10-Q/A 1 form10qaeb093007.htm FORM 10 QA EB 09-30-07 form10qaeb093007.htm

10-Q 1 form10qeb093007.htm FORM 10Q EB 09-30-07

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
    
Form 10-QSB/A
   
þ
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2007
OR
o
 
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 000-50842
 

Earth Biofuels, Inc.
(Exact name of small business issuer specified in its charter)
  
Delaware
 
71-0915825
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
3001 Knox Street, Suite 403
Dallas, TX 75205
(Address of principal executive offices)
 
(214) 389-9800
(Issuer’s telephone number)
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of November 20, 2007, there were 250,720,619 shares of the registrant’s common stock outstanding.
 
Transitional Small Business Disclosure Format (check one):  Yes o     No þ

1

 
FORM 10-QSBA QUARTERLY REPORT
 
PART I FINANCIAL INFORMATION
 

Item 1.
Financial Statements
3
 
Consolidated Balance Sheets at September 30, 2007 and December 31, 2006 (unaudited)
3
 
Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2007 and 2006 (unaudited)
4
 
Consolidated Statement of Stockholders’ Equity for the Nine Month period ended September 30, 2007 (unaudited)
5
 
Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2007 and 2006 (unaudited)
6
 
Notes to Consolidated Financial Statements (unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3.
Controls and Procedures
26
PART II OTHER INFORMATION
Item 1.
Legal Proceedings
27
Item 2.
Equity Securities and Use of Proceeds
29
Item 3.
Defaults upon Senior Securities
30
Item 4.
Submission of Matters to a Vote of Security Holders
30
Item 5.
Other Information
30
Item 6.
Exhibits
31
Signatures
 
34
 
 
 
Certification of Chief Executive Officer
 
Certification of Chief Financial Officer
 
Certification of Chief Executive Officer
 
Certification of Chief Financial Officer
 











2






PART I FINANCIAL INFORMATION
EARTH BIOFUELS, INC.
(Unaudited)
($ in thousands except share amounts)
 
 
September 30, 2007
   
December 31, 2006
 
Current Assets
 
 
   
 
 
Cash and cash equivalents
  $
63
    $
  291
 
Investments in equity securities
   
35
     
285
 
Trade accounts receivable, net of allowances totaling $30 and $109
   
2,071
     
3,019
 
Inventory, finished goods
   
667
     
785
 
Prepaid expenses and other current assets
   
2,546
     
1,471
 
Notes receivable from related parties
   
2,000
     
857
 
Total Current Assets
   
7,382
     
6,708
 
 
               
Property, Plant and equipment, net of accumulated depreciation of $10,068 and $7,854
   
26,824
     
27,015
 
Investments and advances
   
11,641
     
40,860
 
Investment — related party
   
30
     
100
 
Notes receivable from related parties
   
11,709
     
5,824
 
Deferred financing fees
   
2,154
     
2,445
 
Goodwill and intangibles, net of impairment of $10,938 and $0 in 2007 and 2006, respectively
   
27,177
     
30,032
 
Prepaid and other long term assets
   
275
     
747
 
Total Assets
  $
87,192
    $
113,731
 
Current Liabilities
               
Accounts payable
  $
9,416
    $
8,064
 
Accrued interest payable
   
48,151
     
11,944
 
Payables to related parties
   
555
     
6,826
 
Demand Notes
   
390
     
250
 
Line of Credit
   
1,274
     
5,679
 
Short term convertible promissory notes, net of discount of $31,530 and $39,633
   
22,070
     
13,967
 
Term debt facilities
   
24,000
     
 
Income taxes payable
   
1,818
     
1,818
 
Total Current Liabilities and Total Liabilities
   
107,674
     
48,548
 
 
               
Commitments and contingencies
               
 
               
Stockholders’ Equity
               
Preferred stock, $.001 par value, 15,000,000 shares authorized, 0 shares issued and outstanding
   
     
 
Common stock, $.001 par value, 400,000,000 shares authorized, 252,698,785 and 233,047,225 shares issued and outstanding
   
252
     
233
 
 
               
Additional paid-in capital
   
153,930
     
145,555
 
Other comprehensive income
   
      (570 )
Treasury stock at cost (279,200 shares)
   
      (463 )
Accumulated deficit
    (174,664 )     (79,572 )
Total Stockholders’ Equity
    (20,482 )    
65,183
 
Total Liabilities and Stockholders’ Equity
  $
87,192
    $
113,731
 
See accompanying notes to consolidated financial statements
3

EARTH BIOFUELS, INC.
Statements of Operations
(Unaudited)
($ in Thousands Except Per Share Amounts)
 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
   
 
 
2007
   
2006
   
2007
   
2006
   
 
 
 
   
(Restated)
   
 
   
(Restated)
 
Sales revenue
  $
6,524
    $
16,601
    $
19,911
    $
34,224
 
Cost of sales (exclusive of items shown separately below)
   
4,622
     
16,104
     
16,708
     
33,507
 
Gross profit
   
1,902
     
497
     
3,203
     
717
 
 
                         
 
Compensation ,(including share based compensation)
   
984
     
26,297
     
7,505
     
39,406
 
Other selling, general and administrative
   
1,877
     
5,873
     
8,695
     
13,005
 
Depreciation and amortization
   
784
     
638
     
2,979
     
1,391
 
Loss on sale of fixed assets
   
13
     
     
134
     
 
Impairment losses
   
     
     
10,938
     
 
Net loss from operations
    (1,756 )     (32,311 )     (27,048 )     (53,085 )
 
                         
 
Other income (expense)
                         
 
Interest income
   
405
     
33
     
610
     
171
 
Interest expense
    (27,273 )     (6,851 )     (51,708 )     (9,982 )
Loss on equity investments
    (6,615 )    
      (15,479 )    
 
Gain/Loss on Derivatives
   
     
22,805
     
     
22,404
 
Realized losses on trading securities
            (402 )             (402 )
Other income (expenses)
   
10
     
1,042
      (396 )    
970
 
 
Total other income (expense)
    (33,473 )    
16,627
      (66,973 )    
13,161
 
 
Net loss
    (35,229 )     (15,684 )     (94,021 )     (39,924 )
Other Comprehensive expense
                         
 
Realized losses on available for sale securities
    (220 )    
      (1,071 )    
 
Total Comprehensive loss
  $ (35,449 )   $ (15,684 )   $ (95,092 )   $ (39,924 )
 
                         
 
Net loss per common share
                         
 
 
                         
 
Basic and diluted net loss
  $ (0.14 )   $ (0.09 )   $ (0.38 )   $ (0.22 )
 
                         
 
Weighted average shares
   
252,699
     
183,701
     
252,699
     
183,701
 


See accompanying notes to consolidated financial statements
4
EARTH BIOFUELS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Nine Months Period Ended September 30, 2007
(Unaudited)
($ in Thousands Except Per Share Amounts)
                                                                                                                                                                         
 
 
Common Stock Shares
   
Common Stock at Par
   
Additional Paid in Capital
   
Other Comprehensive Income (Loss)
   
Treasury Stock
   
Accumulated Deficit
   
Totals
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Balance 12/31/06 (restated)
   
233,047
    $
233
    $
145,555
    $ (570 )   $ (463 )   $ (79,572 )   $
65,183
 
Shares issued for cash
   
7,872
     
8
     
1,522
     
     
     
     
1,530
 
Shares issued for services
   
6,532
     
6
     
3,909
     
     
     
     
3,915
 
Shares issued for exercise of warrants
   
250
     
1
     
     
     
     
     
1
 
 
Shares issued for related party payables
   
 8,219
     
8
     
1,802
     
     
     
     
1,810
 
Unrealized loss on marketable securities
   
     
     
      (127 )    
     
      (127 )
Realized losses
   
     
     
     
697
     
     
     
697
 
Treasury Stock
   
279
     
     
     
     
463
     
     
463
 
Shares issued to escrow
   
2,500
     
2
     
     
     
     
     
2
 
Forfeiture of shares
    (6,000 )     (6 )    
     
     
     
      (6 )
Net Changes in discounts on convertible debt and long term debt issued with warrants
   
 
 
     
 
 
     
 
 
   1,142
     
 
 
     
 
 
     
 
 
     
 
 
 1,142
 
Net loss
   
     
     
     
     
      (95,092 )     (95,092 )
Balance
September 30, 2007
   
252,699
    $
252
    $
153,930
    $
    $
    $ (174,664 )   $ (20,482 )
   

See accompanying notes to consolidated financial statements










5

EARTH BIOFUELS, INC
For the Nine Month Periods Ended September 30, 2007 and 2006
(Unaudited)
($ in Thousands Except Per Share Amounts)
 
 
Nine Months Ended September 30,
 
 
 
2007
   
2006
 
Cash Flows from Operating Activities:
 
 
   
(Restated)
 
Total Comprehensive loss
  $ (95,092 )   $ (39,924 )
Loss on sales of fixed assets
   
121
     
 
Losses on equity securities
   
1,071
     
402
 
Depreciation
   
2,232
     
1,391
 
Amortization of debt issuance costs
   
788
     
173
 
Impairment of  investments
   
15,479
     
 
Goodwill impairment
   
10,938
     
 
Gain on derivatives
   
      (22,404 )
Share-based compensation expense
   
3,915
     
36,631
 
Debt discount amortization
   
8,199
     
6,500
 
Changes in assets and liabilities:
               
Decrease (increase) in:
               
Trade accounts receivable
   
948
      (3,490 )
Inventory
   
118
      (102 )
Prepaid expenses & other current assets
    (1,908 )     (2074 )
Related party advances
   
     
6,009
 
Notes receivable, current
   
      (3,764 )
Other Assets
   
      (118 )
Increase (decrease) in:
               
Accounts payable and accrued expenses
   
1,352
     
1,482
 
Accrued interest  payable
   
36,206
     
 
Other liabilities
    (1 )    
571
 
Net cash provided by (used in) operating activities
    (15,634 )     (18,717 )
 
               
Cash Flows From Investing Activities:
               
Cash paid for investments
    (252 )     (1,354 )
Repayments to related parties
    (2,147 )    
 
Cash paid for advances on investments
    (5,346 )     (25,945 )
Repayments from investments and advances
   
3,250
     
 
Cash paid for purchases of fixed assets
    (2,237 )     (6,813 )
Net cash used in investing activities
    (6,732 )     (34,112 )
 
               
Cash Flows From Financing Activities:
               
Proceeds from issuance of common stock
   
1,530
     
1,074
 
Proceeds from term debt facilities and line of credit
   
30,036
     
74,900
 
Repayments of long term debt and line of credit
    (9,405 )     (24,584 )
Proceeds from sale of treasury stock
   
463
     
 
Cash paid for debt issuance cost
    (486 )     (3,452 )
Net cash provided by financing activities
   
22,138
     
47,938
 
 
               
Net increase (decrease) in cash
    (228 )     (4,891 )
 
               
Cash and cash equivalents
               
Beginning of period
   
291
     
5,070
 
End of period
  $
63
    $
179
 
 
               
Supplemental Cash Flow Disclosures:
               
Cash paid for income taxes
  $
    $
 
Cash paid for interest
  $
6,183
    $
1,171
 
See accompanying notes to consolidated financial statements
 

6
 
EARTH BIOFUELS, INC.
 
(UNAUDITED)

 
NOTE 1 — BASIS OF PRESENTATION
 
The accompanying unaudited interim financial statements of Earth Biofuels, Inc. (“Earth” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Earth’s Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2006 as reported elsewhere in this Form 10-QSB have been omitted.

Tax Credits  — Earth files federal excise tax returns each quarter, claiming refundable biodiesel mixture tax credits. There were no credits for the nine months and three months ended September 30 2007, respectively.  There were no refundable tax credits received as of September 30, 2007.  These credits are accounted for on a gross basis and included as part of sales revenues when earned.

Marketable Securities — In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, securities are marked to market with gains and losses being reflected as unrealized for “available for sale” securities, and realized gains or losses for “trading securities”. At September 30, 2007 the market value of investments in equity securities was approximately $36,000. The change in fair value during the period has been determined to be other than temporary based on the deteriorations in the credit ratings of the investee, and the related losses on the investment totaling $1,071,000 is included in earnings as of September 30, 2007.

NOTE 2 — GOING CONCERN
 
Earth has incurred significant losses from operations and as of September 30, 2007, has limited financial resources. These factors raise substantial doubt about our ability to continue as a going concern.

 During the nine months ended September 30, 2007 the Company received net proceeds of $30 million from the issuance of credit facilities. We used the net proceeds in concert with other funds, to continue to execute our business plan and to finance the working capital needs of its Bio-diesel and LNG operations.

 
Earth has implemented cost saving measures, primarily in its Bio-diesel operations, by implementing cost controls designed to reduce unnecessary expenditures and operate production activities within the current economic constraints with which Earth currently operates. Earth will take additional cost savings measures, if necessary, to enhance its liquidity position. Earths’ management is attempting to seek strategic alternatives, including the pursuit of additional investors for strategic acquisitions or a merger with other businesses. Management intends to complete construction of the underlying investment projects through partnerships with other interested investors, so to provide the additional capital needed to grow and enhance its alternative fuel production and distribution operations. The accompanying financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.

On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”) with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year.  The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 120 days.



7


NOTE 3 — RESTATEMENTS
 
Earth entered into a share exchange agreement with the shareholders of Apollo LNG, (the LNG Business on November 22, 2006. Under the Agreement, Earth acquired from the shareholders all of the issued and outstanding shares of the LNG Business (the “LNG Shares”). Earth agreed to issue 18,844,222 shares of its common stock as consideration for the LNG Shares. The LNG Business had been previously acquired by Apollo on December 7, 2005.
 
Under the guidance in Statement of Financial Accounting Standards (SFAS) No. 141 transactions between companies under common control are to be accounted for at the historical cost basis. The transaction between Earth and the LNG business was a transaction between entities under common ownership and therefore recorded no adjustment for the fair value of the assets acquired. Earth follows the guidance included in Accounting Principles Board Opinion 16 by applying the pooling method in accounting for this acquisition.

 In accordance with SFAS 141 the prior year’s information has been restated to furnish comparative information.
 
