2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and Section 27A of the Securities Act of 1933. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will” and similar expressions, we are identifying forward-looking statements. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements.  These factors include the fact that we are a development stage enterprise and we are still developing our first Waste-to-Energy plant, as a consequence we have limited experience with our business plan and several key assumptions inherent in that plan are unproven and untested; the continuing world interest in alternative energy sources, the continued availability of government incentives to support renewable energy and our ability to gain the appropriate licenses to obtain such incentives; our ability to source the feedstock that we require at the right prices, quality and quantity; our exposure to competition in the rapidly changing market for renewable energy and our ability to raise adequate capital to finance the completion of the planned development of our UK plant and fund our working capital requirements.  

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.  

3

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

9

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

10

Four Rivers BioEnergy Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

July 31, 2011 and 2010

(Unaudited)

Note 1:  Organization and Nature of Business

Four Rivers BioEnergy Inc. (“Four Rivers” or the “Company”) was incorporated under the name Med-Tech Solutions, Inc. (which is referred to as MTSI) in the State of Nevada on May 28, 2004, and the Company changed the name on January 25, 2008 to Four Rivers BioEnergy Inc., (reference herein to Four Rivers and the Company includes, where the context requires, the Company and its subsidiaries).  On March 26, 2007, the Company entered into an Acquisition Agreement (the “Agreement”) with The Four Rivers BioEnergy Company Inc., a Kentucky corporation (which is referred to as 4Rivers), and all of the shareholders of 4Rivers to acquire 4Rivers by share purchase and share exchange.  Pursuant to the Agreement, MTSI acquired the entire issued and outstanding shares of common stock of 4Rivers in two stages: (a) on March 26, 2007, 15% was acquired in exchange for an investment by MTSI in cash into 4Rivers of $2,000,000; and (b) on December 4, 2007, the remaining 85% was acquired by the issuance of 2,392,059 shares of MTSI’s common stock to the shareholders of 4Rivers.  On December 4, 2007, as a condition of the acquisition, the Company raised $22,829,022, net of expenses, through a private placement of 1,657,881 shares of common stock.  As a further condition of the Agreement, the Company received 3,655,087 shares of common stock (647,059 shares were received in October 2007 and 3,008,028 shares were received during the quarter ended January 31, 2008) for cancellation held by certain former stockholders and former management of MTSI.  In addition, a former director agreed to waive his prior loans extended to MTSI amounting to $296,714. Upon consummation of the acquisition, 4Rivers became a wholly-owned subsidiary of the Company. The acquisition of 4Rivers was accounted for as a “reverse merger”, since the stockholders of 4Rivers owned a majority of the Company’s common stock immediately following the transaction and their management has assumed operational, management and governance control. The reverse merger is recorded as a recapitalization of 4Rivers pursuant to which 4Rivers is treated as the surviving and continuing entity. The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s consolidated financial statements presented for periods prior to the reverse merger are those of 4Rivers. The Company has been a development stage entity, as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, since March 9, 2007 (which is regarded as the ‘date of inception’).

On July 30, 2008, the Company raised an additional $1,631, 564, net of expenses, in a private placement of 131,061 shares of common stock.

The Company is currently engaged in the final stages of development of an Integrated Waste to Energy Plant on a 41 acre industrial site in the North East of England that it acquired in April, 2009. The Waste to Energy plant will trade under the brand name, ‘Verta Energy’. To facilitate this branding the Company has created a wholly owned sub-group of companies, together known as the ‘Verta Energy Group’. Three of the Verta Energy Group subsidiaries, Verta Energy Trading Limited, Verta Energy Generation Limited and Verta Energy Oils Limited, will each operate different areas within the integrated plant.

