** **

**UNITED STATES**SECURITIES AND EXCHANGE COMMISSION

**Washington,D.C. 20549**

 

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**Form 10-QSB**

 

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**ý**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For theQuarterly Period Ended September 30, 2005**

 

**or**

 

**o**** TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**CommissionFile Number 000-25873**

 

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**Apollo Resources International, Inc.**

(Exact name of registrant asspecified in its charter)

 
| **Utah**                                                        | ** ** | **84-1431425**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |

** **

**3001 KnoxStreet, Suite 403**

**Dallas,TX  75205**

(Address of principal executiveoffices, including zip code)

 

**(214) 389-9800**

(Registrant’s telephone number,including area code)

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes ý    No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).   Yes  o   Noý

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes  o   Noý

 

As of November 15, 2005there were 102,611,579 shares of the registrant’s common stock outstanding.

 

 

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**APOLLORESOURCES INTERNATIONAL, INC.**

**BALANCESHEETS**

 
| ** **                                                                                                                                                                                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |                         |       |                        |       |
| Current  Assets                                                                                                                                                                             |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                   |       | $                            | 33,164     |                        | $          | 56,018 |   |
| Accounts receivable working interest owners                                                                                                                                                 |       | 173,298                      |       | 102,790                     |       |
| Trade accounts receivable                                                                                                                                                                   |       | 137,891                      |       | 35,063                      |       |
| Accounts receivable other                                                                                                                                                                   |       | 36,982                       |       | 30,709                      |       |
| Inventory                                                                                                                                                                                   |       | 52,807                       |       | —                      |       |
| Other current assets                                                                                                                                                                        |       | 188,409                      |       | 7,643                       |       |
| Total Current Assets                                                                                                                                                                        |       | 622,551                      |       | 232,223                     |       |
| Property and  equipment, net                                                                                                                                                                |       | 16,420,079                   |       | 7,564,531                   |       |
| Investment  in joint ventures                                                                                                                                                               |       | 200,000                      |       | —                      |       |
| Investment  in convertible preferred stock                                                                                                                                                  |       | 495,000                      |       | —                      |       |
| Patents and  assigned technology net of amortization of $15,300 at December 31, 2004                                                                                                   |       | —                       |       | 35,903                      |       |
| Goodwill                                                                                                                                                                                    |       | 4,493,972                    |       | —                      |       |
| Other assets                                                                                                                                                                                |       | 462,839                      |       | 56,475                      |       |
|                                                                                                                                                                                        |       | $                            | 22,694,441 |                        | $          | 7,889,132 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                               |       |                         |       |                        |       |
| Current  Liabilities                                                                                                                                                                        |       |                         |       |                        |       |
| Accounts payable and accrued liabilities                                                                                                                                                    |       | $                            | 1,698,198  |                        | $          | 379,152 |   |
| Royalty payable                                                                                                                                                                             |       | 845,232                      |       | 807,970                     |       |
| Production, property and payroll taxes  payable                                                                                                                                             |       | 421,072                      |       | 147,067                     |       |
| Lease payable                                                                                                                                                                               |       | 406,071                      |       | —                      |       |
| Notes payable                                                                                                                                                                               |       | 1,282,679                    |       | 1,971,072                   |       |
| Total Current Liabilities                                                                                                                                                                   |       | 4,653,252                    |       | 3,305,261                   |       |
| Long-term debt                                                                                                                                                                              |       | 1,089,754                    |       | —                      |       |
| Total Liabilities                                                                                                                                                                           |       | 5,743,006                    |       | 3,305,261                   |       |
|                                                                                                                                                                                        |       |                         |       |                        |       |
| Stockholders’  Equity                                                                                                                                                                  |       |                         |       |                        |       |
| Common stock, $.001 par value; 150,000,000  shares authorized; 96,811,664 and 23,853,900 shares issued and outstanding at  September 30, 2005 and December 31, 2004, respectively |       | $                            | 96,812     |                        | $          | 23,854 |   |
| Additional paid-in capital                                                                                                                                                                  |       | 45,663,972                   |       | 6,739,052                   |       |
| Accumulated deficit                                                                                                                                                                         |       | (18,339,527                  | )          | (1,610,181                  | )          |
| Common stock issued for future services                                                                                                                                                     |       | (10,469,822                  | )          | (568,854                    | )          |
| Total Stockholders’ Equity                                                                                                                                                             |       | 16,951,435                   |       | 4,583,871                   |       |
|                                                                                                                                                                                        |       | $                            | 22,694,441 |                        | $          | 7,889,132 |   |

 

Seeaccompanying notes to financial statements.

 

2

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**APOLLORESOURCES INTERNATIONAL, INC.**

**STATEMENTOF OPERATIONS**

** **
| ** **                                  | ** ** | **Three Months Ended**      | ** **  | **Nine Months Ended**       | ** ** |
|---------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| ** **                                  | ** ** | **September 30, 2005** | ** **  | **September 30, 2005** | ** ** |
| Oil sales,  net                             |       | $                           | —      |                        | $          | 178,037 |   |
| Product  sales – bio diesel            |       | 86,205                      |        | 86,205                      |       |
| Pipeline  rental fees                       |       | 9,023                       |        | 20,389                      |       |
| Gas sales                                   |       | —                      |        | 955                         |       |
| Total  revenue                              |       | 95,228                      |        | 285,586                     |       |
| Cost of  sales                              |       | 338,155                     |        | 591,087                     |       |
| Gross profit  (loss)                        |       | (242,927                    | )           | (305,501                    | )          |
| Selling,  general and administrative        |       | 10,504,361                  |        | 18,419,179                  |       |
| Operating  loss                             |       | (10,747,288                 | )           | (18,724,680                 | )          |
| Interest  expense, net                      |       | (453,355                    | )           | (625,178                    | )          |
| Other income                                |       | 362,252                     |        | 437,826                     |       |
| Loss from  operations before income taxes   |       | (10,838,391                 | )           | (18,912,032                 | )          |
| Income taxes                                |       | —                      |        | —                      |       |
| Loss before  extraordinary item             |       | (10,838,391                 | )           | (18,912,032                 | )          |
|                                        |       |                        |        |                        |       |
| Extraordinary  item:                        |       |                        |        |                        |       |
| Gain on  extinguishment of debt, net of tax |       | —                      |        | 2,182,686                   |       |
| Net loss                                    |       | $                           | (10,838,391 | )                           | $          | (16,729,346 | ) |
|                                        |       |                        |        |                        |       |
| Income  (loss) per common share:            | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| ** **                                  | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| Basic and  diluted:                         |       |                        |        |                        |       |
| Loss before  extraordinary item             |       | $                           | (.13        | )                           | $          | (.34 | ) |
| Extraordinary  item                         |       | —                      |        | .04                         |       |
| Net loss                                    |       | $                           | (.13        | )                           | $          | (.30 | ) |
| ** **                                  | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| Weighted  average shares:                   | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| ** **                                  | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| Basic and  diluted                          |       | 81,056,761                  |        | 54,926,122                  |       |

 

Seeaccompanying notes to financial statements.

 

3

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**APOLLORESOURCES INTERNATIONAL, INC.**

**STATEMENTSOF STOCKHOLDERS’ EQUITY**

 
| ** **                                            | ** ** | **Common   Stock** | ** ** | **Additional   Paid In   Capital** | ** ** | **Common   Stock Issued   for Future  Services** | ** ** | **Accumulated  Deficit** | ** **  | **Totals**  | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|--------------------------|-------------|-------------|------------|
| **Balance December 31, 2004**                    |       | $                  | 23,854     |                               | $          | 6,739,052                                        |       | $                        | (568,854    | )           | $          | (1,610,181 | ) | $ | 4,583,871 |   |
| Common stock issued in acquisition                    |       | 8,000              |       | 3,992,000                          |       | —                                           |       | —                   |        | 4,000,000   |       |
| Common stock issued for investment in joint  ventures |       | 8,500              |       | 4,402,300                          |       | —                                           |       | —                   |        | 4,410,800   |       |
| Stock issued to retire debt                           |       | 300                |       | 110,610                            |       |                                             |       |                     |        | 110,910     |       |
| Stock issued in exercise of warrants                  |       | 2,559              |       | 3,632,549                          |       |                                             |       |                     |        | 3,635,108   |       |
| Common stock issued in private equity sales           |       | 15,255             |       | 6,646,829                          |       | —                                           |       | —                   |        | 6,662,084   |       |
| Common stock issued for services                      |       | 26,738             |       | 14,285,446                         |       | (9,900,968                                       | )          | —                   |        | 4,411,216   |       |
| Common stock issued for employee  compensation        |       | 10,500             |       | 4,883,328                          |       | —                                           |       | —                   |        | 4,893,828   |       |
| Common stock issued as collateral for  purchases      |       | 832                |       | 357,532                            |       | —                                           |       | —                   |        | 358,364     |       |
| Stock issued in litigation settlement                 |       | 274                |       | 114,326                            |       |                                             |       |                     |        | 114,600     |       |
| Capital contribution to subsidiary                    |       | —             |       | 500,000                            |       | —                                           |       | —                   |        | 500,000     |       |
| Net and comprehensive loss                            |       | —             |       | —                             |       | —                                           |       | (16,729,346              | )           | (16,729,346 | )          |
| **Balance September 30, 2005**                   |       | $                  | 96,812     |                               | $          | 45,663,972                                       |       | $                        | (10,469,822 | )           | $          | (18,339,527 | ) | 16,951,435 |   |
|                                                       |            |                    |            |                                    |            |                                                  |            |                          |             |             |            |  |  |  |  |  |