NOTE 4 — INVESTMENTS, ADVANCES AND NOTES RECEIVABLE FROM RELATED PARTIES

 
Amounts representing the Company’s percentage interest in the underlying net assets of other significant subsidiaries, and less-than-majority-owned companies in which a significant ownership percentage interest is held, are included in “Investments and advances”. There were minimal related operations during the three months ended September 30, 2007 and as such the Company’s share of the net income of these companies is $0 in the consolidated statement of income. Evidence of loss in value that might indicate impairment of investments in companies accounted for on the equity method is assessed to determine if such evidence represents a loss in value of the Company’s investment that is other than temporary. Examples of key indicators include a history of operating losses, negative earnings and cash flow outlook, and the financial condition and prospects for the investee’s business segment or geographic region. If evidence of an other than temporary loss in fair value below carrying amount is determined, impairment is recognized. In the absence of market prices for the investment, discounted cash flows are used to assess fair value.
Investments and advances consist of the following entities and amounts as of and for the three and nine month periods ended September 30, 2007:

 
 
 
Description
 
Method of Accounting
 
Investment
 ($ in 000’s)
   
Advances ($ in 000’s)
   
Total
($ in 000’s)
 
 
Investments
 
 
 
   
 
   
 
 
Truckers Corner
Equity
  $
1,120
    $
5,256
    $
6,376
 
American Earth
Equity
   
     
     
 
 
Letters of Intent
 
                       
Systems Management Solutions, Inc.
Cost
   
     
     
 
Vertex Processing, LP
Cost
   
     
     
 
Biodiesel Investment Group and Bunge North America
Cost
   
4,976
     
     
4,976
 
Earth Ethanol and Liquafaction  Corporation
Cost
   
     
     
 
Earth Ethanol and HPS Development, L.L.C.
Cost
   
     
     
 
Cordele Industrial
Cost
   
     
10
     
10
 
Dineh-bi-Keya
Cost
   
     
279
     
279
 
DFI-Albemarle Bio-Refinery,        Inc.,
Cost
   
     
     
 
 
Total
 
  $
6,096
    $
5,545
    $
11,641
 

 Investments
 
Truckers Corner - 50% interest in retail facility located in Hillsboro, TX for Bio-diesel distribution. Increased investment ownership  to 50% during the second quarter of 2007 with additional advances of $726,000 during the three months ended September 30, 2007. This project is currently 86% complete.



8


American Earth Fuels Company — 51% interest (proposed) in this start up entity located in Dallas, TX created to pursue acquisitions of retail sites for Bio-diesel distribution. During 2006, the Company put down on deposit $250,000 related to a potential contract to purchase certain retail locations in Texas. In addition, advances totaling $77k had been made. Subsequent to year-end, this deposit was forfeited and the advances were written off due to the business decision to disband operations related to the retail locations. During 2007 the company was dissolved.
 
Advances on Letters of Intent 

Systems Management Solutions, Inc. (“SMS”) Advance on letter of intent for this bio-diesel production facility in San Antonio, TX - Investment deemed impaired for $22k plus  note receivable $788,000. Earth is pursuing its security interests underlying the investment.
 
Vertex Processing, LP Bio-diesel production facility in Houston, TX - On May 2, 2006, Earth entered into a letter of intent with Vertex Energy, L.P., which contemplated a joint venture in which a newly created company would own and operate a biodiesel production facility on the Houston Ship Channel in Houston, Texas. As contemplated by the letter of intent, Vertex Energy would acquire a 49% interest in the newly created company in exchange for contributing to the new operating company real property and improvements, including an existing chemical processing facility. Earth would acquire a 51% interest in the operating company in exchange for the payment of $2,500,000 and the issuance of 1,500,000 shares of our common stock to Vertex Energy. These shares were issued in October, 2006 and had a fair market value of $4,320,000. In addition advances of $658,000 had been made.

On February 5, 2007, Vertex Energy, LP & Benjamin P. Cowart alleged breach of contract and a motion for new trial was granted. We believe these allegations are substantively without merit, and are vigorously contesting the claims brought by the plaintiff, and are exercising all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain. Due to the lack of continuing operations at this location the investment amount is deemed impaired. The company has recorded losses of $2,435,000 during the first quarter 2007, $2,543,000 during the second quarter 2007, resulting in total estimated impairments of $4,978,000.
 
Biodiesel Investment Group and Bunge North America -10% investment in 30 million gallon per year Bio-diesel production facility located in Danville, Illinois – currently under construction. There were no additional investments or advances related to this investment during the three months ended September 30, 2007, nor are any future obligations required under this investment.
 
Earth Ethanol and Liquafaction Corporation , Ethanol production facility in Moses Lake, Washington - Amended agreement with 5 day termination notice by third party-additional advances of $86,000 - all deemed impaired due to  termination notice $750,000.
 
Earth Ethanol and HPS Development, L.L.C.  Ethanol production facility Plaquemines Parish, Louisiana - Litigation settled, whereby Earth received $4 million in cash, an $18 million note receivable and a non-compete agreement in settlement.
On August 31, 2006, Earth entered into letters of intent with HPS Development, L.L.C. which contemplated a joint venture in which a newly created limited liability company would own and operate a fuel ethanol distillery located on the Mississippi River in Plaquemines Parish, Louisiana. As contemplated by the letters of intent, HPS Development was to acquire a 50% interest in the newly created limited liability company in exchange for contributing to the new operating company real property and improvements, including a currently idle ethanol distillery.  Earth was to acquire a 50% interest in the operating company for a purchase price consisting of cash in the amount of $50.0 million and the issuance of 5,829,005 shares of our common stock to HPS development in addition to the assumption of a $40.0 million debt obligation to be incurred by the operating company in connection with the renovation of the facility. We anticipated the renovation of this facility would take 12 to 14 months, after which time we estimated the plant would have an ethanol production capacity of 60-80 MMGPY.  





9

 
Earth had paid approximately $27 million towards the project when a breach of contract occurred.  No shares or warrants had been issued at this time, or subsequently related to the project. Earth filed a claim for breach of contract and default by SLE under the terms of the agreement. The Claim involved enforcement of certain rights under a contribution and purchase agreement regarding the construction and operation of the ethanol plant in Belle Chasse, Louisiana that we entered into with HPS/SLE wherein HPS/SLE agreed to contribute plant and property to a new company and we agreed to provide capital necessary to obtain a fifty percent ownership interest in Earth Ethanol and collectively, to help Earth Ethanol begin the construction and retrofitting work necessary to bring the plant online. One such issue in the Claim included Earth Ethanol’s learning that HPS, via SLE, attempted to sell a portion of the facilities’ equipment to an unaffiliated third-party, namely, Southridge Ethanol, Inc., a wholly-owned subsidiary of Southridge Enterprises, Inc. This sale could have increased construction costs. In order to protect and preserve the assets of the Company, Earth Ethanol notified Southridge of its interests. Southridge subsequently chose to not seek the acquisition of such equipment.

Earth entered into a settlement agreement with HPS during June 2007, whereby Earth received $4 million in cash and a non interest bearing note for $18 million.  In addition, HPS signed an agreement not to compete valued at $5 million.  The note is payable thru 2015.  The Company has reported the non interest bearing note at fair market value totaling $13,584,874 as of September 30, 2007.  Principal of $2 million is due within the next year, and is included in notes receivable from related parties current assets. The value assigned to the non-compete agreement was determined to be impaired and losses totaling $5,000,000 were recorded. In addition, approximately $4.7 million was recorded as additional losses on this investment in the second quarter of 2007.
 
Cordele Industrial – Investment in a Cellulosic production facility located in Cordele, Georgia.  New investment in second quarter.
 
Dineh-bi-Keya - Cellulosic production facility located in Texas.  New investment in second quarter.
 
DFI-Albemarle Bio-Refinery, Inc.  Ethanol production facility located in Albemarle, North Carolina. This investment was converted to promissory notes and subsequently deemed impaired due to lack of activity. The investment totaling $5,462,416 was written off during the three months ended September 30, 2007.
 
 Notes receivable from related parties —
 
Notes receivable from related parties consists of notes related to investments bearing market rates from 4.85% to 6.25%, with collateral of underlying physical assets, and maturities in 2 to 5 years.. Total notes receivable as of Sept 30, 2007 are as follows:
 
 
 
 
 
Description
 
2007
 
 
 
($ in 000’s)
 
 
 
 
 
   HPS
  $
13,585
 
  Other related parties
   
124
 
 
       
Total
   
13,709
 
Less current portion
    (2,000 )
 
       
Long term notes receivable from related parties
  $
11,709
 
 
       
 


 Investment in related party –
Earth has an investment in Blue Wireless, a publicly traded telecommunication company, which also provides information technology support to the Company. The company owned shares in the company previously valued at $100,000.  Due to the decline is the shares value, which has been deemed other than temporary, the Company has written down the investment to $30,000, based on the most recent publicly quoted market price.  In addition, Earth had previously advanced the company $160,000, which has been deemed uncollectible and was written off to bad debt expense during the second quarter of 2007.
The 



10

 
NOTE 6 — INTANGIBLE ASSETS
 
Goodwill recorded on Earth’s balance sheet reflects the purchase price of Earth’s acquisitions exceeding the fair market value of the net assets. At September 30, 2007, Earth had recorded approximately $27,177,000 of goodwill related to its acquisition of its LNG businesses, and $3,981,280 related to the acquisition of Distribution Drive, reduced by $315,000 during the first quarter of 2007. In addition, other intangible assets consisted of a license costing approximately $2.2 million for the sales of a brand name biodiesel product, which had an unamortized balance of $2,012,000 as of March 31, 2007.
 
Earth has determined that, based on the impairment tests performed on Earth as a separate business unit from the LNG business, the intangible assets related to goodwill from the acquisition of Distribution Drive and the license for the brand name have been impaired. As such the carrying amounts of approximately $3,666,000 and $2,012,000 have been written down to zero and charged against earnings. In addition, a non-compete agreement had been obtained as a result of the settlement with the HPS investment above.  This intangible was also deemed to be impaired and $5,000,000 was charged against earnings during the quarter ended June 30, 2007. 

NOTE 7-ACCRUED INTEREST AND SHORT TERM CONVERTIBLE PROMISSORY NOTES

Convertible debt consists of the following as of September 30, 2007:
 
 
 
 
 
 
 
 
2007
 
 
 
 
 
 
8% convertible promissory notes, due August 31, 2007
 
$
53,600
 
Discount on convertible promissory notes
 
 
(31,530
)
 
 
 
 
 
Current portion of convertible promissory notes
 
    $
22,070
 
 
 
 
 
 
 
On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $52.5 million aggregate senior convertible notes that were due in 2011 to eight institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 9,051,725 shares of common stock to the investors and five-year warrants to purchase 1,357,759 shares of common stock to Earth’s placement agent, at $2.90 per share.  
On August 11, 2006,
 Earth entered into a securities purchase agreement pursuant to which Earth issued $1.1 million aggregate senior convertible notes that are due in 2011 to two institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share.  In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 232,759 shares of common stock to the investors at $2.90 per share.
At the date of original issuance the warrants had a relative fair value of $18,808,359, and Earth recognized a beneficial conversion feature in the amount of $42,906,599 based on the intrinsic value of the conversion feature. 
 
Due to ongoing renegotiations with the above investors, Earth did not make the first quarterly interest payments due October 1, 2006, or register the underlying securities within 30 days from closing in accordance with the original securities purchase agreement dated July 24, 2006 and August 11, 2006. As such, penalties and interest totaling approximately have accrued at the default rate of 15% interest, plus 1.5% for the amount outstanding for registration penalties, and an 18% late charge. Additionally there is a redemption penalty of 20% due upon settlement of the notes.
Subsequent to year end 2006 Earth brought all coupon rate interest current through the end of March 31, 2007.
 
Subsequent to the second quarter of 2007, certain of the note holders above, filed with the bankruptcy courts a Chapter 7 – Involuntary Liquidation against the company.  On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”) with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year.  The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 120 days. A confession of judgment was signed by the company noting the entire amount of debt and penalties due under the original notes was $100,651,173. Total accrued penalties were approximately $48,151,000 as of September 30, 2007.



11

Accrued unpaid penalties and interest  related to the above judgment is as follows:
 
 
 
 
 
 
Accrued interest payable on convertible debts
 
2007
 
 
 
 
 
 
 
 
 
Interest
  $
9,148
 
Late charges
   
15,120
 
Redemption fee
   
10,500
 
Registration penalites
   
13,383
 
 
       
Total interest expense
  $
48,151
 

NOTE 8 — DEMAND NOTES —
 
Earth has several demand notes totaling $390,362 as of September 30, 2007. The notes are un-collateralized, with interest at 8%, all of which is due upon demand.
 
NOTE 9 — LINE OF CREDIT
 
The LNG subsidiary obtained a new revolving credit as of March 31, 2007, and used the proceeds to repay a former line of credit. Earth obtained a $5 million revolving credit facility which is advanced at the rate of 85% of accounts receivable. Interest of prime plus 2% is payable monthly.
 
NOTE 10 — TERM DEBT FACILITIES
 
On February 28, 2007, our LNG subsidiary obtained several credit facilities totaling $15 million. The $15 million term loan is due and payable in 3 years, with interest accruing at LIBOR plus 1,000 basis points and payable monthly in advance. The loan is secured by the LNG plant facility in Topock, Arizona. In connection with this facility Warrant Purchase and Registration Right agreements were issued to purchase 13,549,816 of the Company’s common stock at $.36 per share for 10 years. At the date of original issuance the warrants had a relative fair value of $3,674,702. Amortization on the related debt discount totaled $202,560 for the three months ended September 30, 2007.
 
On March 23, 2007, Earth obtained a $9 million term loan facility. The principal amount is due in 3 years with interest payable at LIBOR plus 1,000 basis points. The loan is secured by the Durant plant facility in Durant, Oklahoma. In connection with this facility, Warrant Purchase and Registration Right agreements were issued to purchase 6,774,908 of the Company’s common stock at $.36 per share for 10 years. At the date of original issuance the warrants had a relative fair value of $1,654,643. Amortization on the related debt discount totaled $95,888 for the three months ended September 30, 2007. In June 2007 the lenders exchanged their rights to purchase the warrants in lieu of additional fees totaling $3,000,000.  These financing fees are payable at maturity of the debt and are being accrued monthly.  Total financing fee expense was $509,000 as of September 30, 2007.
 
In connection with these facilities interest reserves were escrowed totaling $1,053,000 for interest payments due the first twelve months. These facilities are also cross-collaterized.

The Company has not met underlying debt covenants related to fixed charge ratios and advances to subsidiaries.  The debtor has noted these defaults and has not relinquished their rights per the underlying debt agreements.  However, subsequent to September 30, 2007, the Company received additional fundings from the debtor in the amount of $4.7 million, which increased the amount of the existing term loan facilities.
 

12
 
NOTE 11 — STOCKHOLDERS’ EQUITY

During the quarter ended September 30, 2007, 7,218,750 shares were issued to in lieu of debt guaranteed on behalf of the parent, which had a fair market value of $1,299,375 at date of issuance.

Warrants —
Warrants granted by the Company consisted of the following for the three months ended September 30, 2007.
 