The Company has invested in the site, equipment and infrastructure to re-configure it into an Integrated Waste-to-Energy plant, which will use waste liquid biomass as a feedstock. The Company plans to carry out the following principal processes on the reconfigured site: (a) it will process and pre-treat waste liquid biomass, using its established know-how, in the waste liquid biomass processing plant, which is located on the site; (b) it will crush rape seed to produce virgin oil, which will be used as an additional feedstock for blending and which will also be sold to food processors under contract, whereby their waste used oil will be purchased back by the Company under a back-haul arrangement for use as further captive waste biomass feedstock; (c) it will produce renewable electricity from generators which it will acquire and install. The first of these generators was acquired in June 2011 by Verta Energy Generation Limited, and it has been fully and satisfactorily tested under operating conditions. These generators will use fuel produced by Verta Energy Oils Limited in the liquid biomass processing plant, referred to above. The site already has access to the power grid through on-site electricity sub-stations; and (d) it will also be  able to produce bio-diesel from its on-site bio-diesel plant, using the processed biomass and virgin oil in a blend as feedstock.

11

The Company also plans to vertically integrate into the procurement of waste liquid biomass by acquisition and/or merger of existing established operators in this space and, as detailed in Note 12, in May 2011 Verta Energy Trading Limited entered into a contract to acquire a company that has considerable experience in sourcing and aggregating waste cooking oils. Completion of the contract is dependent upon certain conditions being met by the parties which, as explained in Note 12, are expected to be met in the foreseeable future.

The Company is presently in the final stages of (i) completing the planned Integrated Waste-to-Energy plant; (ii) finalizing the necessary commercial arrangements and regulatory licenses and permits, to the extent not already in place; and (iii) completing the acquisition, referred to above, in line with its plans to secure vertical integration into the waste liquid biomass feedstock space.

As detailed in Note 10 (“Debenture Payable”), on May 5, 2011 the Company raised $1,600,000 by way of issuance of a secured, convertible debenture.  After (i) paying the purchaser an arrangement fee of $100,000 and reimbursing its legal expenses of $24,997 and (ii) redeeming an existing secured promissory note in the amount of $454,600, the net cash available from the issuance of the debenture (of $1,020,403) is being used to provide ongoing working capital and to purchase, install and operate the first generator train at the Waste-to-Energy Plant. As further explained in Note 10, under the terms of the Securities Purchase Agreement which gave rise to this debenture, the Company is entitled to draw down a second debenture, which would introduce additional cash of $2,000,000 (which is stated after deducting an arrangement fee of $150,000), once it has achieved certain milestones that are described in the Securities Purchase Agreement.

The Company will require further capital, in addition to the $2,000,000 that it may receive under the second debenture referred to above, to enable it to expand and operate the UK Waste-to-Energy plant at a level which is expected to be profitable. It plans to raise such additional capital through the issuance of more debt and/or equity in due course.

Note 2: Going Concern, Liquidity and Management’s Plan

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is still in its development stage and has not commenced planned principal operations. As shown in the accompanying unaudited condensed consolidated financial statements, the Company has incurred aggregate losses for the period from March 9, 2007 (date of inception) through July 31, 2011 of $28,676,649, which also represents its accumulated deficit at July 31, 2011. The Company has negative cash flows from operations since inception of $18,379,279. The Company also had a working capital deficiency of $1,201,996 as of July 31, 2011. The limited revenues (of $3,201,412) that the Company has recorded were for a relatively short period in 2009 while it was testing and commissioning its UK oil processing and bio-diesel plant on a trial basis.

As explained above,

(a) In May 2011 the Company raised $1,600,000 through the issuance of a convertible debenture (the “Debenture”), which, after payment of costs and expenses and redeeming a prior secured loan, resulted in a net cash inflow of approximately $1,020,000; and

(b) The Company is entitled to receive a further $2,150,000 (from which an arrangement fee of $150,000 will be deducted) under the terms of the Securities Purchase Agreement which gave rise to the Debenture. This second debenture may only be drawn down once the Company achieves certain milestones which are described in the Securities Purchase Agreement.  

In addition:

(c) The Company is currently engaged in discussions with certain new potential investors to raise additional finance in the form of equity and/or debt.

Our ability to commence operations and then grow capacity and develop into a profitable business is dependent  upon (i) the satisfactory completion of the final stages of our UK Waste to Energy Plant (ii) obtaining the required permits and consents to supply renewable energy into the power grid and earn renewable obligation credits (iii) the success of our feedstock supply strategy, including our plans to vertically integrate into the supply chain; and (iv) raising additional capital in the form of  debt and/or equity finance, as discussed above, to enable us to commence revenue generation and then expand the scale of operations to a level that is expected to be profitable and, in due course, establish other Integrated Waste-to-Energy plants.