 

See accompanying notes to financialstatements

 

4

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**APOLLORESOURCES INTERNATIONAL, INC.**

** STATEMENTS OF CASH FLOWS**

 
| ** **                                     | ** ** | **Nine Months Ended** | ** **  |
|------------------------------------------------|------------|-----------------------|-------------|
| ** **                                     | ** ** | **September 30** | ** **  |
| ** **                                     | ** ** | **2005**              | ** **  |
|                                           |       |                  |        |
| **Cash  Flows from Operating Activities:**     |       |                  |        |
| Net loss                                       |       | $                     | (16,729,346 | ) |
| Non-cash items included in net loss:           |       |                  |        |
| Depreciation, amortization and depletion       |       | 156,573               |        |
| Common stock issued for services               |       | 4,411,216             |        |
| Stock issuance compensation expense            |       | 4,199,921             |        |
| Common stock issued for compensation           |       | 4,893,828             |        |
| Cashless exercise of stock warrants            |       | 1,507,201             |        |
| Gain on extinguishment of debt                 |       | (2,182,686            | )           |
| Gain on litigation settlement                  |       | (497,430              | )           |
| Other                                          |       | (77,567               | )           |
|                                           |       |                  |        |
| Changes in assets and liabilities:             |       |                  |        |
| Decrease (increase) in:                        |       |                  |        |
| Accounts receivable                            |       | 15,612                |        |
| Prepaid and other assets                       |       | (233,032              | )           |
|                                           |       |                  |        |
| Increase (decrease) in:                        |       |                  |        |
| Accounts payable and accrued expenses          |       | 666,653               |        |
| Net cash  used in operating activities         |       | (3,869,057            | )           |
|                                           |       |                  |        |
| **Cash  Flows From Investing Activities:**     |       |                  |        |
| Cash acquired  in acquisitions                 |       | 10,374                |        |
| Purchase of  property, plant and equipment     |       | (223,620              | )           |
| Net cash  used in investing activities         |       | (213,246              | )           |
|                                           |       |                  |        |
| **Cash  Flows From Financing Activities:**     |       |                  |        |
| Proceeds  from notes payable                   |       | 112,005               |        |
| Proceeds  from sales of common stock           |       | 2,462,163             |        |
| Proceeds  from convertible notes               |       | 3,000,000             |        |
| Repayments  of notes and capital lease payable |       | (1,514,719            | )           |
| Net cash  provided by financing activities     |       | 4,059,449             |        |
|                                           |       |                  |        |
| Net decrease  in cash                          |       | (22,854               | )           |
|                                           |       |                  |        |
| Cash and  cash equivalents                     |       |                  |        |
| Beginning of year                              |       | 56,018                |        |
| End of period                                  |       | $                     | 33,164      |   |

 

See accompanying notes to financialstatements.

 

5

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**1.  NATURE OFOPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Company and Purpose – ApolloResources International, Inc. (the “Company”) was incorporated on July 9,1997 under the laws of the State of Utah. Effective October 28, 2004, theCompany executed a share exchange agreement, in which the Company acquired anoil and natural gas production company. With this acquisition the Companychanged its primary business focus to oil & natural gas production.Subsequent acquisitions and ventures have added oil and natural gastransportation via the acquisition of pipelines and developed an alternativefuels segment with ventures in biodiesel and hydrogen energy alternatives.Before October 28, 2004, the Company was accounted for as a developmentalstage company for the purpose of raising capital to invest in a joint venturewhich acquired a license to certain technology relating to the production ofhydrogen, to generate hydrogen for sale, and to market hydrogen generatingequipment and products.

 

Basis of Presentation - The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries. All significant intercompany transactions andbalances have been eliminated. Results of operations for the Company’s gastransmission company OGC Pipeline, LLC (“OGC”) have been consolidated since February 7,2005 the effective date of the acquisition. Results of operations for theCompany’s bio diesel production and distribution company Earth Biofuels, Inc.(“Biofuels”) have been consolidated since August 19, 2005 the date theCompany completed the acquisition of 80% interest in Biofuels.

 

The results of operations of JSC Kaliningradneft (“Kaliningrad”)acquired March 22, 2005, are not included with the accounts presented inthis Form 10-QSB. Effective November 3, 2005, the Company announcedthat it was exercising its contractual right to rescind the March 2005stock sale transaction with shareholders of Kaliningrad. The Company’s decisioncomes after protracted efforts to resolve serious issues that were discoveredby the Company post-closing, as well as efforts to resolve the failure ofKaliningrad to provide certain critical financial data that was represented inthe March agreement. Specifically, shareholders of Kaliningrad hadpurported to transfer 90% of its issued and outstanding shares of stock to theCompany; however, it has become apparent that shareholders of Kaliningrad arenot in a position to transfer more than 50.10% of its stock. The Company hasbeen in protracted discussion with the owners of the remaining shares but, sofar, has been unable to reach a new agreement with them and has agreed torelease any claims it may have had in regard to their shares. Additionally,Kaliningrad, pursuant to the March agreement, was required to provide theCompany with audited statements for fiscal years 2003 and 2004, prepared inaccordance with U.S. Generally Accepted Accounting Principles, whichKaliningrad has failed to do despite repeated efforts on the part of theCompany to secure them. As a result of the above issues, the Company isexercising the contractual right of rescission that was reserved to the Companyunder the March 2005 stock sale agreement, bill of sale, and $18.5 millionconvertible debenture. The Company remains in contact with the ownership ofKaliningrad and a new agreement may be reached. In the meantime, theconvertible debenture issued by the Company is cancelled and the Company hasreserved certain rights that it may have had under the March agreementwith respect to the rescission of the stock sale transaction.

 

With the execution of the share exchange agreementon October 28, 2004, the Company affected a 2 for 1 reverse split of itscommon stock.  Pursuant to the agreement,the Company acquired all of the issued and outstanding shares of TheseusResources, Inc. (“Theseus”), in exchange for the issuance of 18,000,000 post-splitshares of the Company’s restricted common stock.  This transaction was recorded as a reverseacquisition using the purchase method of business combinations.  In a reverse acquisition all accountinghistory becomes that of the accounting acquirer.  Therefore, all historical information priorto the acquisition is that of Theseus.  Accordingly,there are no comparative financial statements presented for the three and ninemonth periods ended September 30, 2005.

 

In management’s opinion, these financial statementsinclude all adjustments necessary to present fairly the financial position ofthe Company at September 30, 2005 and the results of operations andchanges in cash flows for the three and nine month periods ended September 30,2005. The accounting and reporting policies of the Company conform to generallyaccepted accounting principles and reflect practices appropriate for itsindustry.  Revenue is recognized whenearned in accordance with the accrual basis of accounting.  These policies are summarized below.

 

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Management’s Estimates andAssumptions – The presentation of financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates. The Company reviews all significant estimates affecting thefinancial statements on a recurring basis and records the effect of anynecessary adjustments prior to their issuance.

 

Cash and Cash Equivalents—Cash equivalents consistof highly liquid investments with original maturities of three months or less.

 

Accounts Receivable— At September 30,2005, the amounts carried in accounts receivable were considered by managementto be collectible in full.

 

Accounts Receivable WorkingInterest Owners— The Company previously advanced funds to working interestowners.  As net royalties are earned, theworking interest owners are reducing their receivable on a quarterly basis. Theworking interest owners receive 54% of the revenue and are billed 54% of thedirect expenses.  For the period ended September 30,2005, the working interest owners accrued revenue of $58,317. As of September 30,2005 the working interest owners owed the Company $173,298.

 

Concentration of Credit Risk— Financial instrumentswhich potentially subject the Company to concentrations of credit risk consistprincipally of accounts receivable and temporary cash investments.  Exposure to losses on receivables is principallydependent on each customer’s financial condition.  The Company controls its exposure to creditrisk through credit approvals, credit limits and monitoring procedures andestablishes allowances for anticipated losses. The Company places its temporarycash investments with quality financial institutions and, by policy, limits theamount of credit exposure with any one financial instrument.

 

Fair Market Value of Financial Instruments— Theestimated fair value of cash and cash equivalents, accounts receivable, investmentsin marketable equity securities, accounts payable, accrued expenses and otherliabilities approximate their carrying amounts in the financial statements. TheCompany’s financial instruments include notes payable. The carrying value of notespayable approximates market value because the borrowing rate is similar toother financial instruments with similar terms.

 

Inventory — Inventory consisting of well equipmentpurchased in bulk for use on the Company’s oil and gas leases was $30,597 and inventoriesof biodiesel fuel and products purchased for resale related to the Company’sbio diesel distribution centers are included in inventory and totaled $22,210at September 30, 2005, respectively.

 

Patents and AssignedTechnology – The Company contributed its Patent technology to Decarb EnergyTechnologies, LLC (“Decarb”) upon entering into a joint venture with Decarb.The Patent technology related to a Hydrogen Generation System and Fuel Pellettechnology relating to the production of hydrogen. Effective August 31,2005 the Company assigned its 50% interest in Decarb to its joint venturepartner. After several months of monitoring the project the Company did notfeel the continuation of the hydrogen alternative fuel research would produceprofitable results. With this assignment the Company released all rights to anyof the 5 patents related to the hydrogen research and development.