 
 
 
 
 
 
Description
Remaining Life
Exercise Price
2006
Warrants
May 4, 2006 convertible debt-(debt repaid), warrants issued to investor
 
 
8 – 9 years
$
2.00
 
920,810
May 26, 2006 convertible debt-(debt repaid), warrants issued to investor and placement agent
 
 
8 – 9 years
$
3.84
 
768,750
June 7, 2006 convertible debt-(debt repaid), warrants issued to investor and placement agent
 
 
 
8 – 9 years
$
2.93
 
1,545,000
July 10, 2006 convertible debt (debt repaid), warrants issued to investor and placement agent
 
 
 
9-10 years
$
2.50
 
1,515,000
July 21,2006 warrants issued for consulting fees
 
 
9-10 years
$
.25
 
4,000,000
July 24, 2006 convertible debt, warrants issued to investors
 
9-10 years
$
2.90
 
9,051,725
 

The weighted average exercise price for all warrants outstanding as of September 30, 2007 was $.47 per share. During the three months ended September 30, 2007, 20,124,688 shares were forfeited, and 125,000 shares were exercised.

All warrants have a five-year or ten year expiration. The warrant fair value was determined by using the Black Scholes option pricing model. Variables used in the Black-Scholes option-pricing model include (1) risk-free interest rate, (2) expected warrant life is the actual remaining life of the warrants as of the year end, (3) expected volatility was 100%-400%, and (4) zero expected dividends.

A summary of the Company’s stock warrant activity and related information at September, 30, 2007 is as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Shares
 
 
 
 
 
Weighted Average
 
 
 
Under Warrant
 
 
Exercise Price
 
 
Exercise Price
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrants outstanding at December 31, 2006
 
 
17,990,940
 
 
$
.25-3.84
 
 
$
1.02
 
Issued
 
 
20,699,724
 
 
$
.01-.36
 
 
$
.25
 
Exercised
 
 
(250,000
)
 
$
.01
 
 
$
(.01
Forfeited
 
 
(20,324,724
)
 
$
.30-.36
 
 
$
(.25
)
Expired
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrants outstanding and exercisable at September 30, 2007
 
 
18,115,940
 
 
$
.01-$3.84
 
 
$
1.01
 
 
 
 
 
 
 
 
 
 
 
 
 
 

In summary there were warrants for 18,115,940 shares of common stock, and conversion options for 18,482,760 shares outstanding both totaling 36,598,700 as of September 30, 2007. Due to net losses or anti-dilutive features these warrants and conversion options were not presented on the Consolidated Statement of Operations.
 


13

 
Share-based Compensation —
 
During the three months ended September 30, 2007, Earth issued 251,000 restricted shares for consulting services, valued at approximately $35,140.
 
There have been no stock options granted as of September 30, 2007.
 
NOTE 12 — RELATED PARTY TRANSACTIONS
 
Advances

As of September 30, 2007, Earth had payables to the following related parties totaling $555,000 as follows:
 
 
 
 
 
 
Description
 
2007
 
 
 
($ in 000’s)
 
 
 
 
 
 
Apollo International Resources, Inc. 
 
$
0
 
Other affiliates
 
 
555
 
 
 
 
 
 
Total
 
$
555
 
 
 
 
 
 
 
Apollo International Resources, Inc. is the majority stockholder of Earth, and LNG is a wholly owned subsidiary of Earth.  Amounts advanced from related parties were used to fund operations and investments of Earth. All related party payables are classified as current due to management’s intent to pay the amounts owed during the following fiscal year. During the quarter ended September 30, 2007, 7,218,750 shares were issued to in lieu of debt guaranteed on behalf of the parent, valued at $1,299,375. In addition, a contingent amount was also recorded in accrued liabilities related to these guarantees totaling $1,393,264, of which was used towards amounts owed to the parent from previous advances.
Earth also made advances totaling $969,000 to a subsidiary of the parent company Apollo Resources, which was also used towards amounts owed to the parent.
Other affiliates are shareholders of the Company, whom also provide shipping services for our liquefied natural gas.
Total shipping services for the nine months ended September 30, 2007 was approximately $3,656,000.
In addition, the affiliate advanced the company approximately $555,000 for various operating activities.

NOTE 13 — COMMITMENTS AND CONTINGENCIES
 
The Company has guaranteed secured notes issued to the parent Apollo Resources International, Inc. (“ARI”) (the parent), The secured notes were issued in the total amount of $3,550,000 to ARI and guaranteed by the Company on February 12, 2007. The notes were collateralized by 18,214,936 shares of Earth owned by the parent-ARI. The secured notes matured on July 12, 2007, and the plan of repayment was to be from the production of oil and natural gas from assets owned by ARI, and/or the underlying collateral.

Subsequent to September 30, 2007 the notes have been repaid through the sale of underlying collateral, and from the issuance of 7,218,750 additional shares of the Company’s stock, resulting in a net contingent liability of $1,393,264 still owed, and recorded in accounts payable on the Consolidated Balance Sheets as of September 30, 2007.  The fair market value of the additional shares issued and the remaining contingent liability was considered repayment by Earth on amounts due to the parent from prior advances, resulting in no losses to the Company.     

On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”) with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year.  The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 120 days.


14


Registration Payments
 
In December 2006, The FASB issued No. EITF 00-19-2 “Accounting for Registration Payment Arrangements”.  The Company adopted EITF 00-19-2 for the year ended December 31, 2006.  In connection with the Securities Purchase Agreements and the related Registration Agreements of the company, registration penalties were incurred for non timely filing of a registration statement, and effectiveness of a registration statement, equal to 2.5% per month with a maximum penalty of 12.5%.  As of September 30, 2007 these penalties total $6,652,500 and are being classified as accrued interest with a related charge to interest expense.

NOTE 14 — SEGMENT INFORMATION
 
Earth maintains one operating segment whose business is conducted through a separate legal entity that is wholly owned by Earth. This segment is Earth LNG, Inc. LNG is managed separately, as this business has distinct customer base and requires different strategic and marketing efforts. The accounting policies of the segment are the same as those described in the summary of significant accounting policies. The segment company contains liquefied natural gas production, distribution and marketing operations. The subsidiary revenues are in excess of 10% of consolidated revenues. There are no inter-segment revenues or expenses.
 
Certain segment data is included in the table below as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LNG
 
Earth Biofuels
 
Consolidated
 
 
 
($ in 000’s)
 
($ in 000’s)
 
($ in 000’s)
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2007
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
18,886
 
 
1,025
 
 
19,911
 
Income (Loss) from operations
 
$
(87)
 
 
(26,961)
 
 
(27,048)
 
Interest Expense
 
$
(2,410)
 
 
(49,298)
 
 
(51,708)
 
Net Loss for the nine months ended September 30, 2007
 
$
(1,581)
 
 
(93.511)
 
 
(95,092)
 
Property, plant and equipment, net
 
$
10,431
 
 
16,393
 
 
26,824
 
Total Assets
 
$
41,950
 
 
45,242
 
 
87,192
 
Current Liabilities
 
$
18,724
 
 
88,950
 
 
107,674
 
 

Municipal customers represent approximately 58% of the consolidated revenues related to LNG. The total sales to these customers for the nine months ended September 30, 2007 was approximately $11 million.
 
NOTE 15 — SUBSEQUENT EVENTS

H.C. Wainwright & Co., Inc. (“HCW”) commenced arbitration against us on July 20, 2006, asserting a claim for breach of contract relating to a March 7, 2006 letter allegedly appointing H.C. Wainwright our placement agent for a limited time for the sale of our securities. H.C. Wainwright is seeking an award of unpaid commissions, warrants for the purchase our common stock, and attorneys’ fees and costs. Earth filed an answering statement on August 25, 2006, and denied that it was liable to HCW for breach of contract. Among other things, Earth asserts that any agreement was terminated prior to any alleged breach, HCW failed to perform as promised, and HCW made material misrepresentations of fact to induce Earth in to the alleged agreement. An Award of Arbitration was granted in July 2007, in the absence of representation by Earth. Earth was ordered to pay $5,656,000 with 9% interest calculated annually, attorney fees of $118,887.10, and an arbitration fee of $35,120.  This matter was thought to be settled by actions taken previously by the Company. Subsequent to September 30, 2007 this matter was settled in the amount of $325,000 which was paid by the parent Apollo, and the above judgment against Earth was dismissed.

On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”) with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year.  The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 120 days.

In addition subsequent to the quarter ended September 30, 2007, the Company obtained a $4,700,000 increase on existing credit facilities.
 
 
15
 
ITEM 2.                   Management’s Discussion and Analysis.

 
The following discussion and analysis should be read in conjunction with Earth’s Financial Statements, together with the notes to those statements, included in Item 7 of this Annual Report on Form 10-KSB.
 
Overview
 
The principal business of Earth is the domestic production, supply and distribution of alternative based fuels consisting of biodiesel, ethanol and vehicle-grade liquid natural gas (“lng”). Earth produces pure biodiesel fuel (B100) for sale directly to wholesalers, and to be used as a blend stock to make B20 biodiesel. Biodiesel is a non-toxic, biodegradable diesel fuel made from soybean and other vegetable oils, and used or recycled oils and fats. Earth utilizes vegetable oils such as soy and canola oil as raw material (feedstock) for the production of biodiesel fuel. Earth’s primary bio-diesel operations are located in Oklahoma and Texas. Earth also has investments in various Ethanol plants. Ethanol is another renewable alternative fuel. Ethanol, also known as ethyl alcohol or grain alcohol, and is produced primarily from corn and wheat. Earth also produces and distributes liquefied natural gas, or lng, which is natural gas in its liquid form. Unlike pipeline quality LNG, vehicle-grade Liquid natural gas is over 98% methane with only small amounts of other hydrocarbons. Earth’s primary operations are in Arizona and California.
 
Our primary sources of revenue for the three months ended September 30, 2007 are from the sale of biodiesel fuels and lng. Our sales revenue is a function of the volume we sell and the price at which we sell. The volume of our sales is largely dependent upon demand and our ability to distribute the product. The selling prices we realize for our products are largely determined by the market supply and demand, which in turn, is influenced by industry factors over which we have little, if any, control, such as the price of gasoline and other alternative energy sources. We blend and market our biodiesel directly to fuel stations. For our biodiesel products the distribution strategy includes supplying B100 for storage and blending terminals, controlling the blending point, and obtaining exclusive agreements with terminal chains throughout the United States. We have entered into agreements with oil companies with the capability to deliver to fleet, agricultural and retail fueling terminals, and retail service stations, to expand biodiesel consumption in their local areas. For our lng products the production facility is one of only seven Vehicle Grade LNG plant in the United States. located in Topock, AZ, is just one mile east of the Arizona border with California. The plant has a maximum capacity of 86,000 gallons per day, and is currently running at approximately 96% efficiency. The facility is strategically located in close proximity to its primary metropolitan markets along the west coast to minimize transportation costs. The plant’s natural gas feedstock supply is fed by an El Paso Natural Gas pipeline. Vehicles-grade LNG is sold to credit worthy corporations and municipalities on pricing above market indices. None of the currently LNG customer are fixed priced.
 
Our gross profit is derived from our total revenues less our cost of sales. Our cost of sales is affected by the price of our purchases of biodiesel and natural gas on the open market, which are also affected by supply and demand, and the cost of raw materials used in the production process, such as soy oil and natural gas. As we implement our facility construction and expansion strategy, we expect our cost of sales to be impacted by our cost of raw materials used in production.
 
 
16
 
 Continuing Losses.  We have had net losses from operations each year since inception, and there can be no assurance that we will be profitable in the future. Our financial results depend upon many factors that impact our results of operations including sales prices of natural gas, soy oil and corn, the volume of sales of liquefied natural gas, biodiesel and ethanol, availability of and the level and success of production, development and distribution activities and financial resources to meet cash flow needs. Earths’ management is attempting to seek strategic alternatives, including the pursuit of additional financing for strategic acquisitions or a merger with other businesses. The Company has incurred significant losses from operations and as of September 30, 2007, and has limited financial resources. These factors raise substantial doubt about our ability to continue as a going concern. Management intends to raise capital through private securities offerings, secure collateralized debt financing and use these sources of capital to grow and enhance its alternative fuel production and distribution operations. If additional funds are raised by issuing debt, we may be subject to restrictive covenants that could limit our operating flexibility. Earth’s performance will also be affected by prevailing economic conditions. Many of these factors are beyond Earth’s control. There can be no assurance that adequate funds will be available when needed and on acceptable terms, or that a strategic alternative can be arranged. The accompanying financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.
 
During the fourth quarter of fiscal 2006 Earth completed the acquisition of the LNG business. The acquisition of the LNG business marked the initial entrance of Earth into the liquefied natural gas production business. The acquisition added the largest producer of wholesaler vehicle-quality LNG in the western US and Mexico, and has allowed Earth to be more diversified. Earth believes this acquisition will be a major part of establishing future financial stability. The LNG company acquisitions have produced revenues in excess of $50 million over the preceding two fiscal years.
 In response to soaring fuel costs, and to avail it of government subsidies and tax incentives, Earth has pursued a strategy of developing renewable forms of energy, such as biodiesel and ethanol. Consequently, Earth has acquired various interests in companies in Texas, N. Carolina, New Orleans, Illinois and Washington. We are working with other partners to build and refurbish plants in order to produce substantial quantities of renewable, domestic fuel.
 
Subsequent to year end 2006 Earth obtained several credit facilities totaling $33.7 million with various lenders to finance the working capital needs of its Biodiesel and LNG operations. Our partners in various Ethanol plants are raising additional equity through performance bonds and USDA guaranteed loans.
 
While we have a history of operating loss, management has made substantial progress improving the operating results of the businesses. In the LNG business, management has increased the vehicle-grade LNG production to the plant’s capacity and successfully converted the formerly fixed pricing customer contracts to variable index pricing to reduce the commodity risk of the business. The effect of the changes has made the LNG business report positive monthly cash flow and profits since the second quarter of fiscal year 2007. In the third quarter 2007, the LNG business reported approximately $1.2 million in EBITDA for the three months ended Sepember 30,2007. Management expects the LNG business to report over $400,000 EBITDA monthly after management converted the customer contracts to index pricing making the operating profit more predictable since the business does not feel the impact of LNG commodity commodity price movements. Furthermore, management has several business initiatives to improve profits namely in further expansion of the Topock production plant, reduce transportation expenses (an important component of the company’s success) and strategic joint ventures with LNG related businesses that will improve the Company’s margins or fee income.
For the biodiesel business, management is actively seeking alternatives to agriculture feedstock like soybean oil. The commodity price spread between diesel rack prices and soybean oil has steadily deteriorated since management announced the construction of the Durant, Oklahoma plant in 2006. Today, soybean oil is at an all time high and truly tied to the prices within the energy market. Management sees no changes in this relationship in the foreseeable future. Instead, management is exploring alternative non-food feedstock such as biomass, waste-oils and algae. With the sourcing of reliable feed stocks, management believes it can achieve cost advantages and make the production of biodiesel a viable profitable business.
On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”) with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year.  The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 120 days.
 
