Oil Co.
 SFPP, Inc. v. Penn Octane Corporation
  Letters of Credit
   20




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE I  COMMITMENTS AND CONTINGENCIES  Continued
 Norfolk Southern Leases
    Consulting Agreement
  Environmental Indemnification
   21




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE I  COMMITMENTS AND CONTINGENCIES  Continued
 Concentrations of Credit Risk
  Partnership Tax Treatment and Mexican Subsidiaries, Regional and MV Income Taxes
       22




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE I  COMMITMENTS AND CONTINGENCIES  Continued
 Partnership Tax Treatment and Mexican Subsidiaries, Regional and MV Income Taxes  Continued
  NOTE J  OIL AND GAS SALES CONTRACTS
   NOTE K  RELATED PARTY TRANSACTIONS
   Sale  Purchase of Rio Vista Common Units
   23




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  RELATED PARTY TRANSACTIONS  Continued
 Loans To Rio Vista
   Omnibus Agreement
    NOTE L  401K
   24




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE M  REALIZATION OF ASSETS
       25




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE N  SEGMENT INFORMATION
   TransportationandThree months ended March 31, 2009:
    
    Terminaling
    
    
    Oil and Gas
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    1,740,000
    
    
    $
    1,168,000
    
    
    $
    
    
    
    $
    2,908,000Interest expense
    
    
    186,000
    
    
    
    770,000
    
    
    
    11,000
    
    
    
    967,000Interest income
    
    
    
    
    
    
    
    
    
    
    14,000
    
    
    
    14,000Depreciation and amortization
    
    
    159,000
    
    
    
    360,000
    
    
    
    
    
    
    
    519,000Segment gross profit
    
    
    527,000
    
    
    
    407,000
    
    
    
    
    
    
    
    934,000Segment assets
    
    
    11,800,000
    
    
    
    35,896,000
    
    
    
    
    
    
    
    47,696,000Segment liabilities
    
    
    4,566,000
    
    
    
    28,734,000
    
    
    
    2,356,000
    
    
    
    35,656,000Expenditure for segment assets
    
    
    26,000
    
    
    
    2,000
    
    
    
    
    
    
    
    28,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    $
    2,908,000Elimination of intersegment revenues
    
    
    
    
    
    
    Other revenues
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    $
    2,908,000Profit (loss)Total gross profit (loss) for reportable
segments
    
    
    
    
    
    $
    934,000Total other gross profit (loss)
    
    
    
    
    
    
    Selling, general and administrative expense
and other
    
    
    
    
    
    
    (1,239,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    (957,000
    )Interest income
    
    
    
    
    
    
    14,000Elimination of intersegment profits
    
    
    
    
    
    
    Unallocated amountsCorporate headquarters expense
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    Consolidated income from continuing
operations before income tax
    
    
    
    
    
    $
    (1,248,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    $
    47,696,000Other assets
    
    
    
    
    
    
    4,354,000Corporate headquarters
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    $
    52,050,000
  26




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE N  SEGMENT INFORMATION  Continued
 TransportationandThree months ended March 31, 2008:
    
    Terminaling
    
    
    Oil and Gas
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    2,107,000
    
    
    $
    988,000
    
    
    $
    30,308,000
    
    
    $
    33,403,000Interest 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
    
    
    
    
    
    $
    33,403,000Elimination of intersegment revenues
    
    
    
    
    
    
    Other revenues
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    $
    33,403,000Profit (loss)Total gross profit (loss) 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
    
    
    
    
    
    
    10,000Elimination of intersegment profits
    
    
    
    
    
    
    Unallocated amountsCorporate headquarters expense
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    Consolidated income from continuing
operations before income tax
    
    
    
    
    
    $
    (2,826,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    $
    57,682,000Other assets
    
    
    
    
    
    
    3,213,000Corporate headquarters
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    $
    60,895,000
  27




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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.
 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;
    
    our strategic plans, objectives, expectations and intentions for future operations. and
    
    our ability to restructure the TCW Credit Facility and/or the RZB Note under terms
satisfactory to us.
    28




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##### Table of Contents



Overview
  Fuel Sales Business
  Results of Operations
   QUARTER ENDED MARCH 31, 2009
 Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales
    
    
    Assets
    
    
    Enterprises
    
    
    Trans.(a)
    