 

Warrants – The Companyissued warrants to the investors that participated in the Company’s recentprivate placement of 8% secured convertible promissory notes. In total, theCompany issued warrants to purchase an aggregate of 12,000,000 shares of itscommon stock. The warrants have an exercise price of $0.30 per share, andexpire in June 2010. The warrant exercise price is subject to adjustmentupon the occurrence of certain specified events, including stock dividends andstock splits, pro rata distributions of equity securities, evidences ofindebtedness, rights or warrants to purchase common stock or cash or any other asset,mergers or consolidations, or certain issuances of common stock at a pricebelow the initial exercise price of $0.30 per share. The warrants include a “cashlessexercise” feature, which permits the holder to exercise the warrants bysurrender of a portion of the warrants. The cashless exercise feature isavailable to the holder, if at the time of exercise, there is not in effect aregistration statement covering the shares underlying the warrants.

 

In addition, the Companyissued to H. C. Wainwright & Co., Inc., 1,200,000 shares ofcommon stock at $0.25 and warrants to purchase 1,200,000 shares of common stockat $0.30, all of which were issued in connection with their 

 

7

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services as exclusiveplacement agent for the recent private placement. The warrants generally havethe same terms as those issued to the investors. The Comapny also issued to 1stSB Partners Ltd., warrants to purchase 1,200,000 shares of common stock at$0.25 and warrants to purchase 1,200,000 shares of common stock at $0.30. Thesewarrants generally have the same terms as those issued to the investors. BothH.C. Wainwright & Co., Inc. and 1st SB PartnersLtd., exercised their cashless exercise feature, on both warrants, on September 8,2005. Both organizations received 1,279,458 shares of the Company’s commonstock upon exercise of their warrants.

 

During 2003, the Company issued a former officer inconnection with such officer’s employment agreement, a warrant for 65,000shares of restricted common stock. Such warrant has an exercise price of $2.50per share and expires on December 11, 2006.

 

Stock Options and Warrants—The Company accounts forits stock-based compensation plans in accordance with Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (APB25) and related interpretations. The Company accounts for stock-basedcompensation for non-employees under the fair value method prescribed byStatement of Financial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation.” Through September 30, 2005, there have been no significantgrants to non-employees.

 

The Company grants incentive and non-qualified stockoptions and has reserved 23,282,000 shares of common stock for issuance underits stock option plans. The majority of the options granted become exercisableat the date of grant, and generally expire three years after the date of grant.

 

Under the Company’s 2003 Stock Option and AwardPlan, 15,875 options were granted to an outside business consultant in 2003 inconnection with strategic planning consulting services, with an exercise priceof $2.00, vested immediately and exercisable until December 31, 2006.

 

The Company adopted the disclosure provisions ofStatement of Financial Accounting Standards No. 123 (SFAS No. 123), “Accountingfor Stock Based Compensation.” This statement requires the Company to providepro forma information regarding net income and net income per share as ifcompensation cost for the Company’s stock options had been determined inaccordance with the fair value method. The fair value of these options wasestimated at the date of grant using a Black-Scholes option pricing model withthe following weighted average assumptions for 2005.

 

| Dividend Yield           |   | 0    | %      |
|--------------------------|--------|------|--------|
| Expected volatility      |   | 80   | %      |
| Risk free  interest rate |   | 3.25 | %      |
| Expected  life (years)   |   | 3    |   |

 

Had compensation cost for the Company’s stock optionplans been determined based on the fair value at the grant date consistent withthe provisions of SFAS No. 123, the Company’s net loss and loss per sharewould have been reduced to the pro forma amounts indicated below:

 
| ** **                                                                                                       | ** ** | **Three Months Ended  September 30, 2005** | ** **  | **Nine Months Ended  September 30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|-------------|------------------------------------------------|------------|
|                                                                                                             |       |                                            |        |                                           |       |
| Net loss, as  reported                                                                                           |       | $                                               | (10,838,391 | )                                              | $          | (16,729,346 | ) |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |       | (1,752,000                                      | )           | (2,940,238                                     | )          |
| Adjusted net  loss                                                                                               |       | $                                               | (12,590,391 | )                                              | $          | (19,669,584 | ) |
|                                                                                                             |       |                                            |        |                                           |       |
| Earnings per  share                                                                                              |       |                                            |        |                                           |       |
| As reported                                                                                                      |       |                                            |        |                                           |       |
| Basic and diluted                                                                                                |       | $                                               | (.13        | )                                              | $          | (.30 | ) |
| As adjusted                                                                                                      |       |                                            |        |                                           |       |
| Basic and diluted                                                                                                |       | $                                               | (.16        | )                                              | $          | (.36 | ) |

 

8

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Revenue – Oil and natural gas production revenue isrecognized at the time and point of sale after the product has been extractedfrom the ground. Revenue from pipeline rental fees for natural gas transmissionis based on volume of Mcf of natural gas metered monthly. Revenue from productsales of bio diesel fuel and other sales related to service station operationsare point of sale transactions.

 

Comprehensive Income—Comprehensive income includesall changes in equity except those resulting from investments by stockholdersand distributions to stockholders.

 

Earnings per Share - Earnings (loss) per commonshare is presented in accordance with the provisions of the Statement ofFinancial Accounting Standards No. 128, “Earnings Per Share”(SFAS 128), which requires the presentation of “basic” and “diluted”earnings per share. Basic earnings (loss) per share are based on the weightedaverage shares outstanding. Diluted earnings (loss) per share include theeffect of dilutive securities such as stock options and warrants.

 

The following table reconciles basic earnings pershare to diluted earnings per share under the provisions of SFAS 128.

 
| ** **                                  | ** ** | **Net Income  (Numerator)** | ** **  | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|---------------------------------------------|------------|-----------------------------|-------------|---------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | ** **                  | ** **  | ** **                | ** ** | ** **            | ** ** |
| Three Months  Ended September 30, 2005 |       |                        |        |                      |       |                  |       |
| Basic loss  per share                       |       | $                           | (10,838,391 | )                         | 81,056,761 |                  | $          | (.13 | ) |
| Effect of  dilutive securities:             |       |                        |        |                      |       |                  |       |
| Stock options and warrants                  |       | —                      |        | —                    |       | —                |       |
| Convertible notes                           |       | —                      |        | —                    |       | —                |       |
| Diluted loss  per share                     |       | $                           | (10,838,391 | )                         | 81,056,761 |                  | $          | (.13 | ) |

 
| ** **                                 | ** ** | **Net Income  (Numerator)** | ** **  | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|--------------------------------------------|------------|-----------------------------|-------------|---------------------------|------------|-----------------------|------------|
|                                       |       |                        |        |                      |       |                  |       |
| Nine Months  Ended September 30, 2005 |       |                        |        |                      |       |                  |       |
| Basic loss  per share                      |       | $                           | (16,729,346 | )                         | 54,926,122 |                  | $          | (.30 | ) |
| Effect of  dilutive securities:            |       |                        |        |                      |       |                  |       |
| Stock options and warrants                 |       | —                      |        | —                    |       | —                |       |
| Convertible notes                          |       | —                      |        | —                    |       | —                |       |
| Diluted loss  per share                    |       | $                           | (16,729,346 | )                         | 54,926,122 |                  | $          | (.30 | ) |

 

Total stock options and warrants outstanding at September 30,2005 that are not included in the diluted earnings per share computation areapproximately 12,080,875. Convertible notes not included in the computation ofdiluted earnings per share are equivalent to approximately 13,530,651 shares. Thesestock options, warrants and convertible notes were not included in thecomputation of earnings per share at September 30, 2005 due to exerciseprices exceeding the average market value of the Company’s common stock, anddue to the Company’s incurring a net loss during the periods presented.

 

Basic net income per shareis computed by dividing net income available to common shareholders (numerator)by the weighted average number of common shares outstanding during the year(denominator).  Diluted net income pershare is computed using the weighted average number of common shares andpotential common shares outstanding during the year.  Potential common shares result from theassumed exercise, using the treasury stock method, of outstanding stock options,warrants and convertible notes having a dilutive effect. The numerator for theperiods presented is equal to the reported net income.

 

Income Taxes— The Company utilizes the liabilitymethod for accounting for income taxes. The liability method accounts for deferred income taxes by applyingenacted statutory rates in effect at the balance sheet date to 

 

9

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differences between financial statementamounts and tax bases of assets and liabilities.  The resulting deferred income tax liabilitiesare adjusted to reflect changes in tax laws and rates.  Temporary differences consist of thedifference in financial statement and income tax bases for accounting forstart-up and organizational costs. Deferred income taxes related to an asset or liability is classified ascurrent or non-current based on the classification of the related asset orliability.  Deferred tax assets relatedto losses accumulated during the development stage and thereafter has beenreduced by a corresponding valuation allowance at September 30, 2005, andaccordingly, no income tax expense or benefit has been recognized. Netoperating loss carryforwards approximating $1.6 million expire in the year2019.