Earth has implemented cost saving measures, primarily in its Bio-diesel operations, by implementing cost controls designed to reduce unnecessary expenditures and operate production activities within the current economic constraints with which Earth currently operates. Earth will take additional cost savings measures, if necessary, to enhance its liquidity position.
 
 
17
 
Results of Operations
 
 
Comparison of Nine Months Ended September 30, 2007
To Nine Months Ended September 30, 2006
 
The following table sets forth selected data as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of operations.


 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2007
 
 
2006
 
Revenues:
 
 
 
 
 
 
 
 
Sales revenue
 
 
100
%
 
 
100
%
 
 
 
 
 
 
 
 
 
Cost of sales
 
 
84
%
 
 
98
%
 
 
 
 
 
 
 
 
 
Gross profit
 
 
16
%
 
 
2
%
Compensation
 
 
38
%
 
 
115
Other selling, general and administrative
 
 
44
%
 
 
38
%
Depreciation and amortization
 
 
15
%
 
 
4
%
 
 
 
 
 
 
 
 
 
Impairments
 
 
55
%
 
 
0
%
Net loss from operations
 
 
(136
)%
 
 
(155
)%
Interest expense
 
 
260
%
 
 
29
%
Gain on derivatives
 
 
0
%
 
 
65
%
Loss on investments
 
 
78
%
 
 
0
%
Net (loss)
 
 
(478
)%
 
 
(117
)%
 
 
 
 
 
 
 
 
 

 
 
18
 
 
Revenue.  Total revenue for the nine months ended September 30, 2007 decreased $12.5 million, or 39%, to approximately $19.9 million from approximately $32.4 million in 2006. The decrease in total revenue is primarily the result of decreased sales of biodiesel in 2007.
Cost of Sales.  The types of expenses included in the cost of sales line item include the cost of raw materials, inbound freight charges, purchasing and receiving costs, terminal fees for storage and loading of biodiesel, petro fees, chemicals, and related costs of production. Our cost of sales excludes depreciation, amortization and compensation related to the production of alternative fuels.
Cost of sales for nine months ended September 30, 2007 decreased $16.8 million, or 50%, to approximately $16.7 million from approximately $33.5 million for 2006. Our cost of goods sold is mainly affected by the cost of biodiesel, vegetable oil, and other raw materials. The decrease in cost of sales is primarily the result of decreased sales of biodiesel.
 
Compensation.  Compensation for nine months ended September 30, 2007 decreased approximately $31.9 million and related primarily to shares issued to consultants for employees and consulting services issued in 2006. The shares issued as share based compensation were valued at market consistent with SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”).
 
Other Selling, General and Administrative Expenses.  The types of expenses included in the selling, general and administrative expenses line item include salaries and benefits, office expenses, insurance, professional services, travel and other miscellaneous expenses.
Other selling, general and administrative expenses for nine months ended September 30, 2007 decreased approximately $4.3 million from approximately $13 million for the same period in 2006. The 2007 costs decrease consists of reductions in consulting, marketing, professional, administrative and travel expenses.
 
Depreciation and Amortization.  Depreciation and amortization for the nine months ended September 30, 2007 increased to approximately $3 million from $1.4 million for the same period in 2006. The increase in depreciation and amortization is related primarily to purchases of plant and equipment.
 
Impairments. Goodwill related to the prior acquisition of Distribution Drive, trademarks, and a non-compete agreement totaling $10.9 million were all deemed impaired due to continuing losses related to biodiesal fuels.
Gain on derivatives. A gain totaling $22 million was recorded in 2006 relating to convertible debts and securities.
   Losses on investments. Investments in various proposed plants were deemed impaired during 2007 totaling $15.5 million for the nine        months ended September 30, 2007.
Interest Expense.  Interest expense related primarily to short term convertible debts and long term debts for the nine months ended September 30, 2007 was approximately $51.7 million from $10 million for the same period in 2006. Interest expense consisted primarily of interest fees, late charges, redemption premiums and registration penalties related to defaults on agreements in late 2006 and 2007.
 
Comparison of Three Months Ended September 30, 2007
 
To Three Months Ended September 30, 2006
 The following table sets forth selected data as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of operations.
 
 
 
   
 
 
 
 
 
   
 
 
 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2007
   
2006
 
Revenues:
 
 
   
 
 
Sales revenue
    100 %     100 %
 
               
Cost of sales
    71 %     97 %
 
               
Gross profit
    29 %     3 %
Compensation
    15 %     158 %
Other selling, general and administrative
    29 %     35 %
Depreciation and amortization
    12 %     4 %
 
               
Net loss from operations
    (27 )%     (195 )%
Interest expense
    418 %     41 %
Gain on derivatives
    0 %     137 %
Loss on investments
    101 %     0 %
Net (loss)
    (543 )%     (94 )%
 
               


 
 
19
 
 
Revenue.  Total revenue for the three months ended September 30, 2007 decreased $10 million, or 61%, to approximately $6.5 million from approximately $16.6 million in 2006. The decrease in total revenue is primarily the result of decreased sales of biodiesel.
Cost of Sales.  Cost of sales for three months ended September 30, 2007 decreased $11.4 million, or 71%, to approximately $4.6 million from approximately $16.1 million for 2006. Our cost of goods sold is mainly affected by the cost of biodiesel, vegetable oil, and other raw materials. The decrease in cost of sales is primarily the result of decreased sales of biodiesel in 2007.
 
Compensation.  Compensation for three months ended September 30, 2007 decreased approximately $25.3 million and related primarily to shares issued to consultants for employees and consulting services in 2006. The shares issued as share based compensation were valued at market consistent with SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”).
 
Other Selling, General and Administrative Expenses.  Other selling, general and administrative expenses for three months ended September 30, 2007 decreased approximately $4 million from approximately $5.8 million for the same period in 2006. The decrease consists of reductions in consulting, marketing, professional, administrative and travel expenses during 2007.
 
Depreciation and Amortization.  Depreciation and amortization for three months ended September 30, 2007 increased to approximately $784,000 million from $638,000 for the same period in 2006. The increase in depreciation and amortization is related primarily to purchases of plant and equipment.
Gain on derivatives. A gain totaling $22 million was recorded in 2006 relating to convertible debts and securities.
Losses on investments.  Biodiesal investments were deemed impaired during 2007 totaling $6.6 million for the nine        months ended September 30, 2007.
 
Interest Expense.  Interest expense related primarily to short term convertible debts and long term debts for three months ended September 30, 2007 was approximately $27.2 million from $6.8 million for the same period in 2006. Interest expense consisted primarily of interest fees and the amortization of debt discounts. Interest expense consisted primarily of interest fees, late charges, redemption premium, and registration penalties related to defaults on agreements in late 2006 and 2007.

Liquidity and Capital Resources
 
Overview.  Our principal sources of liquidity consist of cash and cash equivalents, cash provided by operations and from obtaining approximately $30 million in term debt facilities. During the nine months ended September, 30, 2007 our cash and cash equivalents decreased by approximately $228,000 from the same period in 2006, primarily as the result of reduction in sales related to biodiesal operations during 2007.
 
Net cash used in operating activities was approximately $15.6 million for nine months ended September 30, 2007 compared to net cash used in operating activities of approximately $18.7 million for the same period in 2006. The decrease in net cash flow used in operating activities relates to decreasing operating costs as a result of reducing production of biodiesal fuels due to current economic prices of feedstock.
 
Net cash used in investing activities was approximately $6.7 million for nine months ended September 30, 2007 compared to net cash used in investing activities of approximately $34.1 million for the same period in 2006. The decrease in net cash used in investing activities related to purchases of fixed assets of $6.8  million during 2006 for our Durant facility, and a decrease of $22.8 million related to investments and advances related to letters of intent and investments we have entered into to own and operate biodiesel and ethanol facilities during 2006.
 
Net cash provided by financing activities was $22.1 million for nine months ended September 30, 2007 compared to net cash provided by financing activities of approximately $47.9 million for the same period in 2006. Cash flows
provided by financing activities during nine months ended September 30, 2007 relate primarily to new credit facilities totaling $30 million, less the repayment of prior debts of $9.4 million.  
We incurred net losses and negative cash flows from operations of approximately $95 million and $15.6 million, respectively, for the nine months ended September 30, 2007. Of the net losses for the nine months ended September 30, 2007 approximately $10.9 million related to the impairment of goodwill and intangibles, $15.5 million related losses on investments deemed impaired, and accrued interest and penalties totaling $51.7 million. We had approximately $63,000 in cash and cash equivalents at September 30, 2007. Our working capital deficit at nine months ended September 30, 2007 was approximately $100 million.
 
Current and Future Financing Needs —
Our limited operating history makes evaluating our business and prospects difficult. Our limited operating history and recent acquisitions make it difficult to evaluate our current business and prospects or to accurately predict our future revenues or results of operations.  Our revenue and income potential are unproven, and our business plan is constantly evolving.  The market for alternative fuels is evolving and we may need to continue to modify our business plan to adapt to these changes.  As a result, we are more vulnerable to risks, uncertainties, expenses and difficulties than more established companies.
Some of these risks relate to our potential inability to: effectively manage our business and operations; successfully maintain our low-cost structure as we expand the scale of our business; and manage rapid growth in personnel and operations.
We have a history of operating losses and we anticipate losses for the foreseeable future.  Unless we are able to generate profits and positive cash flow we may not be able to continue operations. We incurred consolidated net losses from operations of approximately $23 million, before depreciation and other non-cash based expenses, for the nine months ended September 30, 2007. We expect operating losses to continue for the foreseeable future as we incur expenditures for start up business operations and until the additional investors are obtained and construction of all plants are completed. With increased on-going operating expenses, we will need to generate significant revenues to achieve profitability.  Consequently, we may never achieve profitability.  Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future.
For the year ended December 31, 2006, the report of our independent registered public accounting firm stated that our financial statements were prepared assuming that we would continue as a going concern.  We continue to experience net operating losses.  Our ability to continue as a going concern is subject to our ability to generate and increase profits, and obtain additional investors and necessary funding from outside sources.
We may have difficulty raising additional capital, which could deprive us of necessary resources to grow our business and achieve our business objectives and expansion strategy. We expect to continue to devote capital resources to fund our business plan. Our ability to raise additional funding depends on many factors beyond our control, including the state of capital markets, the market price of our common stock and the prices of various commodities, particularly the prices of ethanol, soybean, corn, natural gas and unleaded gasoline.  We might not have access to the funding required for the expansion of our business or such funding might not be available to us on acceptable terms. Given our current indebtedness, and limited liquidity and access to financial markets and required amounts of cash flow required to service our debt, we have increased our financial risks and have decreased the amount of funds available for our growth strategy, thereby making it more challenging to implement our strategy in a timely manner.
Because our common stock is listed on the NASD OTC Bulletin Board, many investors may not be willing or allowed to purchase it or may demand steep discounts.  Sufficient additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock.  If we are unable to raise additional funds when we need them, we may have to severely curtail our operations and expansion plans.
 
 
20
 
If we fail to remain current on our reporting requirements, we could be removed from the over-the-counter bulletin board, which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. Companies trading on the over-the-counter bulletin board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13 in order to maintain price quotation privileges on the over-the-counter bulletin board.
There is significant volatility in our stock price. The trading price of our common stock on the over-the-counter bulletin board has been and continues to be subject to wide fluctuations.  The market price of our common stock could be subject to significant fluctuations in response to various factors and events, including, among other things, the depth and liquidity of the trading market of our common stock, quarterly variations in actual or anticipated operating results, growth rates, changes in estimates by analysts, market conditions in the industry, announcements by competitors, regulatory actions and general economic conditions.  In addition, the stock market from time to time experiences significant price and volume fluctuations, which may be unrelated to the operating performance of particular companies.  As a result of the foregoing, our operating results and prospects from time to time may be below the expectations of public market analysts and investors.  Any such event would likely result in a material adverse effect on the price of our common stock. In addition, the trading price of our common stock will continue to be volatile in response to factors including the following, many of which are beyond our control: variations in our operating results; announcements of technological innovations, new products or new services by us or our competitors; changes in expectations of our future financial performance, including financial estimates by securities analysts and investors; our failure to meet analysts’ expectations; changes in operating and stock price performance of other energy companies similar to us; fluctuations in oil and gas prices; conditions or trends in the oil and gas and alternative fuels industry; additions or departures of key personnel; and future sales of our common stock.
The loss of any of our key personnel would likely have an adverse effect on our business. Our future success depends, to a significant extent, on the continued services of our key personnel, including plant managers.  Our loss of any of these key personnel most likely would have an adverse effect on our business.  Competition for personnel throughout the industry is intense and we may be unable to retain our current management and staff or attract, integrate or retain other highly qualified personnel in the future.  If we do not succeed in retaining our current management and our staff or in attracting and motivating new personnel and plant managers, our business could be materially adversely affected.
We may not be able to protect and enforce our intellectual property rights, which could result in the loss of our rights or increased costs. Our future success depends to a significant degree upon the protection of our proprietary technology.  The misappropriation of our proprietary technology would enable third parties to benefit from our technology without paying us for it.  Although we have taken steps to protect our proprietary technology, they may be inadequate and the unauthorized use thereof could have a material adverse effect on our business.  If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive, even if we were to prevail.
Our expansion plans, including with respect to the sites in Texas, Oklahoma, Tennessee, Kentucky, Illinois and Mississippi, are subject to significant risks and uncertainties with respect to timing of completion, financing of construction costs and our ability to timely realize the benefits we anticipate of these additional sites. Accordingly, investors should not place undue reliance on our statements about our expansion plans or their feasibility in the timeframe anticipated or at all.
Our construction costs could increase to levels that would make construction of new facilities too expensive to complete or unprofitable. Our construction costs could materially exceed budgets, which may adversely affect our financial condition and our anticipated operating results. We believe that contractors, engineering firms, construction firms and equipment suppliers increasingly are receiving requests and orders from other biodiesel/ethanol companies and, therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial or commercial terms. We may suffer significant delays or cost overruns as a result of a variety of factors, such as shortages of workers or materials, transportation constraints, adverse weather, unforeseen difficulties or labor issues, any of which could prevent us from commencing operations as expected at our facilities. Any new facility that we may complete may not operate as planned.
Our results of operations and financial condition will be significantly affected by the market price for biodiesel and the co-products from biodiesel production.  Price and supply are subject to and determined by market forces over which we have no control. Presently there are more than 165 companies that have invested millions of dollars into the development of biodiesal manufacturing plants and are actively marketing biodiesal. Based on existing dedicated processing capacity and long term construction agreements 1.85 billion gallons of biodiesal capacity currently exists.  Eighty companies have reported that their plants are currently under construction and scheduled to be completed within the next 18 months.  In addition, investors should understand that we face a competitive challenge from larger biodiesel plants and from biodiesel plants owned and operated by the companies that supply our inputs.  Cargill, Inc., a large supplier of soybean oil, is constructing a 37.5 million gallon biodiesel plant in Iowa Falls.  Another large corporation and supplier of soybean oil, Archer Daniels Midland Co., plans to construct a 50 million gallon biodiesel plant in North Dakota.  These plants will be capable of producing significantly greater quantities of biodiesel than the amount we will produce.  Furthermore, these plants may not face the same competition we do for feedstock as the companies that own them are suppliers of the feedstock.  In light of such competition, there is no assurance that we will be able to compete effectively in the industry.  We may generate less income as a result, which would decrease the value of your shares.
Although the price of diesel fuel has increased over the last several years and continues to rise, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel.  In addition, other more cost-efficient domestic alternative fuels may be developed and displace biodiesel as an environmentally-friendly alternative.  If diesel prices do not continue to increase or a new fuel is developed to compete with biodiesel, it may be difficult to market our biodiesel, which could result in the loss of some or all of your investment.
 
