Note 4. Bank Loans and Convertible Debt.

3 Months Ended

Jun. 30, 2012

4. BANK LOANS AND CONVERTIBLE DEBT.

JPMorgan Chase Bank, N.A. (“JPM”) loan agreements

Storage Tank Construction at the Brunswick Terminal

In connection with the construction of a 60,000 barrel storage tank at the Brunswick Terminal, on February 28, 2012, Blackwater Georgia, L.L.C. (“BWGA”) entered into a term loan with JPM in the principal amount of $1,380,000 to finance the construction of the new storage tank. During the three-month period ended June 30, 2012, BWGA received advances on this loan in the amount of $347,487. As of the filing date of this quarterly report on Form 10-Q, BWGA had received advances on this loan in the amount of approximately $1,194,400.

Storage Tank Construction at the Westwego Terminal and Storage Tank System Modifications at the Salisbury Terminal

On June 22, 2012, in connection with the construction of two 50,000 barrel storage tanks at the Westwego Terminal and storage tank system modifications at the Salisbury Terminal, Blackwater New Orleans, L.L.C. (“BWNO”) entered into a term loan with JPM in the principal amount of $2,300,000 to finance the construction. During the three-month period ended June 30, 2012, the Company received advances on this loan in the amount of $202,325. As of the filing date of this quarterly report on Form 10-Q, the Company had received advances on this loan in the amount of approximately $1,034,700.

The loan bears interest at the JPM Commercial Bank Prime floating rate. Beginning on July 31, 2012 and continuing on the last day of each calendar month thereafter, the Company will pay consecutive monthly installments of interest only on the loan. In addition, beginning on January 31, 2013 and continuing on the last day of each calendar month thereafter, the Company will pay monthly principal installments of approximately $38,000. All unpaid principal and accrued and unpaid interest is finally due and payable on December 31, 2017.

The loan includes customary events of default including, but not limited to, the failure of the Company to pay any principal or interest when due, the breach of any representation or warranty in any of JPM’s loan documents, or insolvency or bankruptcy. Upon the occurrence of an event of default, the loan will become due and payable automatically and without notice.

Additionally, in connection with the closing of the term loan, BWNO entered into the following with JPM: the Fifth Amendment to the Credit Agreement, an Allonge to the Collateral Mortgage Note, dated December 23, 2008, and a First Amendment to Collateral Mortgage, Assignment of Leases and Rents and Security Agreement, dated December 23, 2008.

Blackwater Midstream Corp. entered into a continuing guaranty pursuant to which the Company guaranteed the obligations of BWNO to JPM.

Convertible Debt

October 2009 convertible debt offering

On October 15, 2009, we issued $3,001,033 of convertible notes. The convertible notes originally set a maturity date on October 15, 2011 (the date was later extended, see below) and have a stated annual interest rate of 10%. The principal is payable at maturity but interest is paid quarterly beginning January 15, 2010. The Company incurred interest expense of $75,026 for the three-month periods ended June 30, 2012 and June 30, 2011. In addition, the notes are convertible at any time into restricted shares of the Company’s common stock at $0.50 per share.

Related party investors as of June 30, 2012 and June 30, 2011 accounted for $430,000 of the aggregate amount of convertible debt funds collected.

On March 28, 2011, the convertible note agreements were amended to reduce the conversion price to $0.40 per share upon a change in control of the Company. In June 2011, the Company contacted the holders of the Company’s 2009 Convertible Promissory Notes to extend the note’s maturity date from October 15, 2011 to October 15, 2013.

The change in the conversion feature was evaluated under ASC 815-40 “Contracts in Entity’s Own Equity”. On June 30, 2012, as per ASC 815-40, we evaluated the fair market value of the derivative liability (using the BWMS closing share price of $0.61) and recorded a net non-cash loss of approximately $637,600.