 

**2. GOING CONCERN AND MANAGEMENT PLANS**

 

During the period ending September 30,2005, the Company recorded a net loss of $16,729,346. Since the Companycompleted its reverse merger on October 28, 2004, the Company hasaccumulated losses aggregating $18.3 million. The Company’s continued existence is dependent upon its ability to takeadvantage of acquisition opportunities, raise capital through privatesecurities offerings, secure collateralized debt financing and use thesesources of capital to grow and enhance its oil and gas production, gas pipelinetransmission operations and alternative fuels ventures, primarily its bio dieseloperations. During the fourth quarter of fiscal 2004 the Company completed theacquisition of BC&D Oil and Gas Corporation (“BC&D”). The acquisitionof BC&D marked the initial entrance of the Company into the oil and naturalgas production business. During the first quarter of fiscal 2005, the Company negotiatedthe acquisition of OGC, a gas gathering company. The OGC acquisition added apipeline network to the Company’s assets enabling the Company to diversify intothe oil and gas transmission business. In response to soaring fuel costs, andto avail itself of government subsidies and tax incentives, the Company haspursued a strategy of developing renewable forms of energy, such as biodiesel.  Consequently, on February 25,2005 the Company acquired a 50% interest in Biofuels, a Mississippi-basedcompany and on August 19, 2005, acquired an additional 30% ownershipinterest. On September 13, 2005, the Company executed a share exchangewith Meadows Springs, Inc. whereby the Company contributed its 80%interest in Biofuels in exchange for 21,000,000 shares of the common stock ofMeadows Springs. As a consequence of the share exchange the Company maintains acontrolling interest in Meadows Springs of approximately 89% and Biofuelsremains an indirect subsidiary of the Company.

 

In July of 2005 theCompany completed a $3.0 million financing consisting of convertible notes withrelated warrants. The Company collateralized certain of its oil and gas assetsand properties along with its pipeline assets to secure this funding. TheCompany has also continued to raise capital through a variety of privatesecurities offerings of its common stock.

 

Management is focusing on expandingand improving its oil and natural gas production operations and alternativefuels ventures. Through acquisition, organic growth and funding viacollateralized loans and private placement offerings, the Company plans to continueto increase the profitability of its operations necessary to supportoperations.

 

There can be no assurancethat any of management’s plans as described above will be successfullyimplemented or that the Company will continue as a going concern.

 

The Company’s Liquidity Plan

 

Recent operating resultsgive rise to concerns about the Company’s ability to generate cash flow fromoperations sufficient to make scheduled debt payments as they become due. On July 7,2005 the Company completed a $3.0 million financing. This financing allowed theCompany to secure full payment of its pipeline assets and infuse capital intoits oil and gas subsidiary BC&D as well as continue funding its alternativefuels joint ventures. As of September 30, 2005, the Company continued toseek other financing from private placements and other acquisitions to expandits opportunities in the areas of oil and gas production, oil and gastransmission and alternative fuels businesses. The Company has implemented costsaving measures including staff reductions. The Company will take additionalcost savings measures, if necessary, to enhance its liquidity position.

 

10

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The Company’s need to raise additional equity ordebt financing and the Company’s ability to generate cash flow from operationssufficient to make scheduled payments on its debts as they become due willdepend on its future performance and the Company’s ability to successfullyraise capital and implement business and growth strategies. The Company’sperformance will also be affected by prevailing economic conditions. Many ofthese factors are beyond the Company’s control. If future cash flows andcapital resources are insufficient to meet the Company’s debt obligations andcommitments, the Company may be forced to reduce or delay activities andcapital expenditures, obtain additional equity capital or restructure orrefinance its debt. In the event that the Company is unable to do so, theCompany may be left without sufficient liquidity and it may not be able to meetits debt service requirements. In such a case, this could result in asubstantial portion of the Company’s indebtedness becoming immediately due andpayable. As a result, the Company may not be able to continue operations due toliens, collateralized notes or other secured positions placed on the Company’sassets.

 

**3. PROPERTY AND EQUIPMENT**

 

The Company follows the full cost method ofaccounting for exploration and development of oil and gas properties wherebyall costs in acquiring, exploring and developing properties are capitalized,including estimates of abandonment costs, net of estimated equipment salvagecosts.  No costs related to production,general corporate overhead, or similar activities have been capitalized.Leasehold costs are depleted based on the units-of-production method based onestimated proved reserves. Property and equipment are stated at cost lessaccumulated depreciation. The Company records impairment losses on long-livedassets used in operations when events and circumstances indicate that theassets might be impaired and the undiscounted cash flows estimated to begenerated by those assets are less than the carrying amounts of those assets.

 

Depreciationis calculated on a straight-line basis over the estimated useful lives of thevarious assets as follows:

 

| Leasehold improvements   |   | 5-7 Years |   |
|--------------------------|--------|-----------|--------|
| Machinery  and equipment |   | 5-7 Years |   |
| Gas plant                |   | 7 Years   |   |
| Automobiles              |   | 5 Years   |   |

 

Property, plant and equipment consist of thefollowing:

 
| ** **                                                 | ** ** | **September 30, 2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| Land                                                       |       | $                                | 231,636    |                        | $          | — |   |
| Building                                                   |       | 205,082                          |       |                        |       |
| Machinery  and equipment                                   |       | 1,949,547                        |       | 2,036,501                   |       |
| Computer and  office equipment                             |       | 56,347                           |       | —                      |       |
| Gas plant                                                  |       | 316,443                          |       | 316,443                     |       |
| Intangible  drilling costs                                 |       | 229,848                          |       | 229,848                     |       |
| Oil &  gas leases                                 |       | 7,694,708                        |       | 7,694,708                   |       |
| Pipeline  easements                                        |       | 8,005,848                        |       | —                      |       |
| Automobiles                                                |       | 49,107                           |       | 49,107                      |       |
| Leasehold  improvements                                    |       | 3,216                            |       | 22,091                      |       |
|                                                       |       | 18,741,782                       |       | 10,348,698                  |       |
| Less  accumulated depreciation, amortization and depletion |       | 2,321,703                        |       | 2,784,167                   |       |
|                                                       |       | $                                | 16,420,079 |                        | $          | 7,564,531 |   |

 

Depreciation, amortization and depletion expense forthe three and six months ended September 30, 2005 was $48,407 and $156,573,respectively. At June 30, 2005, $33,603 of depletion was recorded usingthe units-of-production method on the Company’s only cost center consisting ofoil and gas properties in northwestern New Mexico.

 

At September 30, 2005 the Company had nocapitalized costs of unproved properties and major development projectsexcluded from capitalized costs being amortized under the full cost method ofaccounting for oil and gas properties.

 

11

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**4. ACQUISITIONS**

 

On February 25, 2005the Company acquired a 50% interest in Biofuels, a Mississippi-based company inexchange for 1,700,000 shares of the Company’s common stock valued at $.78 pershare. On August 19, 2005, the Company acquired an additional 30%ownership interest in exchange for 6,000,000 shares of the Company’s commonstock valued at $.50 per share. On September 9, 2005, the Company executeda share exchange with Meadows Springs, Inc. whereby the Companycontributed its 80% interest in Biofuels in exchange for 21,000,000 shares ofthe common stock of Meadows Springs. As a consequence of the share exchange theCompany maintains a controlling interest in Meadows Springs of approximately89% and Biofuels remains an indirect subsidiary of the Company.

 

This transaction wasrecorded using the purchase method of accounting for business combinations.Under the purchase method the Company reports the acquired entities assets andliabilities at fair market value. Any excess of the fair market value of theconsideration given over the fair market value of the net assets acquired isreported as goodwill. The Company recorded goodwill of approximately $4.5million related to this transaction. The operating statements of the Companyfor purchase method combinations report combined results only for the periodsubsequent to the combination.

 

Biofuels is a producer,blender and distributor of biodiesel fuels. Biofuels sells biodiesel to avariety of consumers, such as small businesses and farmers, through a servicestation located in Mississippi, through other oil companies and directly to avariety of commercial and industrial customers. Results of operations for theCompany’s bio diesel production and distribution company Earth Biofuels, Inc.(“Biofuels”) have been consolidated since August 19, 2005 the date theCompany completed the acquisition of 80% interest in Biofuels.

 

Effective February 7,2005 the Company acquired 100% membership interest in OGC from SW EnergyInvestments, Inc. (“SW Energy”). In consideration of this acquisition theCompany exchanged 8,000,000 shares of the Company’s common stock valued at$.50, the closing market price on February 7, 2005. In this acquisitionthe Company acquired approximately 1,800 miles of pipeline used for thetransmission of oil and natural gas. Post acquisition SW Energy ownedapproximately 18% of the outstanding common stock of the Company.

 

This transaction wasrecorded using the purchase method of business combinations.