The success of our operations and business growth and expansion strategy depends upon our ability to raise additional equity and debt financing and our ability to generate sufficient cash flow from operations. We expect to continue to devote capital resources to fund our business plan. In order to support the initiatives envisioned in our business plan, we intend to raise additional funds through the sale of equity, debt or a combination of the two. Our operating performance and ability to raise additional financing depends on many factors beyond our control, including the prevailing economic conditions, state of the capital markets, the market price of our common stock and other risks and uncertainties including the prices of various commodities, particularly the prices of ethanol, soybean, corn, natural gas and petroleum diesel gasoline, our dependence on key suppliers and adverse changes in governmental incentives and governmental regulation. We might not have access to the funding required for the expansion of our business or such funding might not be available to us on acceptable terms. We might finance the expansion of our business with additional indebtedness or by issuing additional equity securities. The amount of any additional indebtedness could be substantial. We could face financial risks associated with incurring additional indebtedness, such as reducing our liquidity and access to financial markets and increasing the amount of cash flow required to service our debt, or associated with issuing additional stock, such as dilution of ownership and earnings. An increase in our debt would decrease the amount of funds available for our growth strategy, thereby making it more challenging to implement our strategy in a timely manner, or at all. If future cash flows and capital resources are insufficient to meet our debt obligations and commitments, we may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital or debt financing. In the event that we are unable to do so, we may be left without sufficient liquidity and we may not be able to continue operations.
 
We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy. Earth acquired a liquid natural gas (“LNG”) production company in November 2006. This company is the largest producer and wholesaler of vehicle-quality liquid natural gas in the United States and is one of only five production facilities in the country that produces clean liquid natural gas. This company offers turnkey fuel solutions, and leases storage, fuel dispensing equipment and fuel loading facilities. The LNG markets include transportation alternative fuel for transit systems, seaports, local delivery fleets and locomotive switch engines. This gas also has industrial and agricultural applications. Earth currently produces 86,000 gallons per day, and expects to expand its production capacity to 58.5 million gallons per year through the construction of an additional plant, and expand market area concentrations.
 
Management is focusing on expanding and improving its biodiesel production and distribution operations. Through acquisition, organic growth and funding via collateralized loans and private placement offerings, Earth plans to continue to increase the profitability of its operations necessary to support operations.
 
On February 28, 2007 and March 1, 2007 our LNG subsidiary obtained several credit facilities totaling $15 million and $5 million, respectively. The loan is secured by the LNG plant facility in Topock, Arizona. The $5 million revolving credit facility is advanced at the rate of 85% of accounts receivable. On March 23, 2010, Earth obtained a $9 million term loan facility. The principal amount is due in 3 years. The loan is secured by the Durant plant facility in Durant, Oklahoma.
On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”) with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year.  The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 120 days.

 
21
 
Critical Accounting Policies and Estimates

 
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the amounts reported 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 and factors. Estimates are based on information available as of the date of the financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions. The most critical accounting policies and estimates are described below.
 
Revenue Recognition — The geographic location of our customer base is primarily in the Texas and California markets, although management intends to expand operations throughout the Southeastern and Southwestern United States. Sales are recorded at net realizable value, net of allowances for returns, upon shipment of products to customers. We record revenue from federal incentive programs related to the production of biodiesel when we have produced, sold, blended the biodiesel, and completed all the requirements of the applicable incentive program. These are accounted for on a gross basis.
 
Business Combinations — Business combinations are accounted for using the purchase method. Under the purchase method, we report the acquired entities’ assets and liabilities at fair market value as of the date of purchase. Any excess of the fair market value of the consideration given over the fair market value of the net assets acquired is reported as goodwill. If the fair market value of the consideration given is less than the fair market value of the net assets acquired, the resulting excess of fair value of acquired net assets over the cost of the acquired entity is allocated, on a pro rata basis, against certain assets acquired in the business combination. If any excess over cost remains after reducing certain assets to zero, the remaining excess is recognized as an extraordinary gain.
 
Accounting for Stock Based Compensation — We use the principles defined in SFAS 123, “Accounting for Stock-Based Compensation,’ to account for stock options, awards and warrants. Under this pronouncement, we determine the fair value of awards, options and warrants using the Black-Scholes Option Price Calculation model, and recognize the fair market value of the options, awards and warrants when granted or vested.
 
Accounting for Derivatives — Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended, requires all derivatives to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in our structured borrowings, are separately valued and accounted for on our balance sheet. Fair values for exchange-traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.
 
In September 2000, the Emerging Issues Task Force (“EITF”) issued EITF Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock,” (“EITF 00-19”) which requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in earnings. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required. In accordance with SFAS 133 and EITF 00-19, we determined that several of the outstanding warrants to purchase our common stock and the embedded conversion feature and certain other features of several of our financial instruments should be separately accounted for as assets or liabilities. Our financial statements reflect the fair value of these warrants and the conversion and other embedded derivatives features on our balance sheet and the unrealized changes in the values of these derivatives in our consolidated statements of operations as “Gain (loss) on derivative liability.” As the notes which included derivatives were paid or converted during the quarter, there is no derivative liability at year end 2006.
 
Net Loss Per Share Data — Basic and diluted net loss per common share are presented in conformity with the SFAS No. 128, “Earnings Per Share”. Diluted net loss per share is the same as basic net loss per share as the inclusion of outstanding warrants until their exercise would be anti-dilutive.
 
Reclassifications — Certain previously reported amounts have been reclassified to conform to the current presentation.
 
Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
Impairment of Long-Lived Assets — In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, Earth reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. Earth assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value.
 
Recent Accounting Pronouncements
 
On February 16, 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. Earth does not expect its adoption of this new standard to have a material impact on its financial position, results of operations or cash flows.
 
 
22
 
NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not impose fair value measurements on items not already accounted for at fair value; rather it applies, with certain exceptions, to other accounting pronouncements that either require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated financial position and results of operations.
In December 2006, The FASB issued No. EITF 00-19-2 “Accounting for Registration Payment Arrangements”.  This FASB Staff Position (FSP) addresses an issuer’s accounting for registration payment arrangements. This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. EITF 00-19-2 is effective for fiscal years beginning after December 15, 2006 and interim periods within those fiscal years. The Company adopted EITF 00-19-2 for the year ended December 31, 2006.  Registration payment arrangements were classified as accrued interest and interest expense in the December 31, 2006 10KSBA filing.

Off-Balance Sheet Arrangements
 
At September 30, 2007 Earth had no obligations that would qualify to be disclosed as off-balance sheet arrangements.
 
Contractual obligations
 
Current Debt Obligations —
 
On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $52.5 million aggregate senior convertible notes that are due in 2011 to eight institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share (without any buyback options required by the Earth).

In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 9,051,725 shares of common stock to the investors and five-year warrants to purchase 1,357,759 shares of common stock to Earth’s placement agent, at $2.90 per share. Earth used the net proceeds from this offering to repay in full the remaining unpaid principal and accrued and unpaid interest on our $20.0 million aggregate principal amount of senior convertible promissory notes issued in May, June and July 2006, and expects to use the remaining proceeds from the offering for its program of building and acquiring interests in biodiesel and ethanol production facilities, and for other general corporate purposes.
 
On August 11, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $1.1 million aggregate senior convertible notes that are due in 2011 to two institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in March, 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 232,759 shares of common stock to the investors at $2.90 per share.
 
Earth has several demand notes totaling $200,000 as of March 31, 2007. The notes are un-collateralized, with interest at 8%, all of which is due upon demand.
 
On January 19, 2007 Earth obtained proceeds totaling $750,000 from three separate individuals and companies. In connection with this debt Earth issued warrants for common stock totaling 375,000 shares, exercisable at $.01 per share for 10 years. The notes were repaid in March 2007. At the date of original issuance the warrants had a relative fair value of $750,000. Amortization on the debt discount totaled $750,000 for the six months ended June 30, 2007.
 
The LNG subsidiary obtained a new revolving credit as of March 31, 2007, and used the proceeds to repay a former line of credit. Earth obtained a $5 million revolving credit facility which is advanced at the rate of 85% of accounts receivable. Interest of prime plus 2% is payable monthly
 
On February 28, 2007, our LNG subsidiary obtained several credit facilities totaling $15 million. The $15 million term loan is due and payable in 3 years, with interest accruing at libor plus 1,000 basis points and payable monthly in advance. The loan is secured by the LNG plant facility in Topock, Arizona.
On March 23, 2007, Earth obtained a $9 million term loan facility. The principal amount is due in 3 years with interest payable at LIBOR plus 1,000 basis points. The loan is secured by the Durant plant facility in Durant, Oklahoma. In connection with this facility,  
In connection with these facilities interest reserves were escrowed totaling $1,053,000 for interest payments due the first twelve months.
 
Leases —
 
On October 17, 2005, EBO leased a truck stop in Grenada, Mississippi from RBB Properties, LLC which is controlled by R. Bruce Blackwell, a shareholder and Director of Earth. The lease agreement provides for monthly payments of $10,000 over a five year term. EBO is responsible for operations and repair and maintenance of the facility.

 
23
 
Risk Factors

 
Feedstocks, natural gas, petroleum products and chemical prices have fluctuated in response to changing market forces. The impacts of these price fluctuations on earnings have varied. For any given period, the extent of actual benefit or detriment will be dependent on the price movements of individual types of feedstocks, taxes and other government impacts, price adjustment lags in long-term contracts, and natural gas production volumes. Accordingly, changes in benchmark prices for these raw materials only provide a broad indicator of changes in the earnings experienced in any particular period. In these very competitive environments, earnings are primarily determined by margin capture rather than absolute price levels of products sold. Operating margins are a function of the difference between what a produces pays for its raw materials and the market prices for the range of products produced. These prices in turn depend on global and regional supply/demand balances, inventory levels, plant operations, import/export balances and weather. Such conditions, along with the capital-intensive nature of the industry and very long lead times associated with many of our projects, underscore the importance of obtaining a strong financial position.
 
Earth’s revenue and operating results may fluctuate significantly from quarter to quarter, and fluctuations in operating results could cause its stock price to decline.
 
Earth’s revenue and operating results may vary significantly from quarter-to-quarter due to a number of factors. In future quarters, operating results may be below the expectations of public market analysis or investors, and the price of its common stock may decline. Factors that could cause quarterly fluctuations include:

 
·  
the ability to quickly bring new production capacity on stream;
·  
the fluctuating prices of feedstocks and natural gas;

·  
the ability to raise the necessary capital to fund working capital, execute mergers, acquisitions and asset purchases;

The market in which Earth competes is intensely competitive and actions by competitors could render its services less competitive, causing revenue and income to decline;
 
The ability to compete depends on a number of factors outside of Earth’s control, including:
 

·  
the prices at which others offer competitive services, including aggressive price competition and discounting;
·  
actions taken by the Federal Government or State Governments to remove subsidies and tax credits associated with the biodiesel business;

·  
large swings in the price of oil which will affect the price at which Earth can purchase fuel supplies;
·  
the ability of competitors to undertake more extensive marketing campaigns;

·  
the extent, if any, to which competitors develop proprietary tools that improve their ability to compete; and
·  
the extent of competitors’ responsiveness to customer needs.

 
24
 
·  
Earth may not be able to compete effectively on these or other factors. If Earth is unable to compete effectively, market position, and therefore revenue and profitability, would decline.

·  
Earth must continually enhance its services to meet the changing needs of its customers or face the possibility of losing future business to competitors.

·  
Future success will depend upon Earth’s ability to enhance existing products and to introduce new products to meet the requirements of customers in a rapidly developing and evolving market. Present or future products may not satisfy the needs of the market. If Earth is unable to anticipate or respond adequately to its customers’ needs, lost business may result and financial performance will suffer.

·  
Earth is dependent on a limited number of key personnel, and the loss of these individuals could harm its competitive position and financial performance.
 
Earth’s business consists of the production, marketing, distribution and sale of biodiesel fuel, LNG and ethanol through Earth’s network of wholesale and retail outlets and, accordingly, its success depends upon the efforts, abilities, business generation capabilities and project execution of its executive officers. Earth’s success is also dependent upon the managerial, operational and administrative skills of its executive officers. The loss of any executive officer could result in a loss of customers or revenue, and could therefore harm Earth’s financial performance.
 
Earth’s ability to secure debt and equity financing could have an adverse effect on Earth’s financial health.
 
The inability to raise capital to fund working capital needs may:

 
·  
increase Earth’s vulnerability to general adverse economic and industry conditions;

·  
limit Earth’s ability to fund future working capital and other general corporate requirements; and

·  
limit Earth’s flexibility in planning for, or reacting to, changes in Earth’s business and the industry in which it operates.

There can be no assurance that Earth’s business will generate sufficient cash flow from operations or that future borrowings will be available to it in an amount sufficient to enable it to obtain debt or to fund other liquidity needs.
 
Forward Looking Statements
 
Certain disclosure and analysis in this report, including information incorporated by reference, includes forward-looking statements that are subject to various risks and uncertainties. In addition to statements of historical fact, this Annual Report on Form 10-KSB contains forward-looking statements. The presentation of future aspects of Earth’s business found in these statements is subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis 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 negative variations thereof or comparable terminology are intended to identify forward-looking statements.
 