12

The above factors raise substantial doubt about the Company’s ability to continue as a going concern, particularly since it is has not yet achieved all of the milestones, or raised adequate capital, to enable it to commence commercial operations and generate revenue, in line with its plan. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company not succeed in the delivery of its business plan and, as a consequence, be unable to continue as a going concern.

Note 3:  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q; accordingly, they do not include all the information and footnotes required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal accruals) considered for fair presentation have been included. The Company has evaluated subsequent events through the issuance of this Form 10-Q. Operating results for the nine months ended July 31, 2011 are not necessarily indicative of the results that may be expected for the year ending October 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended October 31, 2010 filed with the Securities and Exchange Commission (“SEC”) on February 15, 2011.

Consolidation Policy

The unaudited condensed consolidated financial statements include the accounts of Four Rivers BioEnergy Inc., The Four Rivers BioEnergy Company Inc., The Four Rivers BioEthanol Company Limited, Four Rivers STT Trading Company Inc., Four Rivers STT Technology Inc., Four Rivers Real Estate Inc., BF Group Holdings Limited and its subsidiary companies and Verta Energy Group Limited and its subsidiary companies, (Verta Energy Oils Limited, Verta Energy Trading Limited and Verta Energy Generation Limited) (collectively the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. The 1.25% third party ownership of BF Group Holdings Limited at July 31, 2011 is recorded as non-controlling interest in the financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Examples include stock-based compensation assumptions and the potential outcome of future tax consequences of events that have been recognized in our financial statements. Actual results could differ from those estimates.

Development Stage Company

The Company has not generated material revenues to date and has incurred significant expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from March 9, 2007 (date of inception) through July 31, 2011, the Company has accumulated losses of $28,676,649.

The Company is considered to be a development stage entity as defined by the FASB ASC Topic 915. The Company has been a development stage entity since March 9, 2007. The Company undertook a testing and commissioning process to establish the quality of bio-diesel product that could be made to certain specification levels, and that suitable volume quantities could be produced consistently, prior to commercial production. During the third and fourth quarters of fiscal 2009, the Company generated trial revenue through these operations of the plant as an initial stage to fully commercializing this plant.

The Company needs to (i) raise further capital, in addition to the funds of approximately $2 million which may be received from the potential second closing under the Debentures referred to in Note 10,  to enable it to commence initial production and grow the business in line with its plans and (ii) complete the final stages of its pre-production business plan, which  primarily involves: (a) completing the final stages of the development of the UK Waste to Energy Plant and (b) obtaining the necessary permits to enable it to sell electricity into the power grid and obtain Renewable Obligation Credits for such sales.

13

Until the Company commences production at its Waste-to-Energy plant and/or completes the acquisition of the trading subsidiary referred to in Note 12, the Company will remain as a development stage entity.

Revenue Recognition

The Company recognizes revenue from product sales in accordance with ASC Topic 605 “Revenue Recognition”. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists (through written sales documentation); (2) delivery has occurred (through delivery into customer’s tanks and acceptance); (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded, although the Company has not experienced any such items to date and does not expect any significant provisions in the future. The Company has no discount, rebate or warranty programs. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Payments received in advance are deferred until revenue recognition is appropriate.

Foreign Currency Translation

The Company’s functional and reporting currency is the United States Dollar.  The functional currency of the Company’s subsidiaries, The Four Rivers BioEthanol Company Limited and BF Group Holdings Limited, and its group subsidiaries, is their local currency (Great British Pound – GBP). Monetary assets and liabilities are translated into U.S. Dollars as at the balance sheet date and revenue and expense accounts are translated at the average exchange rate for the period or for year end. Transaction gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated statements of operations.

Impairment of Long-Lived Assets

The Company follows ASC Topic 360, "Property, Plant and Equipment" (“ASC 360”) which requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted discounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived assets and certain identifiable intangibles will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  ASC 360 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less disposal costs.