 

The following is a condensedbalance sheet disclosing the actual carrying values of OGC’s assets andliabilities at the acquisition date.

 
| ASSETS                                           |   |      |      |
|--------------------------------------------------|--------|-----------|-----------|
|                                             |   |      |      |
| Cash and  cash equivalents                       |   | $         | 2,003     |   |
| Pipeline  easements                              |   | 3,987,706 |      |
|                                             |   |      |      |
| Total assets                                     |   | $         | 3,989,709 |   |
|                                             |   |      |      |
| LIABILITIES AND STOCKHOLDERS’ EQUITY        |   |      |      |
|                                             |   |      |      |
| Accounts  payable and accrued expenses           |   | $         | 1,204,170 |   |
| Notes  payable                                   |   | 2,785,539 |      |
| Stockholders’  equity                       |   | —    |      |
|                                             |   |      |      |
| Total  liabilities and stockholders’ equity |   | $         | 3,989,709 |   |

 

The following represents theapproximate pro-forma effect assuming the acquisition with OGC had occurred on January 1,2005, the beginning of the Company’s current fiscal year.

 
| ** **                                                     | ** ** | **Nine Months Ended**       | ** **  |
|----------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                     | ** ** | **September 30, 2005** | ** **  |
|                                                           |       |                        |        |
| Net Loss, as  reported                                         |       | $                           | (16,729,346 | ) |
| Additional  estimated OGC net loss (prior to acquisition date) |       | (27,916                     | )           |
|                                                           |       |                        |        |
| Pro-forma  net loss                                            |       | $                           | (16,757,262 | ) |
|                                                           |       |                        |        |
| Weighted  average shares outstanding, as reported              |       | 54,926,122                  |        |
| Adjustment  to reflect common stock issued to SW Energy        |       | 1,084,249                   |        |
|                                                           |       |                        |        |
| Pro-forma  weighted average shares outstanding                 |       | 56,010,371                  |        |
|                                                           |       |                        |        |
| Loss per  share, as reported                                   |       | $                           | (.30        | ) |
|                                                           |       |                        |        |
| Pro-forma  loss per share                                      |       | $                           | (.30        | ) |

 

12

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**5. EQUITY TRANSACTIONS**

 

On June 30, 2005, theCompany issued 8,000,000 shares of its common stock to acquire 100% membershipinterest in OGC.  On February 25, 2005, theCompany issued 1,700,000 shares of its common stock as consideration to enterinto a 50% joint venture with Biofuels and on August 19, 2005, issued 6,000,000shares of its common stock to acquire an additional 30% interest inBiofuels.  The Company also issued 800,000shares of its common stock to acquire a 50% interest in Energy Ventures.

 

During the first nine monthsof 2005 the Company issued approximately 15,255,000 shares of its common stockthrough private placements.  Proceeds ofthese sales total $2,462,163 for the nine months ended September 30, 2005.

 

During the first nine monthsof 2005 the Company issued approximately 26,738,000 shares of the Company’scommon stock to consultants in restricted form and pursuant to the Company’s2004 and 2005 Stock Option and Award Plans. These shares of common stock wereissued at the fair market value price on the date of issuance and resulted inapproximately $1,930,198 and $4,411,216 of non-cash consulting services expensefor the three and nine months ended September 30, 2005.

 

During the first nine monthsof 2005 the Company issued approximately 10,500,000 shares of its common stockto employees as compensation. These shares of common stock were issued at thefair market value price on the date of issuance and resulted in approximately $4,170,428and $4,893,828 of non-cash employee compensation expense for the three and ninemonths ended September 30, 2005.

 

During the quarter ended September 30,2005, the Company issued approximately 2,559,000 shares of the Company’s commonstock to two agents in connection with their services as exclusive placementagent for the Company’s recent $3.0 million private placement. The agentsexercised their cashless exercise feature included with the warrants resultingin a non-cash expense of $1,507,201.

 

During the quarter ended September 30,2005, the Company issued approximately 274,000 shares of the Company’s commonstock valued at $114,600 as part of a litigation settlement. See Item 1 of Part II– Other Information in this document.

 

The Company has issued atotal of 831,818 shares of its common stock valued at $358,364 as collateralfor purchases made by Blue Wireless and Data, Inc. The Company’s CEO andCorporate Secretary act as Chairman of the Board and President of Blue Wirelessand Data, Inc.

 

During the second quarter of2005 the Company issued 5,000,000 shares of its common stock to Koch PipelineCompany L.P. (“Koch”) valued at $1.0 million. These shares were pledged ascollateral on the $1.0 million note due to Koch and were held in escrow pendingthe Company’s final payment. In July of 2005, the Company made fullpayment to Koch. Subsequently the 5,000,000 shares of the Company’s commonstock were returned to the Company and cancelled.

 

During the second quarter of2005 the Company issued 300,000 shares of its common stock valued atapproximately $111,000 to retire a $100,000 convertible note payable to Mr. BruceBlackwell.

 

13

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**6. LEASES**

 

The Company currentlymaintains an agreement to purchase office space in Trona, California tofacilitate its hydrogen alternative fuel technology development for $54,994. Theoffice lease is for a term of 59 months commencing on March 31, 2005 at $917per month.  The Company entered into a twelvemonth capital lease agreement valued at $511,071 for equipment and a gas planton January 17, 2005. The capital lease agreement calls for eleven monthlyinstallments of $15,000 with a final payment of $346,071 due at the end of thelease.

 

The following is a schedule of future minimum rentand lease payments due:

 

| **Year Ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2005                              |       | 402,355    |       |
| 2006                              |       | 11,006     |       |
| 2007                              |       | 11,006     |       |
| 2008                              |       | 11,006     |       |
| 2009                              |       | 11,006     |       |
| Thereafter                        |       | 2,716      |       |
| Total                             |       | 449,095    |       |

 

Rent expense was $3,884 and$6,690 for the three and six months ended September 30, 2005.

 

**7. INVESTMENTS**

 

On February 25, 2005the Company acquired a 50% interest in Biofuels, a Mississippi-based company inexchange for 1,700,000 shares of the Company’s common stock valued at $.78 pershare. On August 19, 2005, the Company acquired an additional 30%ownership interest in exchange for 6,000,000 shares of the Company’s commonstock valued at $.50 per share. On September 9, 2005, the Company executeda share exchange with Meadows Springs, Inc. whereby the Companycontributed its 80% interest in Biofuels in exchange for 21,000,000 shares ofthe common stock of Meadows Springs. As a consequence of the share exchange theCompany maintains a controlling interest in Meadows Springs of approximately89% and Biofuels remains an indirect subsidiary of the Company.  Biofuels is a producer, blender anddistributor of biodiesel fuels. Biofuels sells biodiesel to a variety ofconsumers, such as small businesses and farmers, through a service stationlocated in Mississippi, through other oil companies and directly to a varietyof commercial and industrial customers. Results of operations for Biofuels havebeen consolidated since August 19, 2005 the date the Company completed theacquisition of 80% interest in Biofuels

 

On December 6, 2004,the Company formed Decarb, a joint venture between the Company and a formerofficer of the Company. Effective August 31, 2005 the Company assigned its50% interest in Decarb to its joint venture partner. After several months ofmonitoring the project the Company did not feel the continuation of thehydrogen alternative fuel research would produce profitable results. With thisassignment the Company released all rights to any of the 5 patents related tothe hydrogen research and development.

 

In addition, on May 2, 2005 the Company reached agreement with Energy Ventures to acquire a 50% interest for 800,000 shares of restricted common stock valued at $200,000.

 

The investment in Biofuels was recorded under the equity method of accounting until August 19, 2005, the date the Company acquired an 80% interest in Biofuels. During the three and nine months ended September 30, 2005, the Company realized income of $313,271 and $385,784 related to these investments. These amounts have been classified in the Company’s statement of operations under the caption “Other income”. Energy Ventures is accounted for using the equity method of accounting. During the three and nine months ended September 30, 2005, the Company realized no income related to this investment.

 

On March 31, 2005 the Company assigned a note receivable valued at $495,000 in exchange for 495,000 shares, $1.00 par value, convertible preferred stock of Blue Wireless and Data, Inc. This investment is shown as a non-current asset in the Company’s balance sheet.

 

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**8. NOTES PAYABLE**

 

At September 30, 2005 theCompany maintained notes payable acquired with its acquisitions of BC&D andOGC, as well as, convertible notes related to the Company’s $3.0 millionfinancing and to various vendors.  

 
| **Lender**                                | ** ** | **Maturity Date** | ** ** | **Interest   Rate** | ** ** | **Original  Principal  Amount** | ** ** |
|-------------------------------------------|------------|------------------------|------------|---------------------|------------|---------------------------------|------------|
| Jimmy Brown                               |       | On Demand              |       | 13.00               | %          | $                               | 200,000    |   |
| $3.0 million  convertible notes (1)       |       | 12/31/2007             |       | 8.00                | %          | 1,049,419                       |       |
| TelcoEnergy  Corporation                  |       | On Demand              |       | 6.00                | %          | 179,000                         |       |
| Peter  Knollenberg                        |       | On Demand              |       | 6.00                | %          | 150,000                         |       |
| Convertible  Notes OGC (2)                |       | On Demand              |       | 10.00               | %          | 575,907                         |       |
| JPB  Resources, Inc.                 |       | 2/24/2006              |       | 13.00               | %          | 50,000                          |       |
| JPB  Resources, Inc.                 |       | On Demand              |       | 11.00               | %          | 100,000                         |       |
| Other (4)                                 |       |                   |       |                |       | 68,107                          |       |
| Total notes  payable                      |       |                   |       |                |       | 2,372,433                       |       |
| Less current  portion of notes payable    |       |                   |       |                |       | 1,282,679                       |       |
| Long –term  portion of notes payable |       |                   |       |                |       | $                               | 1,089,754  |   |

 