These forward-looking statements are subject to certain events, circumstances, assumptions, risks and uncertainties that may cause Earth’s actual results to be materially different from any future results expressed or implied by Earth in those statements. Some of these risks might include, but are not limited to, the following:
 
 
 
 
 
• 
volatility or decline of Earth’s stock price;
 
 
 
 
• 
potential fluctuation in quarterly results;
 
 
 
 
• 
ability of Earth to earn revenues or profits;
 
 
 
 
• 
sufficiency of revenues to cover operating costs;
 
 
 
 
• 
availability and cost of raw materials;
 
 
 
 
• 
any impact of competition, competitive products, and pricing;
 
 
 
 
• 
adequacy of capital to continue or expand its business, inability to raise additional capital or financing to implement its business plans;
 
 
 
 
• 
ability to commercialize its technology or to make sales;
 
 
 
 
• 
overall expected growth in the alternative fuels industry;
 
 
 
 
• 
changes in interest rates and capital market conditions;
 
 
 
 
• 
changes in laws and other regulatory actions;
 
 
 
 
• 
acquisitions of business enterprises, including the ability to integrate acquired businesses effectively;
 
 
 
 
• 
litigation with or legal claims and allegations by outside parties; and
 
 
 
 
 
• 
other assumptions described in this report, as well as other reports filed with the United States Securities and Exchange Commission, underlying such forward-looking statements.
 
There is no assurance that Earth will be profitable. Earth may not be able to successfully develop, manage or market its products and services, Earth may not be able to attract or retain qualified executives and technology personnel, Earth’s products and services may become obsolete, government regulation may hinder Earth’s business, and additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of warrants and stock options, and other risks inherent in Earth’s businesses.
 
Earth undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the factors described in other documents Earth files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB filed by Earth and any Current Reports on Form 8-K filed by Earth.
 

 
25
 
Item 3.  Controls and Procedures
 
Our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the SEC. These disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by other of our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the Sec’s rules and forms.
 
Changes were made in our internal control over financial reporting during our last fiscal quarter to which this Quarterly Report on Form 10-QSB relates that have materially affected our internal control over financial reporting. Based on their evaluation, as of September 30, 2007, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are not effective.
 
Extension of Compliance Date for Management’s Report on Internal Control Over Financial Reporting
 
Earth is a non-accelerated filer as defined in Rule 12b-2 of the Exchange Act. On September 21, 2005, the Securities and Exchange Commission extended the compliance dates for non-accelerated filers concerning the provisions of Exchange Act Rule 13a-15(d) or 15d-15(d), whichever applies, requiring an evaluation of changes to internal control over financial reporting requirements with respect to Earth’s first periodic report due after the first annual report that must include management’s report on internal control over financial reporting. A company that is a non-accelerated filer must begin to comply with these requirements for its first fiscal year ending on or after July 15, 2007. In addition, the compliance period was extended to the amended portion of the introductory language in paragraph 4 of the certification required by Exchange Act Rules 13a-14(a) and 15d-14(a) that refers to the certifying officers’ responsibility for establishing and maintaining internal control over financial reporting for Earth, as well as paragraph 4(b). The amended language must be provided in the first annual report required to contain management’s internal control report and in all periodic reports filed thereafter. The extended compliance dates also apply to the amendments of Exchange Act Rules 13a-15(a) and 15d-15(a) relating to the maintenance of internal control over financial reporting.
 
Under the internal control reporting provisions of the Exchange Act, management will be responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
 
Earth’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Earth; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Earth are being made only in accordance with authorizations of management and directors of Earth; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Earth’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Prior to the extended deadline in 2007, management will conduct an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management will determine whether Earth’s internal control over financial reporting is effective. Management’s assessment of the effectiveness of Earth’s internal control over financial reporting will be audited by an independent registered public accounting firm and stated in their report which will be included in Earth’s Form 10-KSB filing.
 
There were no changes other than those noted above in Earth’s internal controls that have materially affected, or are reasonably likely to materially affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 

 
26
 
PART II OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
H.C. Wainwright & Co., Inc. (“HCW”) commenced arbitration against us on July 20, 2006, asserting a claim for breach of contract relating to a March 7, 2006 letter allegedly appointing H.C. Wainwright our placement agent for a limited time for the sale of our securities. H.C. Wainwright is seeking an award of unpaid commissions, warrants for the purchase our common stock, and attorneys’ fees and costs. Earth filed an answering statement on August 25, 2006, and denied that it was liable to HCW for breach of contract. Among other things, Earth asserts that any agreement was terminated prior to any alleged breach, HCW failed to perform as promised, and HCW made material misrepresentations of fact to induce Earth in to the alleged agreement. The arbitration proceeding is at an early stage and no discovery has been taken or dates established. Earth intends to vigorously defend this claim. We believe these allegations are substantively without merit, are vigorously contesting the claims brought by the plaintiff, and are exercising all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain. An Award of Arbitration was granted in July 2007, in the absence of representation by Earth. Earth was ordered to pay $5,656,000 with 9% interest calculated annually, attorney fees of $118,887.10, and an arbitration fee of $35,120.  This matter was thought to be settled by actions taken previously by the Company. Earth is currently deciding whether to take legal action against HC Wainwright for fraud. In addition, Earth is appealing this award and losses, if any, cannot be reasonably estimated at this time.

Subsequent to the quarter ended September 30, 2007 the above judgment was extinguished by court order upon the payment of the company’s parent, Apollo Resources totaling $325,000 to Wainwright.

On May 13, 2006, Earth Biofuels, Inc. (the “Company”) signed a Letter of Intent to acquire a 51% equity interest in Vertex Energy, LP, a company that owns a chemical processing facility adjacent to the Houston Ship Channel in Houston, TX. .On February 5, 2007 Vertex Energy, LP & Benjamin P. Cowart alleged breach of contract and fraud and subsequently a default judgment was entered in the amount of $5,070,640; thereafter a motion for new trial was granted. We believe these allegations are substantively without merit, are vigorously contesting the claims brought by the plaintiff, and are exercising all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain. The company is in the process of filing a countersuit.

We have counterclaimed this action claiming fraud and fraudulent inducement.  We have petitioned the court seeking deculatory judgment and declaring the agreement and the Limited Partnership Agreement set aside, and all of the assets of Vertex Processing be awarded to Earth.  In addition, the Company has petitioned the court to require Vertex and Gehrig to be responsible for the payment of the outstanding obligations, liabilities and indebtedness of Vertex due to their fraudulent conduct.  If the Company does not prevail it will obtain the underlying plant valued in excess of the claim, resulting in no additional losses to the company.

Effective December 20, 2006, Earth Ethanol entered into an Acquisition Agreement (“Agreement”) with Liquafaction Corporation , a Washington corporation, Newco Liquafaction, Inc., a Washington corporation , and Earth Ethanol of Washington, LLC (herein, “Earth-Washington”), a Delaware limited liability company . Subsequent to year end  2006, Earth Ethanol and Liquafaction entered into an amended acquisition agreement. Under terms of the amended agreement, the Company will pay consideration of approximately 40% in common stock of Earth Biofuels and 60% cash.  This project is also referred to as Moses Lake.  As stated above in item number 3, the Company has again renegotiated the agreement and has funded approximately $686k as of June 30, 2007.  The other party to the agreement has the right to terminate this agreement with any 5 day notice, and is also required to provide certain assets to the company before payment is due. In addition, construction of the underlying plant has not commenced at this point in time.  As of September 30, 2007, the agreement has again been terminated and the Company is looking for other investors to take Earth out of the investment.

On or about April 19, 2007, JM Allen & Associates, Inc. filed a civil action in the District Court of Rusk County, Texas for the 4th Judicial District of Texas, entitled JM Allen & Associates, Inc. v. Earth Biofuels, Inc., alleging fraudulent inducement and non-performance under a series of oral alleged agreements to provide labor and materials in the aggregate amount of $1,900,000; and also filed a request for disclosure, admissions, interrogatories, and request for production of documents. We believe these allegations are substantively without merit, are vigorously contesting the claims brought by the plaintiff, and are exercising all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain. Earth argues that only $400k of work and services was provided.  This case is currently stayed until the involuntary Chapter 7 petition has been resolved.

Breaches related to the Security agreements and underlying accredited investors (Castlerigg Master Investments, Ltd, Evolution Master Fund, Ltd, Kings Road Investments, Ltd, Capital Ventures International, Radcliffe SPC, Ltd, Cornell Capital Partners, LP, Cranshire Capital LP, Portside Growth and Opportunity Fund Gundyco ITF Excalibur Limited Partnership and Whalehaven Capital Fund Ltd)were made related to the periods October 1,2006 through March, 2007, and pursuant to the registration requirements of the Registration Rights Agreement, each dated July 24, 2006, and August 11, 2006, respectively. Further, Earth executed confessions of judgment in the approximate amount of $15,956,731, in favor of the accredited investors.

On November 14, 2007, Earth Biofuels, Inc. (the “Company”) negotiated and executed a settlement agreement (the “Agreement”) with the group of creditors who had petitioned for an involuntary bankruptcy against the company on July 11 of this year.  The Agreement requires the creditors to dismiss their petition of bankruptcy. Under the terms of the Agreement, the Company will grant certain security interests to the creditors and will execute a restructuring plan within 120 days.

 
 
 
Item 2.  
Equity Securities and Use of Proceeds
 
Market for Registrant’s Common Equity
Earth’s common stock is traded on the OTCBB under the symbol EBOF. The stock prices set forth below represent the highest and lowest sales prices per share of Earth’s common stock as reported by the OTCBB. The prices reported in the following table reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not represent actual transactions.
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
High
 
 
Low
 
 
 
 
 
 
 
 
 
 
September 30, 2007
 
$
.05
 
 
$
.04
 
June 30, 2007
 
 
.20
 
 
 
.18
 
March 31, 2007
 
 
.41
 
 
 
.39
 
December 31, 2006
 
 
1.29
 
 
 
.98
 
September 30, 2006
 
 
2.35
 
 
 
2.25
 
June 30, 2006
 
 
3.15
 
 
 
2.85
 
March 31, 2006
 
 
2.65
 
 
 
2.44
 
December 31, 2005
 
 
1.20
 
 
 
.35
 
September 30, 2005
 
 
.92
 
 
 
.24
 
 

 
27
 


Holders of Record
 
As of September 30, 2007, there were approximately 198 holders of record of Earth’s common stock, although we believe that there are additional beneficial owners of our common stock who own their shares in “street name.”
 
Dividends
 
There have been no cash dividends declared on our common stock since our company was formed. Dividends are declared at the sole discretion of our board of directors. It is not anticipated that any dividends will be declared for the foreseeable future on our common stock.
 
Equity Compensation Plan Information
 
Our Board of Directors and a majority of our stockholders adopted a written stock option and award plan in 2006. This plan provides for the grant of options or restricted share amounts for up to 5,000,000 shares of common stock. From time to time our Board of Directors has in the past, and may in the future, issue to consultants or other third parties common stock, and options or warrants that are not pursuant to the plan for compensatory purposes or pursuant to financings. The table below sets forth certain information as of December 31, 2006 regarding the shares of our common stock granted or issuable upon exercise of options or warrants granted as compensation for services.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Securities
 
 
 
 
 
 
Remaining Available for
 
 
 
Number of Securities
 
 
Future Issuance Under
 
 
 
Issued or Issuable Upon
 
 
Equity Compensation Plans
 
 
 
Exercise of Outstanding
 
 
(Excluding Securities in
 
 
 
Options, Warrants and
 
 
the First Column of This
 
Description
 
Rights
 
 
Table)
 
 
 
 
 
 
 
 
 
 
Compensatory common stock awards approved by security holders
 
 
5,000,000
 
 
 
0
 
Compensatory common stock awards and warrants or options not approved by security holders
 
 
14,365,812
 
 
 
N/A
 
 
Description of Securities
 
Common Stock — As of September 30, 2007, Earth had  252,698,785 shares of its common stock issued and outstanding; 400,000,000 shares authorized. Common stock holders have full voting rights.
 
Preferred Stock — As of September 30, 2007, there were no shares of its preferred stock issued or outstanding and 15,000,000 shares are authorized.
 

Debt securities and Warrants —
 
On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $52.5 million aggregate senior convertible notes that are due in 2011 to eight institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 9,051,725 shares of common stock to the investors and five-year warrants to purchase 1,357,759 shares of common stock to Earth’s placement agent, at $2.90 per share. Earth used the net proceeds from this offering to repay in full the remaining unpaid principal and accrued and unpaid interest on our $20.0 million aggregate principal amount of senior convertible promissory notes issued in May, June and July 2006, and expects to use the remaining proceeds from the offering for its program of building and acquiring interests in biodiesel and ethanol production facilities, and for other general corporate purposes.
 
On August 11, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $1.1 million aggregate senior convertible notes that are due in 2011 to two institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in March, 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 232,759 shares of common stock to the investors at $2.90 per share.
 
Due to ongoing renegotiations with the above investors, Earth did not make the first quarterly interest payments due October 1, 2006, or register the underlying securities within 30 days from closing in accordance with the original securities purchase agreement dated July 24, 2006 and August 11, 2006. As such, penalties and interest totaling approximately have accrued at the default rate of 15% interest, plus 1.5% for the amount outstanding for registration penalties, and an 18% late charge. Subsequent to year end Earth brought all coupon rate interest current totaling $1,574,222.
 
At the date of original issuance the warrants had a relative fair value of $18,808,359, and Earth recognized a beneficial conversion feature in the amount of $42,906,599 based on the intrinsic value of the conversion feature. Amortization on the debt discount totaled $3,273,933 for the year ended December 31, 2006.
 
Unless converted or redeemed as described above, the 8% secured convertible notes are due in 2007.
 
During the second and third quarters of 2006, Earth received $22.5 million in proceeds from various investors in relation to convertible notes including warrants. The conversion features and exercise prices were at different variable market prices. In addition certain of Earth’s convertible debts were convertible into an indeterminate number of shares. As such, Earth evaluated the application of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities” (“SFAS No. 133”), and EITF 00-19 for these convertible debts, as well as warrants for 3,389,560 shares issued in connection with the debt offerings. Based on the guidance in SFAS No. 133 and EITF 00-19, Earth concluded that instruments were required to be accounted for as derivatives and required Earth to bifurcate and separately account for the conversion features of the convertible debt as embedded derivatives. The conversion features and the warrants met the attributes of a liability and Earth therefore recorded the fair value of the conversion features and the warrants as current liabilities during these quarters.
 
Earth recorded the fair value of the conversion features and the warrants on its balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statement of operations as “Gain (loss) on derivatives”. Some of the debts were converted on July 14, 2006, and the remaining instruments were repaid with the proceeds from the July 24, 2006 issues. Based on Earth’s analysis and application of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities” (“SFAS No. 133”), the derivative liabilities were reversed as appropriate. The remaining discounts were reversed to additional paid in capital, and the repaid debt derivative liability amounts were reversed to gain on derivatives.
 
