You should read the following discussion in conjunction with the unaudited consolidated financial statements and the accompanying notes included in this Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed elsewhere in this Form 10-Q and those listed in other documents we have filed with the Securities and Exchange Commission.
We are a recently formed company whose ultimate goal is to become a leading ethanol producer in the United States. We are currently constructing two 115 Mmgy ethanol plants in the Midwestern corn belt. We had planned to begin construction of a third plant in Alta, Iowa in the second half of 2007. However, plans to construct a third plant have been delayed for three to six months due to the sale of Delta-T, the design engineer on our two initial plants, and increases in construction costs. We will continue to evaluate the attractiveness of initiating construction of a third plant. We hold sites in Gilman, Illinois, Atchison, Kansas and Litchfield, Illinois on which we can build additional plants. At each, land has been optioned and permit filings have begun. In addition, Cargill has a strong local presence and, directly or through affiliates, owns adjacent grain storage facilities at each of the locations. All six sites, including the two on which we are building, were selected primarily based on access to favorably priced corn, the availability of rail transportation and natural gas and Cargill’s competitive position in the area.
While our initial focus has been on plant construction, we ultimately expect to grow, at least in part, through acquisitions. We will continue to assess the trade-offs implicit in acquiring versus building plants as we consider whether and when to initiate building additional plants.
We are a holding company with no operations of our own, and are the sole managing member of BioFuel Energy, LLC (the ‘‘LLC’’), which is itself a holding company and indirectly owns all of our operating assets. The financial statements contained elsewhere in this quarterly report primarily reflect certain start-up costs, fees and expenses incurred by the LLC, the initial costs incurred in connection with the preparation for, and commencement of, construction of our Wood River and Fairmont ethanol facilities and the equity contributions received by the LLC.
We have engineering, procurement and construction, or EPC, contracts with TIC for the construction of our Wood River and Fairmont ethanol plants pursuant to which the timely construction and performance of the two plants is guaranteed by TIC. Construction of both plants has begun, and as of June 30, 2007, we had invested approximately $96.3 million in the financing and construction of the Wood River plant and approximately $86.8 million in the financing and construction of the Fairmont plant. Spending on the actual construction of the Wood River and Fairmont plants (excluding related financing costs) is expected to total approximately $310 million. We currently anticipate that both plants will be completed and begin commercial operation during the first quarter of 2008 and will generate net cash inflows in 2008. If we encounter significant difficulties or delays in constructing our plants, our results of operations and financial conditio n could be materially harmed. Please see ‘‘Risk Factors’’ in our Registration Statement on Form S-1 for a description of certain facts that could cause our projects to be delayed. We may also be required to borrow additional funds to replace lost revenues in the event of such delay. Furthermore, if provisional acceptance of a facility does not occur by December 31, 2009, Cargill may terminate, or seek to renegotiate the terms of, its commercial agreements with us with respect to the relevant facility.
Our primary source of revenue will be the sale of ethanol. We will also receive revenue from the sale of distillers grain, which is a residual co-product of the processed corn and is sold as animal feed.
The selling prices we realize for our ethanol are largely determined by the market supply and demand for ethanol, which, in turn, is influenced by industry factors over which we have little if any control.
Ethanol prices are extremely volatile. In early 2005, ethanol prices decreased due to a perceived over-supply of ethanol. During the summer of 2006, ethanol prices rose due to increased gasoline prices and legislative changes, resulting in an average realized price for the first six months of 2006 that was $0.56 per gallon higher than for the comparable period of the prior year. From September 2006 through June 2007, however, ethanol prices have declined from the levels prevailing in the summer of 2006. The ethanol Bloomberg rack price rose from $1.18 per gallon at April 29, 2005 to a high of $3.98 per gallon at July 3, 2006 and has subsequently declined to $2.23 at June 29, 2007.