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(1)   On June 30, 2005, the Company enteredinto (and on July 7, 2005 completed the transaction contemplated by) aNote and Warrant Purchase Agreement with certain investors, pursuant to whichthe Company issued $3,000,000 principal amount of 8% Secured ConvertiblePromissory Notes and related securities. Pursuant to the Note and WarrantPurchase Agreement, the Company sold to the investors an aggregate of $3,000,000principal amount of 8% secured convertible promissory notes, together withwarrants to purchase an aggregate of 12,000,000 shares of the Company’s commonstock, and an additional investment right entitling the holders to purchasefrom the Company up to an additional $3,000,000 of 8% secured convertiblepromissory notes and warrants to purchase an aggregate of 12,000,000 shares of theCompany’s common stock. These notes are secured by a continuing securityinterest in certain of the Company's assets pursuant to the terms of a securityagreement among the Company and its wholly owned subsidiaries BC&D and OGC,and the investors. These notes are recorded at their fair value based on theallocation of the fair value of the convertible notes and related warrants. Thenotes accrete interest in the amount of $59,109 per month until maturity orconversion by the investors. Additional terms of the 8% secured convertiblenotes include:

 
| • | Unless converted or redeemed as described below,  the 8% secured convertible notes are due on December 30, 2007.                                                                                                                                                                                                                                                                                                                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| • | 8% annual interest, payable semi-annually in  arrears beginning December 1, 2005. The interest is payable either in  cash or at the Company’s option (subject to the satisfaction of certain  conditions) in shares of the Company’s common stock valued at 92.55% of the  volume weighted average price of the Company’s common stock for the 5 trading  days prior to the payment date.                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| • | While the notes are outstanding, if the Company  issues equity or equity linked securities at a price lower than the  conversion price, then the conversion price of these 8% secured convertible  notes will be reduced to the same price.                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| • | The notes are convertible at any time at the  option of the holder into shares of the Company’s common stock at a  conversion price of $0.25 per share. The conversion price is also subject to  adjustment upon the occurrence of certain specified events, including stock  dividends and stock splits, mergers or consolidations, or certain issuances  of common stock at a price below the initial conversion price of $0.25 per  share.                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| • | The number of shares of the Company’s common stock  acquired by any holder upon conversion of the notes is limited to the extent  necessary to ensure that following the conversion the total number of shares  of the Company’s common stock beneficially owned by the holder does not  exceed 4.999% of our issued and outstanding common stock.                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| • | The Company can prepay all or any portion of the  principal amount of the notes, plus any accrued but unpaid interest at 120%  of face amount, but only if certain conditions are satisfied, including an  effective registration. If the Company should elect to prepay the notes, the  holders will have 30 calendar days to convert the notes into shares of our  common stock. If the Company elects to prepay the notes, it must do so  pro-rata amongst the holders. |

 

(2) Convertible notesdue to former owners of OGC Pipeline, LLC.

(3) Miscellaneous notesfor insurance and other vendors

 

15

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**9. ROYALTY PAYABLE**

 

The Company has variousroyalty arrangements with non-working interest owners.  As of September 30, 2005 the Companyowed royalties of $845,232 to non-working interest owners and regulatoryagencies.

 

**10. EXTRAORDINARY ITEM**

 

Effective March 31,2005 the Company executed a Compromise of Debt Agreement with Koch. Thisagreement effectively reduced the principal and interest obligation on the notepayable assumed in the acquisition of OGC in February 2005. The principal andinterest was reduced to $1,100,000 as full payment on the pipeline assetsresulting in forgiveness of debt in the amount of $2,182,686 in principal andaccrued interest. The Company made payments totaling $100,000 to Koch duringthe second quarter of 2005. In July 2005, the remaining balance of$1,000,000 was paid in full.

 

**11. RELATED PARTY TRANSACTIONS**

 

The Company entered into a management servicesagreement with DGMAC, LLC effective March 15, 2005. Under the terms ofthis agreement the Company is charged $40,000 monthly for services provided byDennis McLaughlin, its Chief Executive Officer and Chairman of the Board. TheCompany and Mr. McLaughlin agreed to make no accrual of Mr. McLaughlin’scompensation, related to his management services agreement during the firstquarter of 2005. The Company resumed accrual of Mr. McLaughlin’smanagement service agreement effective July 1, 2005 upon completion of theCompany’s current funding.

 

The Company entered into a management servicesagreement with Johnny Flame Consulting, LLC effective March 15, 2005. Underthe terms of the agreement the Company is charged $15,000 monthly for servicesprovided by Christopher Chambers, its Corporate Secretary.The Company and Mr. Chambers agreed tomake no accrual of Mr. Chamber compensation, related to his managementservices agreement during the first quarter of 2005. The Company resumedaccrual of Mr. Chambers management service agreement effective July 1,2005 upon completion of the Company’s current funding.

 

The Company entered into a management services agreement with MAC Partners, LP (“MAC”) effective November 12, 2004. Under the terms of this agreement the Company is charged $45,000 monthly for general administration, human resources, turnkey office and legal services. In addition, MAC provides the services of Mr. J. Mark Ariail and Mr. Wayne McPherson, the Company’s Chief Financial Officer and Chief Operating Officer. Effective March 15, 2005, Mr. Ariail and Mr. McPherson’s services were no longer provided by MAC and they became employees of the Company. On February 15, 2005, MAC loaned the Company $112,015 through a promissory note bearing interest at 7% per annum. This promissory note was paid in full during the second quarter of 2005.

 

On January 17, 2005 theCompany entered into a Bill of Sale and Assignment Agreement whereby it conveyedownership of two generators and a gas plant, valued at approximately $500,000,to Sovereign Strategic Partners, Ltd. (“Sovereign”) in exchange for a promissorynote in the amount of $495,000.  Thisnote was secured by an Agreement of Pledge pursuant to which 20,000,000 sharesof Blue Wireless and Data, Inc. (“Blue”) were contributed as collateral.Subsequently, the Company entered into a Capital Lease Agreement with Sovereignwhereby Sovereign leased the generators and gas plant to the Company. TheCompany subsequently assigned the Sovereign promissory note to MAC in exchangefor 495,000 shares of convertible preferred stock of Blue. Mr. McLaughlincurrently serves as the Chairman of the Board of Blue and Mr. Chambersserves as Blue’s President.

 

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During the first quarter of 2005, the Company issued150,000 shares of its common stock valued at $222,000 to Blue to be pledged ascollateral for an equipment loan for Blue. During the second quarter of 2005 anadditional 681,818 shares of the Company’s common stock valued at $136,364 wereissued directly to Blue’s vendor for additional collateral required on theequipment loan due to fluctuations in the Company’s stock price. Mr. McLaughlincurrently serves as the Chairman of the Board of Blue and Mr. Chambersserves as Blue’s President.

 

**12. SUPPLEMENTAL CASH FLOW INFORMATION**

 

Significantnon-cash transactions are summarized as follows:

 
| ** **                                            | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| Common stock  issued for services                     |       | $                            | 4,411,216  |   |
| Common stock  issued in acquisition of subsidiary     |       | $                            | 4,000,000  |   |
| Stock  issuance compensation expense                  |       | $                            | 4,199,921  |   |
| Common stock  issued for investment in joint ventures |       | $                            | 4,410,800  |   |
| Gain on extinguishment  of debt                       |       | $                            | 2,182,686  |   |
| Common stock  issued for compensation                 |       | $                            | 4,893,828  |   |
| Cashless  exercise of stock warrants                  |       | $                            | 1,507,201  |   |

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

Overview

 

The Company derives its revenue primarily frommonthly oil and natural gas production sales, rental fees related to its gaspipeline and sales of bio diesel fuel. During the first quarter of 2005, theCompany started its alternative fuels business segment designed to complementthe growing need for alternative energy sources versus the increasing demand oftraditional oil and natural gas energy sources. The Company also focused onraising capital through private placements of its common stock and securingcollateralized debt financing essential to providing the capital to expand itsbusiness segments.

 

CriticalAccounting Policies

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the accompanying financial statements and related footnotes.Management bases its estimates and assumptions on historical experience,observance of industry trends and various other sources of information andfactors. Actual results could differ from these estimates. Critical accountingpolicies are defined as those that are reflective of significant judgments anduncertainties, and potentially could result in materially different results underdifferent assumptions and conditions.

 

RevenueRecognition

 

Oil and natural gas production revenue is recognizedat the time and point of sale after the product has been extracted from theground. Rental fee revenue related to transmission of gas through pipelines iscollected on a monthly basis based on the volume of gas transmitted. Revenuefrom product sales of bio diesel fuel and other sales related to servicestation operations are point of sale transactions.

 

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BusinessCombinations

 

Business combinations are accounted for using thepurchase method. Under the purchase method the Company reports the acquiredentities’ assets and liabilities at fair market value. Any excess of the fairmarket value of the consideration given over the fair market value of the netassets acquired is reported as goodwill. If the fair market value of theconsideration given is less than the fair market value of the net assetsacquired, the resulting excess of fair value of acquired net assets over thecost of the acquired entity is allocated, on a pro rata basis, against certainassets acquired in the business combination. If any excess over cost remainsafter reducing certain assets to zero, the remaining excess is recognized as anextraordinary gain. The operating statements of the Company for purchase methodcombinations report combined results only for the period subsequent to thecombination.