    
    Other
    
    
    TotalRevenues
    
    
    
    
    
    
    1,168,000
    
    
    
    1,740,000
    
    
    
    
    
    
    
    (0
    )
    
    
    2,908,000Cost Of Goods Sold
    
    
    
    
    
    
    761,000
    
    
    
    1,213,000
    
    
    
    
    
    
    
    
    
    
    
    1,974,000Gross Profit
    
    
    
    
    
    
    407,000
    
    
    
    527,000
    
    
    
    
    
    
    
    (0
    )
    
    
    934,000Selling, General And
Administrative Expenses
    
    
    11,000
    
    
    
    249,000
    
    
    
    191,000
    
    
    
    
    
    
    
    788,000
    
    
    
    1,239,000Loss On Sale Of Remaining
LPG  Related Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Income (Loss)
    
    
    (11,000
    )
    
    
    158,000
    
    
    
    336,000
    
    
    
    
    
    
    
    (788,000
    )
    
    
    (305,000
    )Other Income (Expense)Interest Expense
    
    
    (11,000
    )
    
    
    (770,000
    )
    
    
    (186,000
    )
    
    
    
    
    
    
    10,000
    
    
    
    (957,000
    )Interest Income
    
    
    14,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,000Income (Loss) Before Taxes
    
    
    (8,000
    )
    
    
    (612,000
    )
    
    
    150,000
    
    
    
    
    
    
    
    (778,000
    )
    
    
    (1,248,000
    )Provision (Benefit) For Income Taxes
    
    
    
    
    
    
    
    
    
    
    110,000
    
    
    
    
    
    
    
    
    
    
    
    110,000Net Income (Loss)
    
    
    (8,000
    )
    
    
    (612,000
    )
    
    
    40,000
    
    
    
    
    
    
    
    (778,000
    )
    
    
    (1,358,000
    )Net Loss Attributable To Non-Controlling Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,039,000
    )
    
    
    (1,039,000
    )Net Loss Attributable To Penn
Octane Corporation
    
    
    (8,000
    )
    
    
    (612,000
    )
    
    
    40,000
    
    
    
    
    
    
    
    261,000
    
    
    
    (319,000
    )
  29




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##### Table of Contents



QUARTER ENDED MARCH 31, 2008
 Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales
    
    
    Assets
    
    
    Enterprises
    
    
    Trans.(a)
    
    
    Other
    
    
    TotalRevenues
    
    
    30,308,000
    
    
    
    988,000
    
    
    
    2,107,000
    
    
    
    
    
    
    
    0
    
    
    
    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
    
    
    
    58,000
    
    
    
    245,000
    
    
    
    
    
    
    
    2,129,000
    
    
    
    2,623,000Loss On Sale Of Remaining
LPG  Related Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139,000
    
    
    
    
    
    
    
    139,000Operating Income (Loss)
    
    
    11,000
    
    
    
    267,000
    
    
    
    100,000
    
    
    
    (139,000
    )
    
    
    (2,119,000
    )
    
    
    (1,880,000
    )Other Income (Expense)Interest Expense
    
    
    (77,000
    )
    
    
    (638,000
    )
    
    
    (222,000
    )
    
    
    
    
    
    
    (19,000
    )
    
    
    (956,000
    )Interest Income
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    10,000Income (Loss) Before Taxes
    
    
    (66,000
    )
    
    
    (364,000
    )
    
    
    (122,000
    )
    
    
    (139,000
    )
    
    
    (2,135,000
    )
    
    
    (2,826,000
    )Provision (Benefit) For Income Taxes
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000Net Income (Loss)
    
    
    (66,000
    )
    
    
    (364,000
    )
    
    
    (127,000
    )
    
    
    (139,000
    )
    
    
    (2,135,000
    )
    
    
    (2,831,000
    )Net Loss Attributable To Non-Controlling Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,051,000
    )
    
    
    (2,051,000
    )Net Loss Attributable To Penn
Octane Corporation
    
    
    (66,000
    )
    
    
    (364,000
    )
    
    
    (127,000
    )
    
    
    (139,000
    )
    
    
    (84,000
    )
    
    
    (780,000
    )
 CHANGES FOR QUARTER ENDED MARCH 31, 2009 COMPARED WITH QUARTER ENDED MARCH 31, 2008
 Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales
    