Cost of goods sold and gross profit
Our gross profit will be derived from our total revenues less our cost of goods sold. Our cost of goods sold will be affected primarily by the cost of corn and natural gas. Both corn and natural gas are subject to volatile market conditions as a result of weather, market demand, regulation and general economic conditions.
Corn will be our most significant raw material cost. In general, rising corn prices result in lower profit margins because ethanol producers are unable to pass along increased corn costs to customers. The price of corn is influenced by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply. Historically, the spot price of corn tends to rise during the Spring planting season in May and June and tends to decrease during the Fall harvest in October and November. From November 18, 2005 to June 29, 2007, the spot price of corn has risen from $1.83 per bushel to $3.17 per bushel.
We will purchase natural gas to power steam generation in our ethanol production process and fuel for our dryers to dry our distillers grain. Natural gas will represent our second largest operating cost after corn, and natural gas prices are extremely volatile.
We will include corn procurement fees that we pay to Cargill in our cost of goods sold. Other cost of goods sold will primarily consist of our cost of chemicals, depreciation, manufacturing overhead and rail car lease expenses.
Spread between ethanol and corn prices
Our gross profit will depend principally on our ‘‘crush spread’’, which is the difference between the price of a gallon of ethanol and the price of the amount of corn required to produce a gallon of ethanol. Using our dry-mill technology, each bushel of corn produces approximately 2.7 gallons of fuel grade ethanol. Based on the price of a bushel of corn at June 29, 2007 of $3.17, the cost of corn per gallon of ethanol would be approximately $1.17 (.37 bushels per gallon x $3.17). As such, the ‘‘crush spread’’ would be $1.06 per gallon based on the June 29, 2007 ethanol price of $2.23 per gallon.
During the first half of 2006, the spread between ethanol and corn prices reached historically high levels, driven in large part by high oil prices and historically low corn prices resulting from continuing record corn yields and acreage, although the spread has since fallen back to $1.06 as of June 29, 2007. Any increase or decrease in the spread between ethanol and corn prices, whether as a result of changes in the price of ethanol or corn, will have an effect on our financial performance.
Selling, general and administrative expenses
Selling, general and administrative expenses will consist of salaries and benefits paid to our management and administrative employees, expenses relating to third-party services, insurance, travel, marketing and other expenses, including certain expenses associated with being a public company, such as costs associated with compliance with Section 404 of the Sarbanes-Oxley Act and listing and transfer agent fees.
Results of operations
The following discussion summarizes the significant factors affecting the consolidated operating results of the Company for the three and six month periods ended June 30, 2007. This discussion
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should be read in conjunction with the unaudited consolidated financial statements and notes to the unaudited consolidated financial statements contained in Item 1 above, and the consolidated financial statements and related notes for the year ended December 31, 2006 included in the Company’s Registration Statement on Form S-1.
We are a new company with no material operating results to date.
BioFuel Solutions Delaware is considered our predecessor for accounting purposes. The aggregate revenues of our predecessor from its inception through December 31, 2005 were $1,043,707 earned for development services provided in connection with ethanol projects that were unrelated to our planned business. There were no revenues earned by our predecessor in 2006. Costs incurred from inception through December 31, 2005 related to expenses incurred in connection with the initial development of our Wood River and Fairmont facilities. Expenses incurred in 2006 were related primarily to the development of our Wood River and Fairmont facilities. We believe that the results of operations of our predecessor are not meaningful and should not be relied upon as an indication of our future performance.
The LLC, which has been consolidated for accounting purposes by BioFuel Energy Corp., has been arranging financing for and initiating construction of our first two ethanol plants as well as development work on our additional plant sites. From its inception through June 30, 2007, the Company incurred a net loss of $2,774,800 and a net loss distributable to common shareholders of $4,102,200. This loss was primarily due to general and administrative expenses of $13,087,800, of which $10,328,300 was compensation. Compensation expense includes a non-cash charge of $6,983,100 related to share-based payments awarded to our founders and certain key employees. These share-based payments include issuance of membership interests (considered profits interests under the LLC agreement and for tax purposes) which are required to be expensed under generally accepted accounting principles. Compensation expense also includes a $550,000 payment made to a founder, who has sinc e left the LLC, for work performed in connection with the formation of the LLC and initial financing. The expenses were partially offset by $224,600 of interest income primarily earned on the investment of the proceeds from the initial public offering and the concurrent private placement and the $10,088,400 reduction due to the minority interest’s portion (BioFuel Energy, LLC) of the loss. In determining the net loss distributable to common shareholders, the Company also recorded a non-cash beneficial conversion charge of $1,327,400 immediately prior to the public offering.