Basic and Diluted Loss per Share

The Company utilizes ASC Topic 260, “Earnings Per Share” (“ASC 260”) for calculating the basic and diluted loss per share. In accordance with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities were exercised or converted into common stock. Potentially dilutive securities were not included in the calculation of the diluted loss per share as their effect would be anti-dilutive. The diluted net loss per share for the three and nine month periods ended July 31, 2011 and 2010 does not reflect the effect of 5,108,570 and 1,725,000 shares potentially issuable upon the exercise of the Company’s stock warrants and convertible debenture (calculated using the treasury method) because they would be anti-dilutive, thereby decreasing the net loss per common share.

Derivative instruments

ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of ASC 815 and should be classified as a liability and marked-to-market.

14

Fair value of financial instruments

In May 2009, the Company adopted accounting guidance which requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements.

Our short-term financial instruments, including cash, receivables, prepaid expenses and other assets and accounts payable, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value.

Fair value measurements

The Company applies accounting guidance pursuant to ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which establishes a framework for measuring fair value and expands disclosure about fair value measurements.

ASC 820 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes the following three levels of inputs that may be used:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The table below summarizes the fair values of our financial liabilities as of July 31, 2011:

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (conversion feature and warrant derivative liabilities) for the period ended July 31, 2011.

The following is a description of the valuation methodologies used for these items:

Conversion feature and warrant derivative liabilities — these instruments consist of the variable conversion feature of the Company’s convertible debenture and certain of the Company’s warrants with a price protection provision. These instruments were valued using pricing models which incorporate the Company’s stock price, volatility, U.S. risk free rate, dividend rate and estimated life (See Note 10).

15

Income taxes

The Company utilizes ASC Topic 740 “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. 

Comprehensive Income (Loss)

The Company utilizes ASC Topic 220, "Comprehensive Income" which establishes standards for the reporting and displaying of comprehensive income (loss) and its components.  Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The guidance requires other comprehensive income (loss) to include foreign currency translation adjustments.

Stock-Based Compensation

The Company accounts for its stock based compensation under ASC Topic 718 “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

The Company uses the fair value method for equity instruments granted to non-employees and uses the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.

Reclassifications

Certain amounts in the prior year’s condensed consolidated financial statements and the related notes have been reclassified to conform to the current period presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

Recent accounting pronouncements

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (“Topic 820”) – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU 2011-04 developed common requirements between U.S. GAAP and IFRS for measuring fair value and for disclosing information about fair value measurements.  The effective date of ASU 2011-04 will be during interim or annual periods beginning after December 15, 2011 and should be applied prospectively.  Early adoption is not permitted.  The Company has not determined the impact of this ASU on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (“Topic 220”) – Presentation of Comprehensive Income.”  ASU 2011-05 attempts to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  Under the amendments to Topic 220 an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The effective date of ASU 2011-05 will be the first interim or fiscal period beginning after December 15, 2011 and must be applied retrospectively for all periods presented in the financial statements.  Early adoption is permitted.  The adoption of ASU 2011-05 did not have a material impact on the Company’s consolidated financial statements.

16

Other recent accounting pronouncements issued by the FASB and the SEC are not considered by management to be relevant to the Company's present or future consolidated financial statements.

Note 4: Non-Controlling Interest

The Company has acquired operating assets through a holding company structure consisting of a holding company, BF Group Holdings Limited, a United Kingdom formed company (“BF Group”), and several subsidiaries to own the land in freehold and leasehold, plant, patents and intellectual property and other assets and to operate those assets, as appropriate, for greatest operational, financing, income and tax efficiency.  The Company had an 85% equity interest in BF Group at October 31, 2010. On March 10, 2011, the Company received notice from BlueCrest Strategic Limited (“BlueCrest”) that, pursuant to a Put Option, dated April 6, 2009, by and between the Company and BlueCrest (the “Put Option”), BlueCrest exercised its option (the “Option”) to sell to the Company its 6,875 ordinary shares of £0.10 each (the “Shares”) in BF Group Holdings Limited (“BF Group”). Under the terms of the Put Option, BlueCrest was entitled to receive $1,600,000 from the Company in consideration for the Shares. Also, in connection with the exercise of its Option, BlueCrest exercised a warrant (the “Warrant”) to purchase 200,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) for an aggregate exercise price of $1,600,000. The Warrant was issued by the Company to BlueCrest on April 6, 2009 in connection with the Put Option. Accordingly, upon exercise of the Option, the Company owed BlueCrest $1,600,000 and upon exercise of the Warrant, BlueCrest owed the Company $1,600,000, which the Company and BlueCrest agreed to set-off against each other. In addition, in connection with acquisition of the Shares, the Company issued another 100,000 shares of its Common Stock to BlueCrest. As a result of the acquisition of the Shares, the Company now owns 98.75% of BF Group’s issued and outstanding ordinary shares.