As a result of the First Amendment to the Credit Agreement with JPM, the maturity and conversion dates of the convertible debt notes issued pursuant to the Company’s September 2009 Convertible Debt Offering were to be extended by certain intervals. As of June 24, 2011, the maturity and conversion dates have been extended until October 15, 2013 but still do not meet the maturity date of September 30, 2014, as requested by JPM. However, JPM is aware of the maturity date extension that was achieved and has not requested any action from the Company.

March 2010 convertible debt offering

On March 31, 2010, we issued $1,750,000 of convertible notes. The convertible notes originally set a maturity date on March 31, 2012 (the date was later extended, see below) and have a stated annual interest rate of 10%. The principal is payable at maturity but interest is paid quarterly beginning June 30, 2010. The Company incurred interest expense of $43,750 for the three-month periods ended June 30, 2012 and June 30, 2011. In addition, the notes are convertible at any time into restricted shares of the Company’s common stock at $0.50 per share.

Related party investors as of June 30, 2012 and June 30, 2011 accounted for $245,000 of the aggregate amount of convertible debt funds collected.

On March 28, 2011, the convertible note agreement was amended to reduce the conversion price to $0.40 per share upon a change in control of the Company. In June 2011, the Company contacted the holders of the Company’s 2010 Convertible Promissory Notes to extend the note’s maturity date from March 31, 2012 to September 30, 2013.

In summary, during the three-month period ended June 30, 2012, the Company recorded a net non-cash loss of approximately $1,002,000 related to the 2009 and 2010 Notes related to changes in the fair market value of the convertible debt notes derivative liabilities.

Future minimum debt payments

The future minimum payments related to our JPM credit facilities and convertible notes as of June 30, 2012, for the next five years and the total amount thereafter are as follows, assuming none of the convertible notes are converted:

Years ending June 30,
2013	$	1,903,189
2014		6,520,897
2015		886,025
2016		320,000
2017		320,000
Thereafter		0
	$	9,950,111

The following table reconciles our various debt instruments to the balance sheet line items for June 30, 2012 and March 31, 2012.

	As of June 30, 2012
	Consolidated Balance Sheet		JPM CHASE Bank Loans		2009 CD Loans		2010 CD Loans
Related party long-term convertible debt loans *1	$	675,000	$	-	$	430,000	$	245,000
Long-term convertible debt loans *2	$	4,076,033	$	-	$	2,571,033	$	1,505,000
Current portion of long-term bank loans	$	1,903,189	$	1,903,189	$	-	$	-
Long-term bank loans	$	3,295,889	$	3,295,889	$	-	$	-
	$	9,950,111	$	5,199,078	$	3,001,033	$	1,750,000

*1 - Shown on Consolidated Balance Sheet as of June 30, 2012 as Net of CD Discount:

Related party long-term convertible debt loans of $675,000 less CD Discounts of $597,386 = Net of $77,614

*2 - Shown on Consolidated Balance Sheet as of June 30, 2012 as Net of CD Discount:

Long-term convertible debt loans of $4,076,033 less CD Discounts of $3,607,352 = Net of $468,681

	As of March 31, 2012
	Consolidated Balance Sheet		JPM CHASE Bank Loans		2009 CD Loans		2010 CD Loans
Related party long-term convertible debt loans *3	$	675,000	$	-	$	430,000	$	245,000
Long-term convertible debt loans *4	$	4,076,033	$	-	$	2,571,033	$	1,505,000
Current portion of long-term bank loans	$	1,551,864	$	1,551,864	$	-	$	-
Long-term bank loans	$	3,390,868	$	3,390,868	$	-	$	-
	$	9,693,765	$	4,942,732	$	3,001,033	$	1,750,000

*3 - Shown on Consolidated Balance Sheet as of March 31, 2012 as Net of CD Discount:

Related party long-term convertible debt loans of $675,000 less CD Discounts of $620,291 = Net of $54,709

*4 - Shown on Consolidated Balance Sheet as of March 31, 2012 as Net of CD Discount:

Long-term convertible debt loans of $4,076,033 less CD Discounts of $3,745,668 = Net of $330,365

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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