For the three months ended June 30, 2007, the Company incurred a net loss of $287,400 and a net loss distributable to common shareholders of $1,614,800. The loss was primarily due to general and administrative expenses of $2,024,700, of which $1,320,600 was compensation. Compensation expense includes a non-cash charge of $300,500 related to share-based payments awarded to certain officers and employees during the quarter. These share-based payments include issuance of membership interests (considered profits interests under the LLC agreement and for tax purposes) which are required to be expensed under generally accepted accounting principles. The expenses were partially offset by $200,000 of interest income earned on the investment of the proceeds from the initial public offering and the concurrent private placement and the $1,537,300 reduction due to the elimination of the minority interest in the loss. In determining the net loss distributable to co mmon shareholders, the Company also recorded a non-cash beneficial conversion charge of $1,327,400 immediately prior to the public offering.
For the six months ended June 30, 2007, the Company incurred a net loss of $441,200 and a net loss distributable to common shareholders of $1,768,500. The loss was primarily due to general and administrative expenses of $3,925,200, of which $2,615,900 was compensation. Compensation expense includes a non-cash charge of $888,500 related to share-based payments awarded to certain officers and employees during the two quarters. These share-based payments include issuance of membership interests (considered profits interests under the LLC agreement and for tax purposes) which are required to be expensed under generally accepted accounting principles. The expenses were partially offset by $213,300 of interest income primarily earned on the investment of the proceeds from the initial public offering and the concurrent private placement and the $3,270,700 reduction due to the elimination of the minority interest in the loss. In determining the net loss distri butable to common
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shareholders, the Company also recorded a non-cash beneficial conversion charge of $1,327,400 immediately prior to the public offering.
Liquidity and capital resources
Our cash flows from operating, investing and financing activities during the six month period ended June 30, 2007 and the period from inception through June 30, 2007 are summarized below:
| | | | | | | | | | | | |
| | | | For the Six
Months Ended,
June 30, 2007 | | | From Inception
on April 11, 2006
through
June 30, 2007 |
| Cash provided by (used in): | | | | | | | | | | | | |
| Operating activities | | | | $ | (2,618,484 | ) | | | | $ | (5,842,993 | ) |
| Investing activities | | | | | (89,171,332 | ) | | | | | (149,324,682 | ) |
| Financing activities | | | | | 153,165,027 | | | | | | 243,781,403 | |
| Net increase (decrease) in cash and equivalents | | | | $ | 61,375,211 | | | | | $ | 88,613,728 | |
Cash used in operating activities consisted primarily of compensation paid to our employees and expenses incurred by our corporate office. Expenditures incurred under investing activities related primarily to the construction of our Wood River and Fairmont ethanol plants. Cash provided by financing activities consisted of proceeds of equity investments made by our historical equity investors in 2006, proceeds from our initial public offering and concurrent private placement in 2007, and borrowings under our bank facility and subordinated debt in 2007, less equity and debt issuance costs and distributions to certain owners of our predecessor company. We expect to fund the completion of our Wood River and Fairmont plants with our available capital resources as summarized in the following table:
| | | | | | | | | | | | |
| | | | June 30,
2007 | | | December 31,
2006 |
| Cash and equivalents | | | | $ | 88,613,728 | | | | | $ | 27,238,517 | |
| Available under bank facility | | | | | 225,000,000 | | | | | | 230,000,000 | |
| Available under subordinated loan agreement | | | | | — | | | | | | 50,000,000 | |
| Available from tax increment financing | | | | | — | | | | | | 6,050,770 | |
Our principal sources of liquidity at June 30, 2007 consist of cash and equivalents and available borrowings under our bank facility. Our existing balance of cash and equivalents at December 31, 2006 consisted entirely of proceeds of equity investments made by our historical equity investors. Our balance of cash and equivalents at June 30, 2007 consisted of proceeds of subordinated debt borrowings and our initial public offering and concurrent private placement.