 

**RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30,2005**

 

Sales

 

Net product sales related to the Company’s biodiesel operations were $86,205 for the quarter ended September 30, 2005. Thecompany also realized revenue of $9,023 on rental fees related to its pipelineassets.

 

# **Cost of Sales**

# ** **

Cost of sales were $338,155 consistingof employee benefit cost, consulting fees, regulatory taxes on oil and naturalgas production, purchases of supplies and equipment depletion expense andelectric utility cost for the oil and natural gas field operations totaling$253,741. In addition, material costs related to the Company’s bio dieseloperations were $84,414.

 

Selling, General andAdministrative Expenses

 

Selling, general and administrative expenses were $10,504,361for the quarter ended September 30, 2005. These costs reflect $4.2 millionof non-cash stock compensation expense incurred through the issuance of commonstock in private placements and $1.9 million of non-cash consulting expenseincurred through the issuance of the Company’s common stock. The Company alsoincurred non-cash expense for the issuance of common stock valued at $4.2million as compensation to executive and non-executive employees. The balanceof operating expenses was primarily related to personnel salary and benefitcosts, travel, and professional fees for management, legal and accountingservices.

 

OtherIncome

 

Other income for the quarter ended September 30,2005 was $362,252. This income is primarily related to increases in the Company’sinvestment in its bio diesel alternative fuels joint venture.

 

**RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,2005**

 

Sales

 

Net sales for oil production were $178,037. Thecompany also realized revenue of $20,389 on rental fees related to its pipelineassets. Gas sales were $955. Sales related to the Company’s recently acquiredbio diesel operation contributed product sales of $86,205.

 

# **Cost of Sales**

# ** **

Cost of sales were $591,087consisting of employee benefit cost, consulting fees, regulatory taxes on oiland natural gas production, purchases of supplies and equipment depletionexpense and electric utility cost for the oil and natural gas field operationstotaling $506,673. In addition, material costs related to the Company’s biodiesel operations were $84,414.

 

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Selling, General andAdministrative Expenses

 

Selling, general and administrative expenses were $18,419,179for the nine months ended September 30, 2005. These costs reflect $4.2million of non-cash stock compensation expense incurred through the issuance ofcommon stock in private placements and $4.4 million of non-cash consultingexpense incurred through the issuance of the Company’s common stock. TheCompany also incurred non-cash expense for the issuance of common stock valuedat $4.9 million as compensation to executive and non-executive employees. Thebalance of operating expenses was primarily related to personnel salary andbenefit costs, travel, and professional fees for management, legal andaccounting services.

 

OtherIncome

 

Other income for the nine months ended September 30,2005 was $437,826. This income is primarily related to increases in the Company’sinvestment in its bio diesel alternative fuels joint venture.

 

ExtraordinaryItem

 

Effective March 31, 2005 the Company executed aCompromise of Debt Agreement with Koch. This agreement effectively reduced theprincipal and interest obligation on the note payable assumed in theacquisition of OGC in February of 2005. The principal and interest wasreduced to $1,100,000 as full payment on the pipeline assets resulting inforgiveness of debt in the amount of $2,182,686 in principal and accruedinterest. In July of 2005, the Company paid the note in full.

 

**Liquidity and Capital Resources**

 

Cash used in operating activities was $3,869,057 forthe nine months ended September 30, 2005. This use of cash reflects the cash portion of the Company’s net loss forthe period as well as increases in other assets and accounts payable andaccrued liabilities.

 

Net cash used in investing activities was $213,246 forthe nine months ended September 30, 2005. This use of cash primarilyrelated to capital expenditures for land and building construction for theCompany’s bio diesel plant and the purchase of computer equipment and software.

 

Net cash provided by financing activities was $4,059,449for the nine months ended September 30, 2005. During the third quarter of2005, the Company received proceeds of $3,000,000 related to the issuance ofconvertible notes. Proceeds from sales of common stock of $2,462,163 andproceeds from notes payable of $112,005 account for this positive cash flow. Inaddition, the Company paid down debt in the amount of $1,514,719.

 

During the period ending September 30,2005, the Company recorded a net loss of $16,729,346. Since the Companycompleted its reverse merger on October 28, 2004, the Company hasaccumulated losses aggregating $18.3 million. The Company’s continued existence is dependent upon its ability to takeadvantage of acquisition opportunities, raise capital through privatesecurities offerings, secure collateralized debt financing and use thesesources of capital to grow and enhance its oil and gas production, gas pipelinetransmission operations and alternative fuels ventures, primarily its biodiesel operations. During the fourth quarter of fiscal 2004 the Companycompleted the acquisition of BC&D Oil and Gas Corporation (“BC&D”). Theacquisition of BC&D marked the initial entrance of the Company into the oiland natural gas production business. During the first quarter of fiscal 2005,the Company negotiated the acquisition of OGC, a gas gathering company. The OGCacquisition added a pipeline network to the Company’s assets enabling theCompany to diversify into the oil and gas transmission business. In response tosoaring fuel costs, and to avail itself of government subsidies and taxincentives, the Company has pursued a strategy of developing renewable forms ofenergy, such as bio diesel. Consequently, on February 25, 2005 the Company acquired a 50%interest in Biofuels, a Mississippi-based company and on August 19, 2005,acquired an additional 30% ownership interest. On September 13, 2005, theCompany executed a share exchange with Meadows Springs, Inc. whereby theCompany contributed its 80% interest in Biofuels in exchange for 21,000,000shares of the common stock of Meadows Springs. As a consequence of the shareexchange the Company maintains a controlling interest in Meadows Springs ofapproximately 89% and Biofuels remains an indirect subsidiary of the Company.

 

In July of 2005 the Company completed a $3.0million financing consisting of convertible notes with related warrants. TheCompany collateralized certain of its oil and gas assets and properties alongwith its pipeline assets to secure this funding. The Company has also continuedto raise capital through a variety of private securities offerings of itscommon stock.

 

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Management is focusing on expanding and improvingits oil and natural gas production operations and alternative fuels ventures.Through acquisition, organic growth and funding via collateralized loans andprivate placement offerings, the Company plans to continue to increase theprofitability of its operations necessary to support operations.

 

There can be no assurance that any of management’splans as described above will be successfully implemented or that the Companywill continue as a going concern.

 

The Company’s Liquidity Plan

 

Recent operating results give rise to concerns aboutthe Company’s ability to generate cash flow from operations sufficient to makescheduled debt payments as they become due. On July 7, 2005 the Companycompleted a $3.0 million financing. This financing allowed the Company tosecure full payment of its pipeline assets and infuse capital into its oil andgas subsidiary BC&D as well as continue funding its alternative fuels jointventures. As of September 30, 2005, the Company continued to seek otherfinancing from private placements and other acquisitions to expand itsopportunities in the areas of oil and gas production, oil and gas transmissionand alternative fuels businesses. The Company has implemented cost savingmeasures including staff reductions. The Company will take additional costsavings measures, if necessary, to enhance its liquidity position.

 

The Company’s need to raise additional equity ordebt financing and the Company’s ability to generate cash flow from operationssufficient to make scheduled payments on its debts as they become due willdepend on its future performance and the Company’s ability to successfullyraise capital and implement business and growth strategies. The Company’sperformance will also be affected by prevailing economic conditions. Many ofthese factors are beyond the Company’s control. If future cash flows andcapital resources are insufficient to meet the Company’s debt obligations andcommitments, the Company may be forced to reduce or delay activities andcapital expenditures, obtain additional equity capital or restructure orrefinance its debt. In the event that the Company is unable to do so, theCompany may be left without sufficient liquidity and it may not be able to meetits debt service requirements. In such a case, this could result in asubstantial portion of the Company’s indebtedness becoming immediately due andpayable. As a result, the Company may not be able to continue operations due toliens, collateralized notes or other secured positions placed on the Company’sassets.

 

# **Off-Balance Sheet Arrangements**

 

# **At September 30, 2005 the Company had noobligations that would qualify to be disclosed as off-balance sheetarrangements.**

# ** **

RiskFactors

 

TheCompany’s revenue and operating results may fluctuate significantly fromquarter to quarter, and fluctuations in operating results could cause its stockprice to decline.

 

The Company’s revenue andoperating results may vary significantly from quarter-to-quarter due to anumber of factors. In future quarters, operating results may be below theexpectations of public market analysis or investors, and the price of itscommon stock may decline. Factors that could cause quarterly fluctuationsinclude:

 

•              the ability to secure new significantcontracts during a quarter; and

 

•              the ability to raise the necessary capital tofund working capital, execute mergers, acquisitions and asset purchases.

 

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The market in which the Company competes isintensely competitive and actions by competitors could render its services lesscompetitive, causing revenue and income to decline.

 

The ability to compete depends on a number offactors outside of the Company’s control, including:

 

•              the prices at which others offer competitiveservices, including aggressive price competition and discounting;

 

•              the ability of competitors to undertake moreextensive marketing campaigns;

 

•              the extent, if any, to which competitorsdevelop proprietary tools that improve their ability to compete; and

 

•              the extent of competitors’ responsiveness tocustomer needs.

 

The Company may not be able to compete effectivelyon these or other factors. If the Company is unable to compete effectively,market position, and therefore revenue and profitability, would decline.

 

TheCompany must continually enhance its services to meet the changing needs of itscustomers or face the possibility of losing future business to competitors.