The third party ownership of BF Group is recorded as a non-controlling interest in the financial statements effective November 1, 2009.

Note 5: Land, Property, Plant and Equipment

A breakdown of the Company’s main items of land, property, plant and equipment are given in the table below:

Depreciation expense was $51,131 and $40,827 for the three month periods ended July 31, 2011 and 2010, respectively.

Depreciation expense was $152,390 and $126,109 for the nine month periods ended July 31, 2011 and 2010, respectively.

Depreciation expense was $452,228 for the period from March 9, 2007 (date of inception) to July 31, 2011 of which $84,951 was included as part of cost of goods sold.

Note 6: Land Held for Sale

Between 2007 and 2008 the Company acquired approximately 437 acres of land on a site located on the Tennessee River approximately 12 miles upriver of Paducah near Calvert City, Marshall County, Kentucky.  The total purchase price of the land was approximately $6.3 million.  

Based on a valuation of the Kentucky land during the year ended October 31, 2008, the Company’s management concluded that it was appropriate in the circumstances to adjust the carrying value of the land in the balance sheet by an impairment charge of $532,224 at October 31, 2008. Consequently, the land value was reduced to $5,811,240 at October 31, 2008. This reduction in value was a consequence of the general downward trend in the value of land and property across the US during 2008. 

17

During the fourth quarter of the fiscal year ended October 31, 2009 the Company’s management decided that it would commence activities to market and sell the land in Kentucky. This land had originally been acquired in the context of the Company’s initial plan to build a green field bio-energy plant on it. Management made this decision because the global capital markets were averse to financing green field bio fuels developments and, in the opinion of management, this situation will prevail for some time to come, and because the cash tied up in the land can be released for better use in operations.  As a result, the Company classified the land as ‘Land Held for Sale’ at October 31, 2009. The Company recorded an impairment charge of $2,111,239 during the fourth quarter of fiscal 2009, reducing the carrying value of the land to $3,700,000, which was the then fair value less estimated costs to sell.

On December 9, 2010, the Company entered into a contract to sell approximately 220 acres of its 437 acre plot of land in Kentucky for total cash consideration of approximately $1,500,000. On January 18, 2011 the sale transaction was completed and the Company received the net proceeds of the sale which amounted to approximately $910,000, after payment of costs, land taxes and redemption of the $500,000 loan which was secured by way of mortgage against the land. The Company recorded a loss of $423,573 on the sale of the land.

Reclassification of ‘Land Held for Sale’ to ‘Land, Property, Plant and Equipment’

During the first quarter of fiscal 2011, the Company made the decision to retain approximately 217 acres of the land that was previously classified as land ‘held-for sale’ for possible use as a site for a future Waste-to-Energy plant.  In January 2011, the Company had an independent appraiser value this 217 acres site at $2,080,000 (market value). The Company’s current intention is to retain this land and not sell it. Thus, with this renewed intention to hold the remaining land the Company has considered that it should reclassify that land from ‘held-for-sale’ to ‘held-and-used’ during the quarter ending January 31, 2011. As a result, the Company has recorded land with a carrying amount of $2,016,663 as a part of Land, Property, Plant and Equipment at January 31, 2011, this amount being the lower of the current appraised value of the land or the carrying value of the land prior to its classification as ‘held-for-sale’. Upon the decision to retain the land, the Company has reversed a provision which it had previously established for possible land sales costs of $151,250.

Note 7: Intangible Assets

Note 8: Related Party Transactions

The Company has entered into the following transactions with related parties who are executive officers, directors and/or shareholders of the Company, as described in more detail below:

Services provided by PCF Solutions Limited to the Company