In July 2007, the underwriters of the Company’s initial public offering exercised their full over-allotment option, purchasing 787,500 additional shares of common stock. The shares were purchased at the $10.50 per share offering price, resulting in $7.7 million of additional proceeds to the Company. With these proceeds combined with the proceeds from the 5,250,000 shares sold to the public and 4,250,000 shares sold simultaneously to the Company’s three largest pre-existing shareholders, the Company retired $30.0 million of its subordinated debt, leaving $20.0 million of subordinated debt outstanding.
Our principal liquidity needs are expected to be the construction of our planned production facilities, debt service requirements of our indebtedness and general corporate purposes.
We believe that our cash and equivalents, including the retained net proceeds of our recent stock offering, when combined with funds available under our bank facility will be more than sufficient to meet our cash requirements for the next twelve months, including the costs to complete our Wood River and Fairmont plants.
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Ethanol plant construction
We currently have two ethanol plants under construction. We also have four additional sites in development for the possible construction of plants. We estimate that the total project costs, exclusive of corporate overhead and financing charges, to complete Wood River and Fairmont will be approximately $310 million. At July 1, 2007, the estimated remaining costs to complete Wood River and Fairmont approximated $143 million. This is expected to be funded with borrowings under our existing bank facility.
In connection with the formation of the Company, we secured a $50.0 million subordinated debt facility. Subsequently, we entered into a $230.0 million bank facility in connection with the construction of our Wood River and Fairmont facilities. The full $50.0 million of available subordinated debt had been drawn by May 2007 when we made our initial bank borrowing. In July 2007, we repaid $30.0 million of the subordinated debt with a portion of the proceeds of our initial public offering. If we do not proceed on construction of a third plant, we may elect to repay the final $20.0 million of our subordinated debt. We will need to secure additional financing in order to construct a third plant. There can be no assurance that such financing will be able to be obtained on acceptable terms.
We expect to complete the construction of our Wood River facility late in the first quarter of 2008. We have spent approximately $89.1 million on total project costs relating to the Wood River facility from May 1, 2006, to June 30, 2007. We expect to make additional capital expenditures in 2007 and 2008 of approximately $59.9 million in connection with the total project costs relating to our Wood River facility. We expect to complete the construction of our Fairmont facility late in the first quarter of 2008. We have spent approximately $78.3 million on total project costs relating to the Fairmont facility from June 1, 2006, to June 30, 2007. We expect to make additional capital expenditures in 2007 and 2008 of approximately $83.2 million in connection with the total project costs relating to our Fairmont facility. To date, we have used the net proceeds of equity investments by our historical equity investors, th e proceeds of our initial public offering and the concurrent private placement, and borrowings under our bank facility and subordinated debt agreement to finance the construction of the Wood River and Fairmont facilities. As of June 30, 2007, $5.0 million was outstanding under our bank facility and $50.0 million was outstanding under our subordinated loan agreement. We repaid $30.0 million of the subordinated debt in July 2007.
Tax and our tax benefit sharing agreement
We expect that, as a result of future exchanges of membership interests in the LLC for shares of common stock, the tax basis of the LLC’s assets attributable to our interest in the LLC will be increased. These increases in tax basis will result in a tax benefit to BioFuel that would not have been available but for the future exchanges of the LLC membership interests for shares of our common stock. These increases in tax basis would reduce the amount of tax that we would otherwise be required to pay in the future, although the IRS may challenge all or part of the tax basis increases, and a court could sustain such a challenge.