Registration Rights —
 
Earth was obligated under Registration Rights Agreements to file, on the 30th day following the agreements a Registration Statement with the SEC registering for resale shares of common stock, and shares of common stock underlying investor warrants and certain of the placement agent warrants, issued in connection with the private offerings. If (i) Earth did not file the Registration Statement within the time period prescribed, or (ii) Earth failed to file with the SEC a request for acceleration in accordance with Rule 461 promulgated under the Securities Act of 1933, within five trading days of the date that Earth is notified (orally or in writing, whichever is earlier) by the SEC that the Registration Statement will not be “reviewed,” or is not subject to further review, or (iii) the Registration Statement filed or required to be filed under the Registration Rights Agreement was not declared effective by the SEC on or before 120 days following March 23, 2005, or (iv) after the Registration Statement is first declared effective by the SEC, it ceases for any reason to remain continuously effective as to all securities registered there under, or the holders of such securities are not permitted to utilize the prospectus contained in the Registration Statement to resell such securities, for more than an aggregate of 45 trading days during any 12-month period (which need not be consecutive trading days) (any such failure or breach being referred to as an “Event,” and for purposes of clause (i) or (iii) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five-trading day period is exceeded, or for purposes of clause (iv) the date on which such 45-trading day-period is exceeded being referred to as “Event Date”), then in addition to any other rights the holders of such securities may have under the Registration Statement or under applicable law, then, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured and except as disclosed below, Earth is required to pay to each such holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.5% per month of the aggregate purchase price paid by such holder pursuant to the Securities Purchase Agreement relating to such securities then held by such holder. If Earth fails to pay any partial liquidated damages in full within seven days after the date payable, Earth is required to pay interest thereon at a rate of 15% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to such holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages are to apply on a daily pro-rata basis for any portion of a month prior to the cure of an Event.
 
Such non-filing of the registration statement impacted and breached those certain Registration Rights Agreements with Earth and certain investors including Lance Bakrow, Tom Groos, Marc Weill, Josh Cohen, Kamunting Street Master Fund, Ltd., and K Street Emerald Fund, LLC. Subsequent to the forbearance agreement the securities are now required to be registered as of May 15, 2007.
 
The Registration Rights Agreement also provides for customary piggy-back registration rights whereby holders of shares of Earth’s common stock, or warrants to purchase shares of common stock, can cause Earth to register such shares for resale in connection with Earth’s filing of a Registration Statement with the SEC to register shares in another offering. The Registration Rights Agreement also contains customary representations and warranties, covenants and limitations.



 
28
 

 

Change in Securities and Use of Proceeds —
 
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS —
 
On March 31, 2006, we issued 1,800,000 shares of our common stock to Dr. Miguel Dabdoub in connection with the purchase of a membership interest in Earth Biofuels Technology Company, LLC. These shares were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act.
On March 31, 2006, pursuant to the closing of the merger with Southern Bio Fuels, we issued 2,933,333 shares of our common stock to the sole stockholder of Southern Bio Fuels. The sale of these shares of our common stock to accredited investors was made in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act.
 
On April 28, 2006, we entered into a securities purchase agreement, pursuant to which we issued 6,400,000 shares of our common stock to accredited investors, in consideration for the payment of approximately $3.2 million. We will use the proceeds, in concert with other funds, to acquire a 50% equity interest in an entity, which will own and operate a planned ethanol plant in New Orleans, Louisiana. The purchase agreement provides for an additional issuance of 6,400,000 shares of our common stock, if we have not timely consummated the acquisition of the equity interest in the planned New Orleans ethanol plant discussed below. Contemporaneously with the execution and delivery of the securities purchase agreement, we entered into a registration rights agreement, pursuant to which we agreed to provide certain registration rights with respect to the shares of common stock issued pursuant to the securities purchase agreement. The sale of these shares of our common stock to accredited investors was made in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act. The 6,400,000 shares issued to an accredited investor included registration rights therein. As of year end December 31, 2006 these shares have not been registered, however, the company will include these rights upon filing of its registration statement to be filed during the year ended 2007.
 
On June 12, 2006, we issued 125,000 shares of our common stock in connection with our April 20, 2006 acquisition of a 25% limited partnership interest in Trucker’s Corner, L.P. In addition, Trucker’s Corner received $1.1 million from us and 25,000 shares of Apollo Resources’ common stock from Apollo Resources. Our shares of common stock were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act.
 
On June 12, 2006, we issued 537,500 shares of our common stock to Biodiesel Venture, L.P. and 537,500 shares of our common stock to Willie H. Nelson in connection with a sublicense agreement entered into on April 1, 2006 with Biodiesel Venture, L.P., pursuant to which Biodiesel Venture granted us an exclusive sublicense to use the trademark “BioWillie” which is licensed to Biodiesel Venture pursuant to a master license with Mr. Nelson, the owner of the trademark. These shares were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act.
 
On July 13, 2006, holders of convertible notes issued during January through June of 2006, exercised their conversion option and the Company issued an aggregate of 3,000,000 shares of common stock in exchange for the conversion of notes with an aggregate principal amount of $1.5 million. These shares were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act. The related debt, which was converted to shares, included registration rights therein. As of the year end these shares have not been registered, however, the company will include these rights upon filing of its registration statement to be filed during the year ended 2007.
 
In addition, on July 21, 2006, Apollo Resources entered into a securities purchase agreement with Greenwich Power, LLC and Greenwich Power II, LLC, pursuant to which Apollo Resources issued notes exchangeable for shares of our common stock held by Apollo Resources and options to purchase our common stock held by Apollo Resources. In connection with this transaction, Apollo Resources agreed to cause us to grant these Apollo Resources note holders registration rights with respect to the shares of common stock underlying the convertible notes and options. We have acknowledged and agreed to comply with the terms of the registration rights agreements between Apollo and these note holders. In connection with this transaction, Lance Bakrow, who is the sole manager of both Greenwich Power entities, purchased a warrant to purchase 4,000,000 shares of our common stock at an exercise price of $0.25 per share. Mr. Bakrow paid us $100,000 for the issuance of this warrant. We granted Mr. Bakrow certain registration rights with respect to the shares of common stock issuable upon exercise of this warrant. As of year end December 31, 2006 these shares have not been registered, however, the company will include these rights upon filing of its registration statement to be filed during the year ended 2007.
 
On January 19, 2007 Earth obtained proceeds totaling $750,000 from three separate individuals and companies. In connection with this debt Earth issued warrants for common stock totaling 375,000 shares, exercisable at $.01 per share for 10 years. The notes were repaid in March 2007. At the date of original issuance the warrants had a relative fair value of $750,000. Amortization on the debt discount totaled $750,000 for the three months ended March 31, 2007.
 

 
29
 


On February 28, 2007, our LNG subsidiary obtained several credit facilities totaling $15 million. The $15 million term loan is due and payable in 3 years, with interest accruing at libor plus 1,000 basis points and payable monthly in advance. The loan is secured by the LNG plant facility in Topock, Arizona. In connection with this facility Warrant Purchase and Registration Right agreements were issued to purchase 13,549,816 of the Company’s common stock at $.36 per share for 10 years. At the date of original issuance the warrants had a relative fair value of $3,105,394.
 
On March 23, 2007, Earth obtained a $9 million term loan facility. The principal amount is due in 3 years with interest payable at LIBOR plus 1,000 basis points. The loan is secured by the Durant plant facility in Durant, Oklahoma. In connection with this facility, Warrant Purchase and Registration Right agreements were issued to purchase 6,774,908 of the Company’s common stock at $.30 per share for 10 years. At the date of original issuance the warrants had a relative fair value of $1,605,960.  
During the quarters ending June 30, 2006 and September 30, 2006, we issued convertible notes and warrants to institutional investors in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act as follows:
 
 
 
 
 
• 
On May 4, 2006, we issued a $1.0 million convertible, secured promissory note, bearing interest at 7%, payable within thirty days upon demand by the holder, and convertible into shares of our common stock at a conversion price of $1.086 per share. We also issued the investor a warrant to purchase 920,810 shares of our common stock, exercisable until May 31, 2001 at the lesser of $2.00 per share or 80% of the average trading price of our common stock for the thirty trading days prior to the exercise of the warrant. We used the net proceeds from the sale in connection with our biodiesel and ethanol plant acquisition strategy and for other general corporate purposes. We granted the note holder certain registration rights with respect to the shares of common stock underlying the convertible note and the warrant. The note and warrant and a corresponding guarantee given by Apollo Resources, our majority stockholder, were subsequently cancelled by the holder in connection with Apollo Resources’ closing on July 21, 2006 of a securities purchase agreement with Greenwich Power.
 
 
 
 
• 
On May 26, 2006, we issued $5.0 million principal amount of 8% senior convertible promissory notes to a single institutional investor. The notes carried an 8% coupon, payable quarterly, and were redeemable by us at par at any time prior to their initial maturity date in August 2006. The notes were not convertible until after August 2006, at which time the maturity date was extendable to November 2006 at the holder’s option. The notes were convertible into our common stock at a conversion price equal to the greater of $1.00 per share or 75% of the weighted average price per share of our common stock on a five-day volume weighted average prior to closing. We also issued five-year warrants to purchase 750,000 shares of common stock to the investor and five-year warrants to purchase 18,750 shares of common stock to our placement agent, both at an exercise price of $3.84 per share. We used the net proceeds from the sale in connection with our biodiesel and ethanol plant acquisition strategy and for other general corporate purposes. We granted the investor certain registration rights with respect to the shares of common stock issuable upon conversion of the convertible notes and exercise of the warrants. The remaining unpaid principal and accrued and unpaid interest on these notes were repaid in full with a portion of the net proceeds from the senior convertible promissory notes we issued in July 2006. The warrants remain outstanding.
 
 
 
 
• 
On June 2, 2006, we issued a convertible note with a principal amount of $500,000 to one individual. The note bore interest at 8% per year, which was payable on July 28, 2006, August 28, 2006, January 28, 2007 and April 28, 2007. The note had a maturity date of April 28, 2007. The note was convertible into shares of our common stock at a conversion price equal to the lesser of $0.50 per share or 70% of the weighted average price per share of our common stock. We used the net proceeds from the sale in connection with our biodiesel and ethanol plant acquisition strategy and for other general corporate purposes. We granted the note holder certain registration rights with respect to the shares of common stock underlying the convertible notes. On July 13, 2006, the holder of the note exercised its option to convert the notes, and we issued an aggregate of 1,000,000 shares of our common stock to such holder in exchange for the cancellation of the note.
 
• 
On June 7, 2006, we issued $10 million aggregate principal amount of senior convertible notes to four institutional investors. The notes carried an 8% coupon, payable quarterly, and were redeemable by us at par at any time prior to their initial maturity date in September 2006. The notes were not convertible until after September 2006, at which time the maturity date was extendable to December 2006 at the holder’s option. The notes were convertible into our common stock at a conversion price equal to the greater of $1.00 per share or 70% of the weighted average price per share of our common stock on a five-day volume weighted average prior to closing. We also issued to the investors five-year warrants to purchase an aggregate of 1,500,000 shares of common stock to the investors and five-year warrants to purchase 45,000 shares of common stock to our placement agent, at an exercise price of $2.93 per share. We used the net proceeds from the sale, in concert with other funds, to continue to execute our business plan, specifically the construction or acquisition of additional biodiesel and ethanol facilities, and for other general corporate purposes, including working capital. We granted the investor certain registration rights with respect to the shares of common stock underlying the convertible notes and warrants. The remaining unpaid principal and accrued and unpaid interest on these notes were repaid in full with a portion of the net proceeds from the senior convertible promissory notes we issued in July 2006. The warrants remain outstanding.
 
 
 
 
• 
On July 10, 2006, Earth entered into a securities purchase agreement, pursuant to which Earth issued an 8% senior convertible note with a principal amount of $5.0 million to one institutional investor. Earth also issued five-year warrants to purchase an aggregate of 1,500,000 shares of common stock to the investor and five-year warrants to purchase 15,000 shares of common stock to Earth’s placement agent, both at an exercise price of $2.50 per share. On July 24, 2006, Earth used a portion of the net proceeds from its July 24, 2006 offering to repay in full the remaining unpaid principal and accrued and unpaid interest on this note.
 
 
 
 
• 
On July 13, 2006, holders of convertible notes issued during January through June of 2006, exercised their conversion option and Earth issued an aggregate of 3,000,000 shares of common stock in exchange for the conversion of notes with an aggregate principal amount of $1.5 million.
 
 
 
 
• 
On July 24, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $52.5 million aggregate senior convertible notes that are due in 2011 to eight institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 9,051,725 shares of common stock to the investors and five-year warrants to purchase 1,357,759 shares of common stock to Earth’s placement agent, at $2.90 per share. Earth used the net proceeds from this offering to repay in full the remaining unpaid principal and accrued and unpaid interest on our $20.0 million aggregate principal amount of senior convertible promissory notes issued in May, June and July 2006, and expects to use the remaining proceeds from the offering for its program of building and acquiring interests in biodiesel and ethanol production facilities, and for other general corporate purposes.
 
 
 
 
• 
In connection with the 8% senior convertible notes issued in July, 2006, Earth incurred loan costs in the amount of $3,452,000, which will be amortized over the term of the convertible notes.
 
 
 
 
• 
On August 11, 2006, Earth entered into a securities purchase agreement pursuant to which Earth issued $1.1 million aggregate senior convertible notes that are due in 2011 to two institutional investors. The notes initially carry an 8% coupon, payable quarterly, and are convertible into shares of common stock at $2.90 per share. In 2007, the coupon may decline to 6% upon Earth achieving certain financial milestones. The notes will begin to amortize in equal, quarterly payments beginning in March, 2007. In connection with the issuance of the notes, Earth also issued five-year warrants to purchase 232,759 shares of common stock to the investors at $2.90 per share. The shares issued to an accredited investor included registration rights therein. As of year end December 31, 2006 these shares have not been registered, however, the company will include these rights upon filing of its registration statement to be filed during the year ended 2007.
 
 
 
Item 3.  
Defaults upon Senior Securities
 
See footnote 2 in “Going Concern” under Item 1.
 