 

Future success will depend upon the Company’sability to enhance existing services and to introduce new services to meet therequirements of customers in a rapidly developing and evolving market. Presentor future services may not satisfy the needs of the market. If the Company isunable to anticipate or respond adequately to its customers’ needs, lostbusiness may result and financial performance will suffer.

 

TheCompany is dependent on a limited number of key personnel, and the loss ofthese individuals could harm its competitive position and financialperformance.

 

The Company’s business consists primarily of thedelivery of oil and natural gas and, accordingly, its success depends upon theefforts, abilities, business generation capabilities and project execution ofits executive officers. The Company’s success is also dependent upon themanagerial, operational and administrative skills of its executive officers.The loss of any executive officer could result in a loss of customers orrevenue, and could therefore harm the Company’s financial performance.

 

TheCompany’s ability to secure debt and equity financing could have an adverseeffect on the Company’s financial health.

 

The inability to raise debt to fund working capitalmay:

 
| • | require the Company to  dedicate a substantial portion of its cash flows to pay down debt;                                                            |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                  |
| • | increase the Company’s  vulnerability to general adverse economic and industry conditions;                                                       |
|   |                                                                                                                                                  |
| • | limit the Company’s  ability to fund future working capital and other general corporate  requirements; and                                       |
|   |                                                                                                                                                  |
| • | limit the Company’s  flexibility in planning for, or reacting to, changes in the Company’s  business and the industry in which it operates. |

 

The ability to make payments on and to refinance theCompany’s debt will depend on financial and operating performance, which mayfluctuate significantly from quarter to quarter and is subject to prevailingeconomic conditions and to financial, business and other factors beyond theCompany’s control.

 

There can be no assurance that the Company’sbusiness will generate sufficient cash flow from operations or that futureborrowings will be available to it in an amount sufficient to enable it to paydebt or to fund other liquidity needs. The Company may need to refinance all ora portion of its debt on or before maturity. The Company can give no assurancethat it will be able to refinance any of its debt on commercially reasonableterms or at all.

 

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“SafeHarbor” Statement Under The Private Securities Litigation Reform Act:

 

With the exception of historical information, thematters discussed in this report are “forward looking statements” as that termis defined in Section 21E of the Securities Exchange Act of 1934.

 

Cautionaryand Forward Looking Statements

 

In addition to statements of historical fact, this Form 10-QSBcontains forward-looking statements.  Thepresentation of future aspects of the Company found in these statements issubject to a number of risks and uncertainties that could cause actual resultsto differ materially from those reflected in such statements.  Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. Without limiting the generality of the foregoing words such as “may,” “will,”“expect,” “believe,” “anticipate,” “intend,” or “could” or the negativevariations thereof or comparable terminology are intended to identifyforward-looking statements.

 

These forward-looking statements are subject tonumerous assumptions, risks and uncertainties that may cause the Company’sactual results to be materially different from any future results expressed orimplied by the Company in those statements.

 

Some of these risks might include, but are notlimited to, the following:

 

(a)           volatility or decline of the Company’s stockprice;

 

(b)           potential fluctuation in quarterly results;

 

(c)           failure of the Company to earn revenues orprofits;

 

(d)           inadequate capital to continue or expand itsbusiness, inability to raise additional capital or financing to implement itsbusiness plans;

 

(e)           failure to commercialize its technology or tomake sales;

 

(f)            rapid and significant changes in markets;

 

(g)           litigation with or legal claims andallegations by outside parties; and

 

(h)           insufficient revenues to cover operatingcosts.

 

Thereis no assurance that the Company will be profitable, the Company may not be ableto successfully develop, manage or market its products and services, theCompany may not be able to attract or retain qualified executives andtechnology personnel, the Company’s products and services may become obsolete,government regulation may hinder the Company’s business, and additionaldilution in outstanding stock ownership may be incurred due to the issuance ofmore shares, warrants and stock options, or the exercise of warrants and stockoptions, and there exist other risks inherent in the Company’s businesses.

 

TheCompany undertakes no obligation to publicly revise these forward-lookingstatements to reflect events or circumstances that arise after the datehereof.  Readers should carefully reviewthe factors described in other documents the Company files from time to timewith the Securities and Exchange Commission, including the Quarterly Reports onForm 10-QSB and Annual Report on Form 10-KSB filed by the Company andany Current Reports on Form 8-K filed by the Company.

 

**Controls and Procedures**

 

Based on the evaluation of the Company’s disclosurecontrols and procedures as of the end of the period covered by this quarterlyreport, Dennis G. McLaughlin, the President and Chief Executive Officer and J.Mark Ariail, Chief Financial Officer, have concluded that, in their judgment,the Company’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by the Company, including the Company’ssubsidiaries, in the reports it files, or submits under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized, and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules andforms. Management necessarily applied its judgment in assessing the costs and benefitsof such controls and procedures. 

 

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The Company’s disclosure controls andprocedures are designed to provide reasonable assurance of achieving theirobjectives. The Company’s executive officers, listed above, have concluded thatthe Company’s disclosure controls and procedures are effective at thatreasonable assurance level. There were no changes in the Company’s internalcontrols over financial reporting during the Company’s last fiscal quarter thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal controls over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item 1.****   ****Legal Proceedings**

 

On March 7, 2005, the Company received noticethat it has been named as a defendant, among others, by plaintiffs Donnie Hill,a former employee of the Company, and BC&D Operating Co., Inc. Case No. CV-2005-128in the Fifth Judicial District Court, State of New Mexico, for the County ofLea. The plaintiffs allege breach of contract related to certain stock purchaseagreements with the preceding owner of BC&D, breach of contract related to Mr. Hill’semployment agreement with the preceding owner of BC&D, breach of covenantof good faith and fair dealing, negligent misrepresentation, fraudulentmisrepresentation, violation of the New Mexico Securities Act by the precedingowner of BC&D, civil conspiracy, calling for the appointment of a receiverfor the assets and business affairs of BC&D, constructive trust, declaratoryjudgment related to the Company election as successor operators and lastlypunitive damages related to the above allegations. These allegations stem fromthe Company’s execution of a share exchange agreement with TKM, whereby theCompany gained control of 100% of the assets of BC&D.

 

On August 31, 2005, the parties agreed tosettle the case. Under the terms of the settlement the Company will pay to theplaintiffs a) $125,000 in cash; (b) payment in the form of the Company’scommon stock totaling $300,000, payable over 6 months; (c) 260,000 sharesof the Company’s common stock; and (d) the issuance of common stock with avalue of $63,000 as of August 31, 2005.

 

The Company has becomesubject to various claims and other legal matters in the course of conducting itsbusiness. The Company believes that neither such claims and legal matters northe cost of prosecuting and/or defending such claims and legal matters willhave a material adverse effect on the Company’s results of operations,financial condition or cash flows. No material claims are currently pending;however, no assurances can be given that future claims, if any, may not bematerial.

 

**Item 2.****   ****Change in Securities and Use of Proceeds**

 

During the quarter ended September 30, 2005,the Company issued 3,560,447 shares of common stock, via privateplacement.  The Company is seekingworking capital and funds to service its debts and to upgrade and purchaseequipment to increase its oil and natural gas production and pipeline assets. Thecommon stock was sold at prices ranging from $1.07 to $.25 per share. The grossproceeds of these sales amounted to $1,380,560. Commissions on the sales were$756,136.

 

**Item 3.****   ****Defaults upon Senior Securities** – None

 

**Item 4.****   ****Submission of Matters to a Vote of Security Holders**

 

On September 14, 2005 the Company gave noticeof action by written consent of shareholders that shareholders representingmore than 50% of the outstanding common stock on August 1, 2005 approvedan increase in the authorized shares of the Company from 150,000,000 to500,000,000.

 

**Item 5.****   ****Other Information** –None

 

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**Item 6.****   ****Exhibits and Reports on Form 8-K**

 

Reportson Form 8-K.

 
| **Date of Filing**      | ** ** | **Subject**                                                                                                  |
|-------------------------|------------|--------------------------------------------------------------------------------------------------------------|
| July 11, 2005      |       | Payment by OGC Pipeline, LLC of $1 million to Koch Pipeline Company  in satisfaction of mortgage obligation. |
| July 14, 2005      |       | Execution of Note and Warrant Purchase Agreement related to $3  million convertible notes with warrants.     |
| August 22, 2005    |       | Execution of Securities Purchase Agreement between the Company and  Earth Biofuels, Inc.                |
| September 14, 2005 |       | Execution of Share Exchange between the Company and Meadows  Springs, Inc.                              |

 
| **Exhibits.**     | ** ** | ** **                                                                                                                                                      |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.1 |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) under the Securities Act on 1934.                                                |
| Exhibit 31.2 |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) under the Securities Act on 1934.                                                |
| Exhibit 32.1 |       | Certification of Chief Executive Officer pursuant to 18 U.S.C.,  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
| Exhibit 32.2 |       | Certification of Chief Financial Officer pursuant to 18 U.S.C.,  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuantto the requirement of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized this 21st day of November, 2005.

 
|   |   | Apollo Resources International, Inc. |
|--------|--------|-------------------------------------------|
|   |   |                                      |
|   |   | /s/ Dennis G. McLaughlin, III        |   |
|   |   | Dennis G. McLaughlin, III            |
|   |   | Chief Executive Officer                   |

 

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