    
    Assets
    
    
    Enterprises
    
    
    Trans.(a)
    
    
    Other
    
    
    TotalRevenues
    
    
    (30,308,000
    )
    
    
    180,000
    
    
    
    (367,000
    )
    
    
    
    
    
    
    (0
    )
    
    
    (30,495,000
    )Cost Of Goods Sold
    
    
    (30,106,000
    )
    
    
    98,000
    
    
    
    (549,000
    )
    
    
    
    
    
    
    10,000
    
    
    
    (30,547,000
    )Gross Profit
    
    
    (202,000
    )
    
    
    82,000
    
    
    
    182,000
    
    
    
    
    
    
    
    (10,000
    )
    
    
    52,000Selling, General And
Administrative Expenses
    
    
    (180,000
    )
    
    
    191,000
    
    
    
    (54,000
    )
    
    
    
    
    
    
    (1,341,000
    )
    
    
    (1,384,000
    )Loss On Sale Of Remaining
LPG  Related Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (139,000
    )
    
    
    
    
    
    
    (139,000
    )Operating Income (Loss)
    
    
    (22,000
    )
    
    
    (109,000
    )
    
    
    236,000
    
    
    
    139,000
    
    
    
    1,331,000
    
    
    
    1,575,000Other Income (Expense)Interest Expense
    
    
    66,000
    
    
    
    (132,000
    )
    
    
    36,000
    
    
    
    
    
    
    
    29,000
    
    
    
    (1,000
    )Interest Income
    
    
    14,000
    
    
    
    (7,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,000
    )
    
    
    4,000Income (Loss) Before Taxes
    
    
    58,000
    
    
    
    (248,000
    )
    
    
    272,000
    
    
    
    139,000
    
    
    
    1,357,000
    
    
    
    1,578,000Provision (Benefit) For Income Taxes
    
    
    
    
    
    
    
    
    
    
    105,000
    
    
    
    
    
    
    
    
    
    
    
    105,000Net Income (Loss)
    
    
    58,000
    
    
    
    (248,000
    )
    
    
    167,000
    
    
    
    139,000
    
    
    
    1,357,000
    
    
    
    1,473,000Net Loss Attributable To Non-Controlling Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,012,000
    
    
    
    1,012,000Net Loss Attributable To Penn
Octane Corporation
    
    
    58,000
    
    
    
    (248,000
    )
    
    
    167,000
    
    
    
    139,000
    
    
    
    345,000
    
    
    
    461,000
 (a)
    
    LPG Transportation business commenced in August 2006 sold December 31, 2007. Costs represent
remaining charges associated with the sale that were recorded during 2008.  30




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##### Table of Contents



Three Months Ended March 31, 2009 Compared With Three Months Ended March 31, 2008
 Revenues.
 Cost of goods sold.
 Selling, general and administrative expenses.
 Net loss attributable to noncontrolling interest.
 Liquidity and Capital Resources
 General
    31




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##### Table of Contents



Debt Obligations
 RZB Note
     32




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##### Table of Contents



TCW Credit Facility
        33




---



##### Table of Contents



Moores Note
    Sellers Note  Regional
   34




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##### Table of Contents



Richter Note Payable
  Distributions of Available Cash
     Leases
     35




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##### Table of Contents



Consulting Agreement
  Sale Of Remaining LPG Assets
  Related Party Loans to Rio Vista
   Realization of Assets
    36




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Recently Issued Financial Accounting Standards
   Critical Accounting Policies
   37




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4T. Controls and Procedures.
 Disclosure Controls
   Internal Control Over Financial Reporting
       38




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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
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6 Exhibits
 The following Exhibits are filed as part of this report:
 Exhibit No.10.1
    
    
    Letter agreement to extend payments and other requirements pursuant to Note
Purchase Agreement dated March 23, 2009 between Rio Vista Penny LLC and TCW
Asset Management Company.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
  39




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##### Table of Contents



SIGNATURES
  PENN OCTANE CORPORATIONMay 20, 2009
    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)  40




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    
    Letter agreement to extend payments and other requirements pursuant to Note
Purchase Agreement dated March 23, 2009 between Rio Vista Penny LLC and TCW
Asset Management Company.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