 
 
Item 4.  
Submission of Matters to a Vote of Security Holders
 
 
 
Item 5.  
Other Information
 
None


 
30
 


 
ITEM 6.  
EXHIBITS
 
The following documents are filed as part of this report:
 
 
 
 
Exhibit
 
 
Number
 
Description
 
 
 
 
3.01
 
Certificate of Incorporation (filed as Exhibit 3.1 to the Report on Form 10-QSB for the period ending September 30, 2005 and incorporated herein by reference)
 
3.02
 
Bylaws (filed as Exhibit 3.2 to the Report on Form 10-QSB for the period ending September 30, 2005 and incorporated herein by reference)
 
10.1
 
Merger Agreement dated March 31, 2006 by and among Earth Biofuels, Inc., Southern Bio Fuels, Inc. and certain affiliates of Southern Bio Fuels, Inc. (filed as Exhibit 10.1 to the Report on Form 8-K filed April 10, 2006 and incorporated herein by reference)
 
10.2
 
Stock Purchase Agreement dated October 1, 2005 by and between The Wing Sail Company and Earth Biofuels, Inc. (filed as Exhibit 10.1 to the Report on Form 8-K filed December 14, 2005 and incorporated herein by reference)
  10.3 (1)
Indemnification Agreement dated September 29, 2005 by and between Meadow Springs, Inc. (as predecessor to Earth Biofuels, Inc.) and William O. Locket, Jr.
  10.4 (1)
Indemnification Agreement dated September 29, 2005 by and between Meadow Springs, Inc. (as predecessor to Earth Biofuels, Inc.) and Morgan Freeman.
  10.5 (1)
Indemnification Agreement dated September 29, 2005 by and between Meadow Springs, Inc. (as predecessor to Earth Biofuels, Inc.) and Bruce Blackwell.
  10.6 (1)
Lease Agreement dated October 2005 by and between R. Bruce Blackwell and Earth Biofuels, LLC.
  10.7 (1)
Intercompany Credit Agreement dated January 1, 2006 by and between Earth Biofuels, Inc. and Apollo Resources International, Inc.
  10.8 (1)
Registration Rights Agreement dated January 27, 2006 by and between Earth Biofuels, Inc. and Tom Groos.
  10.9 (1)
Earth Biofuels, Inc. Convertible Promissory Note dated January 27, 2006 issued by Earth Biofuels, Inc. in favor of Tom Groos.
  10.10 (1)
Registration Rights Agreement dated January 30, 2006 by and between Earth Biofuels, Inc. and Marc Weill.
  10.11 (1)
Earth Biofuels, Inc. Convertible Promissory Note dated January 30, 2006 issued by Earth Biofuels, Inc. in favor of Marc Weill.
  10.12 (1)
Membership Interest Purchase Agreement dated March 1, 2006 by and between Earth Biofuels, Inc. and Dr. Miguel J. Dabdoub.
  10.13 (1)
Registration Rights Agreement dated March 29, 2006 by and between Earth Biofuels, Inc. and Josh Cohen.
  10.14 (1)
Earth Biofuels, Inc. Convertible Promissory Note dated March 29, 2006 issued by Earth Biofuels, Inc. in favor of Josh Cohen.
  10.15 (1)
Registration Rights Agreement dated March 31, 2006 by and between Earth Biofuels, Inc. and Tom Groos.
  10.16 (1)
Earth Biofuels, Inc. Convertible Promissory Note dated March 31, 2006 issued by Earth Biofuels, Inc. in favor of Tom Groos.
  10.17 (1)
Letter of Intent dated June 13, 2006 by and between Earth Biofuels, Inc. and HPS Development, L.L.C.
  10.17 (1)
Letter of Intent dated June 13, 2006 by and between Earth Biofuels, Inc. and HPS Development, L.L.C.
  10.18 (1)
Agreement dated August 2, 2006 by and between Earth Biofuels, Inc. and HPS Development, L.L.C.
 
10.19
 
Securities Purchase Agreement dated April 28, 2006, by and among Earth Biofuels, Inc. and the buyers listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 10, 2006).
     
 
Exhibit
 
Number
Description
 
10.20
 
Registration Rights Agreement dated April 28, 2006 by and among Earth Biofuels, Inc. and the buyers listed on the schedule thereto (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 10, 2006).
  10.21 (1)
Registration Rights Agreement dated May 4, 2006 by and between Earth Biofuels, Inc. and Greenwich Power, L.L.C.
     
 
     
 
  10.22 (1)
Convertible Secured Promissory Note-Bridge Loan dated May 4, 2006 issued by Earth Biofuels, Inc. in favor of Greenwich Power, L.L.C.
  10.23 (1)
Warrant to Purchase Shares of Common Stock of Earth Biofuels, Inc. dated May 4, 2006 issued to Greenwich Power, L.L.C.
  10.24 (1)
Unconditional Guaranty of Payment and Performance dated May 4, 2006 executed by Apollo Resources International, Inc. in favor of Greenwich Power, L.L.C.
  10.25 (1)
Letter of Intent dated May 13, 2006 by and between Earth Biofuels, Inc. and Vertex Energy, LP.
 
10.26
 
Securities Purchase Agreement dated May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 31, 2006).
  10.27 (1)
Amended and Restated Securities Purchase Agreement dated May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers listed on the schedule thereto.
 
10.28
 
Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated May 26, 2006, issued to Evolution Master Fund, Ltd. (incorporated by reference to Exhibit 4.3 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 31, 2006).
  10.29 (1)
Warrant No. 1r to Purchase Common Stock of Earth Biofuels, Inc. dated May 26, 2006 issued to Evolution Master Fund, Ltd.
  10.30 (1)
Warrant No. 2 to Purchase Common Stock of Earth Biofuels, Inc. dated May 26, 2006 issued to Cowen & Company LLC.
 
10.31
 
8% Senior Convertible Note dated May 26, 2006 issued by Earth Biofuels, Inc. in favor of Evolution Master Fund, Ltd. (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 31, 2006).
 
10.32
 
Registration Rights Agreement dated May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers listed on the signature pages thereto (incorporated by reference to Exhibit 4.4 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on May 31, 2006).
  10.33 (1)
Amended and Restated Registration Rights Agreement dated May 26, 2006 by and between Earth Biofuels, Inc. and the purchasers listed on the signature pages thereto.
  10.34 (1)
Registration Rights Agreement dated June 2, 2006 by and between Earth Biofuels, Inc. and Marc Weill.
  10.35 (1)
Earth Biofuels, Inc. Convertible Promissory Note dated June 2, 2006 issued by Earth Biofuels, Inc. in favor of Marc Weill.
  10.36 (1)
Convertible Promissory Note, dated May 31, 2006, made by Albemarle Bio-Refinery, Inc. in favor of Earth Biofuels, Inc.
  10.37 (1)
Convertible Promissory Note, dated July 19, 2006, made by Albemarle Bio-Refinery, Inc. in favor of Earth Biofuels, Inc.
 
10.38
 
Securities Purchase Agreement dated June 7, 2006 by and among Earth Biofuels, Inc. and the purchasers listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).
 
10.39
 
Registration Rights Agreement dated June 7, 2006, by and among Earth Biofuels, Inc. and the purchasers listed on the schedule thereto (incorporated by reference to Exhibit 4.8 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).
 
10.40
 
Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Capital Ventures International (incorporated by reference to Exhibit 4.6 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).
     
 
Exhibit
 
Number
Description
  10.41 (1)
Warrant No 1r to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Capital Ventures International.
 
10.42
 
8% Senior Convertible Note dated June 7, 2006 issued by Earth Biofuels, Inc. in favor of Capital Ventures International (incorporated by reference to Exhibit 4.3 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).
 
10.43
 
Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Castlerigg Master Investments Ltd. (incorporated by reference to Exhibit 4.5 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006)
 
10.44
 
8% Senior Convertible Note dated June 7, 2006 issued by Earth Biofuels, Inc. in favor of Castlerigg Master Investments, Ltd (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).
 
10.45
 
Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Radcliffe SPC, Ltd for and on behalf of the Class A Convertible Crossover Segregated Portfolio (incorporated by reference to Exhibit 4.7 of the Current Report of Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006)
  10.46 (1)
Warrant No 1r to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Radcliffe SPC, Ltd. for and on behalf of the Class A Convertible Crossover Segregated Portfolio.
 
10.47
 
8% Senior Convertible Note dated June 7, 2006 issued by Earth Biofuels, Inc. in favor of Radcliffe SPC, Ltd. for and on the behalf of the Class A Convertible Crossover Segregated Portfolio (incorporated by reference to Exhibit 4.4 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on June 12, 2006).
  10.48 (1)
Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Cowen & Company LLC.
  10.49 (1)
Warrant No. 1r to Purchase Common Stock of Earth Biofuels, Inc. dated June 7, 2006 issued to Cowen & Company LLC.
  10.50 (1)
Consulting Agreement dated June 9, 2006 by and between Earth Biofuels, Inc. and Herb Meyer.
  10.51 (1)
Securities Purchase Agreement dated July 10, 2006 by and between Earth Biofuels, Inc. and the purchaser’s signatory thereto.
  10.52 (1)
Registration Rights Agreement dated July 10, 2006 by and between Earth Biofuels, Inc. and the purchaser’s signatory thereto.
  10.53 (1)
8% Senior Convertible Note dated July 11, 2006 issued by Earth Biofuels, Inc. to Castlerigg Master Investments Ltd.
  10.54 (1)
Warrant No. 1 to Purchase Common Stock of Earth Biofuels, Inc. dated July 11, 2006 issued to Castlerigg Master Investments Ltd.
  10.55 (1)
Warrant No. 2 to Purchase Common Stock of Earth Biofuels, Inc. dated July 11, 2006 issued to Castlerigg Master Investments Ltd.
  10.56 (1)
Warrant No. 2 to Purchase Common Stock of Earth Biofuels, Inc. dated July 11, 2006 issued to Cowen & Company LLC.
  10.57 (1)
Registration Rights Agreement dated July 21, 2006 by and between Apollo Resources International, Inc. and Greenwich Power, LLC and acknowledged by Earth Biofuels, Inc.
  10.58 (1)
Registration Rights Agreement dated July 21, 2006 by and between Apollo Resources International, Inc. Greenwich Power II, LLC and acknowledged by Earth Biofuels, Inc.
  10.59 (1)
Registration Rights Agreement dated July 21, 2006 by and between Earth Biofuels, Inc. and Lance A Bakrow.
  10.60 (1)
Warrant to Purchase Shares of Common Stock of Earth Biofuels, Inc. dated July 21, 2006 to Lance A. Bakrow.
     
 
Exhibit
 
Number
Description
 
10.61
 
Securities Purchase Agreement dated July 24, 2006 by and among Earth Biofuels, Inc. and the buyers listed on the schedule thereto (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on July 25, 2006).
 
10.62
 
Registration Rights Agreement dated July 24, 2006 among Earth Biofuels, Inc. and the buyers listed on the schedule thereto (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on July 25, 2006).
  10.63 (1)
Lock-Up Letter dated July 24, 2006 from Apollo Resources International, Inc.
  10.64 (1)
Lock-Up Letter dated July 24, 2006 from Dennis G. McLaughlin III.
  10.65 (1)
Warrant No. 3 to Purchase Common Stock of Earth Biofuels, Inc. dated July 24, 2006 by Cowen & Company LLC.
 
10.66
 
Form of Warrant to Purchase Common Stock of Earth Biofuels, Inc. dated July 24, 2006 (incorporated by reference to Exhibit 4.4 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on July 25, 2006).
 
10.67
 
Form of Notes dated as of July 24, 2006 issued by Earth Biofuels, Inc. (incorporated by reference to Exhibit 4.3 on the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on July 25, 2006).
 
10.68
 
Merger Agreement, dated March 31, 2006, by and between Earth Biofuels, Southern Bio Fuels, Inc., Southern Bio Fuels, LLC, and the other members and individuals party thereto (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on April 10, 2006).
  10.69 (1)
Securities Purchase Agreement, dated August 19, 2005, by and among Apollo Resources International, Inc., Tommy Johnson, Bruce Blackwell, William H. Webster and Robert Glenn.
  10.70 (1)
Purchase and Sale Agreement dated February 25, 2005 by and between Earth Biofuels, Inc., R. Bruce Blackwell, Tommy Johnson, Robert Glenn, William Webster and Apollo Resources International, Inc.
  10.71 (1)
Promissory Note issued on March 2, 2006 to Southern Bio Fuels, LLC.
  10.72 (1)
Commercial Guaranty made on March 2, 2006 by Dennis G. McLaughlin, III in favor of Southern Biofuels, LLC.
  10.73 (1)
Promissory Note issued on March 31, 2006 to Southern Bio Fuels, LLC.
  10.74 (1)
Commercial Guaranty made on March 31, 2006 by Dennis G. McLaughlin, III in favor of Southern Bio Fuels, LLC.
     
 

31

 

 
 
 
 
10.75(1)
Commercial Guaranty made on March 31, 2006 by R. Bruce Blackwell in favor of Southern Bio Fuels, LLC.
 
10.76(1)
Commercial Guaranty made on March 31, 2006 by Tommy Johnson in favor of Southern Bio Fuels, LLC.
 
10.77(1)
Earth Biofuels, Inc. 2006 Stock Option and Award Plan effective April 15, 2006.
 
10.78(1)
Sublicense Agreement dated April 1, 2006 by and between Earth Biofuels, Inc. and Biodiesel Venture, L.P.
 
10.79(1)
Securities Purchase Agreement dated August 11, 2006 by and among Earth Biofuels, Inc. and the buyers listed on the schedule.
 
10.80(1)
Revised Schedule of buyers on Securities Purchase Agreement dated August 11, 2006.
 
10.81(1)
Registration Rights Agreement dated August 11, 2006 among Earth Biofuels, Inc. and the buyers listed on the schedule.
 
10.82(1)
Form of Notes dated as of August 11, 2006 issued by Earth Biofuels, Inc. with Whalehaven Capital Fund Ltd.
 
10.83(1)
Form of Notes dated as of August 11, 2006 issued by Earth Biofuels Inc. with Gundyco ITF Excalibur Ltd Partnership.
 
10.84(1)
Form of Warrant to Purchase Common Stock of Earth Biofuels, Inc. dated August 11, 2006, with Whalehaven Capital Fund Ltd.
 
10.85(1)
Form of Warrant to Purchase Common Stock of Earth Biofuels, Inc. dated August 11, 2006, with Gundyco ITF Excalibur Ltd Partnership.
 
10.86(1)
Form of Warrant to purchase Common Stock of Earth Biofuels, Inc. dated July 21, 2006 with Lance Bakrow, and Consulting Agreement with Lance Bakrow.
 
10.87(2)
Share Exchange Agreement effective as of November 17, 2006, by and between Earth Biofuels, Inc., a Delaware corporation (“Earth Biofuels”) and Apollo Resources International, Inc., a Utah corporation (“Apollo”).
 
10.88(4)
Acquisition Agreement between Liquafaction Corporation, et al and Earth Ethanol (incorporated by reference to Exhibit 1.01 of the Current Report on Form 8-K filed by Earth Biofuels, Inc. with the SEC on December 21, 2006).
 
   10.89 (4)
Pledge Agreement, Promissory Notes and Warrant Agreements with and from Two Ponds, Gilcreast and Bryant Russell Construction
 

 
 
 
 
10.90(3)
Letter from Nexxus re offer to Capitalize Biofuels with $150 million in Exchange for Common Stock and Escrow Agreement dated January 9, 2007 (Exhibit previously labeled 14.)
10.91(3)
Credit Agreement dated March 23 2007 by and between Durant Biofuels, LLC and Lenders and related Am