Note 6. Convertible Debentures and Preferred Stock

In connection with the purchase of Wood Energy, the Company issued $1,525,000 of convertible debentures bearing interest at 10% per annum and payable in five years. The debentures were convertible into the Company’s common stock at $2.00 per share. In accordance with ASC 470-20 (Debt with Conversion and Other Options), the Company determined that the convertible debentures had beneficial conversion features because the embedded conversion feature was an “in-the-money” issuance. Therefore the embedded beneficial conversion feature was valued separately at issuance. The convertible debentures met the definition of “conventional convertible debt” because the number of shares which may be issued upon the conversion of the debt is fixed. Therefore, the beneficial conversion feature qualified for equity classification.

Subsequently in February 2010, the Company completed an exchange of the outstanding convertible debentures for shares of convertible preferred stock. The holders of 100% of the outstanding debentures agreed to the exchange, and 15,250 shares of Series A Convertible preferred stock were issued. Similar to the debentures, holders of the Series A Convertible preferred stock are entitled to an annual cash dividend of 10% payable semi-annually, and each share of preferred stock is convertible into 50 shares of common stock at the holder’s option. The holders of the preferred stock are not entitled to redeem their shares for cash. In accordance with ASC 470-20, the Company has determined that the preferred stock includes a beneficial conversion feature and a discount valued at $1,525,000 has been accounted for as a dividend in 2010.

During the remainder of 2010, the Company issued 4,750 additional shares of Series A Convertible preferred stock. The Company has determined that these issuances also include beneficial conversion features and discounts valued at $475,000 which has been accounted for as dividends for the year ended December 31, 2010. These proceeds were used for working capital purposes.

In October 2010, the Company filed a certificate of designation with the Delaware Secretary of State designating 10,000 shares of its preferred stock as Series B Preferred stock. The issuance price of the Series B Preferred stock is $100 per share and it is convertible into 44.4 shares of common stock by the holder at any time after the following conditions are met:

(i)	The Common Stock is listed for trading on Nasdaq or any national securities exchange;

(ii)	The bid price of the Common Stock is equal to or exceeds $5.00 a share for 30 consecutive days, and thereafter so long as the bid price continues to equal or exceed $5.00 per share;

(iii)

The trading volume of the Common Stock is equal to or exceeds 10,000 shares a day for 30 consecutive days, and thereafter so long as the daily trading volume continues to equal or exceed 10,000 shares; or

(iv)	October 15, 2013.

At that time the Company may also elect to convert or redeem the Series B Preferred stock. The conversion price is $2.25 per share of common stock, subject to adjustment for stock dividends, stock splits and reorganizations.

The Company issued 6,000 shares of its Series B Preferred stock through December 31, 2010. In the nine months ended September 30, 2011, the Company issued 4,000 shares of Series B Preferred stock. All shares of the Series B Preferred Stock were issued to Patriot Rail Services Inc. Gary O. Marino, the Company’s Chairman and Chief Executive Officer, is also a significant stockholder of the owner of Patriot Rail Services Inc. The preferred shares were issued for $100 per share.

In July 2011, the Company filed a certificate of designation with the Delaware Secretary of State designating 10,000 shares of its preferred stock as Series C Preferred stock. The issuance price of the Series C Preferred stock is substantially the same as Series A and B Preferred stock with the exception of the conversion price and the date of conversion as June 30, 2014.

The conversion price will be the closing price of the Company’s common stock on the trading date preceding the issuance of that share of Series C Preferred stock, subject to adjustment for stock dividends, stock splits and reorganizations. If the common stock is not quoted on any market or exchange, the conversion price will be determined by the Board of Directors on the date of issuance.

The Series C Preferred stock ranks senior to the common stock and pari-passu with the Series A and Series B Preferred stock of the Company as to dividends and distribution of assets upon the liquidation, dissolution or winding up of the Company.

During the quarter ending September 30, 2011, the Company issued 5,850 shares of its Series C Preferred stock to Patriot Rail Services, Inc. The preferred shares were issued for $100 per share, or $585,000 in the aggregate at a conversion price ranging from $1.96 to $2.06 per share of common stock. The proceeds of the money received in 2011 were used to fund working capital requirements.

As of September 30, 2011, Patriot Rail Services Inc. owned 3,000, 10,000, 5,850 and 686,283 shares of Series A Preferred, Series B Preferred, Series C Preferred and common stock, respectively. If converted Patriot Rail Services Inc. would own 1,572,588 shares of common stock.