We have entered into a tax benefit sharing agreement with our historical LLC equity investors that will provide for a sharing of these tax benefits between the Company and the historical LLC equity investors. Under this agreement, BioFuel will make a payment to an exchanging LLC member of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of this increase in tax basis. BioFuel and its common stockholders will benefit from the remaining 15% of cash savings, if any, in income tax that is realized by BioFuel. For purposes of the tax benefit sharing agreement, cash savings in income tax will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no increase in the tax basis of the tangible and intangible assets of the LLC as a result of the exchanges and had we not entered into the tax benefit sharing agreement. The term of the tax benefit sharing agreement commenced upon consummation of the initial public offering and will continue until all such tax benefits have been utilized or expired, unless a change of control occurs and we exercise our resulting right to terminate the tax benefit sharing agreement for an amount based on agreed payments remaining to be made under the agreement.
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Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, our historical LLC equity investors will not reimburse us for any payments previously made under the tax benefit sharing agreement. As a result, in certain circumstances we could make payments to our historical LLC equity investors under the tax benefit sharing agreement in excess of our cash tax savings. Our historical LLC equity investors will receive 85% of our cash tax savings, leaving us with 15% of the benefits of the tax savings. The actual amount and timing of any payments under the tax benefit sharing agreement will vary depending upon a number of factors, including the timing of exchanges, the extent to which such exchanges are taxable and the amount and timing of our income. We expect that, as a result of the size of the increases of the tangible and intangible assets of the LLC attributable to our interest in the LLC, during the expected term of the tax benefit sharing agreement, the payments that we may make to our historical LLC equity investors could be substantial.
Bank facility
In September 2006, certain of our subsidiaries entered into a $230 million bank facility with BNP Paribas and a syndicate of lenders to finance the construction of our Wood River and Fairmont plants. Neither BioFuel Energy Corp. nor the LLC is a party to the bank facility, although the equity interests and assets of our subsidiaries are pledged as collateral to secure the debt under the bank facility.
Our bank facility consists of $210.0 million of non-amortizing construction loans, which will convert into term loans amortizing in an amount equal to 6.0% of the outstanding principal amount thereof per annum and maturing in September 2014, if certain conditions precedent, including the completion of our Wood River and Fairmont plants, are satisfied prior to June 2009. The construction loans otherwise mature in June 2009. Once repaid, the construction loans may not be re-borrowed in whole or in part.
Our bank facility also includes working capital loans of up to $20.0 million, a portion of which may be available to us in the form of letters of credit. The working capital loans will be available to pay certain operating expenses of the Wood River and Fairmont plants, or alternative plants, as the case may be, with up to $5.0 million becoming available upon mechanical completion of a plant, up to $10.0 million becoming available upon provisional acceptance of a plant and the full $20.0 million becoming available upon conversion of the construction loans to term loans. The working capital loans will mature in September 2010 or, with consent from two-thirds of the lenders, in September 2011.
Although we have commenced borrowing under our bank facility, additional borrowings remain subject to the satisfaction of a number of additional conditions precedent, including continued compliance with debt covenants and provision of engineers’ reports satisfactory to the lenders. To the extent that we are not able to satisfy these requirements, we will not be able to make additional borrowings under the bank facility without obtaining a waiver or consent from the lenders.
The obligations under the bank facility are secured by first priority liens on all assets of the borrowers and a pledge of all of our equity interests in our subsidiaries. In addition, substantially all cash of the borrowers is required to be deposited into blocked collateral accounts subject to security interests to secure any outstanding obligations under the bank facility. Funds will be released from such accounts in accordance with the terms of the bank facility.
Interest rates on each of the loans under our bank facility will be, at our option, (a) a base rate equal to the higher of (i) the federal funds effective rate plus 0.5% and (ii) BNP Paribas’s prime rate, in each case, plus 2.0% or (b) a Eurodollar rate equal to LIBOR adjusted for reserve requirements plus 3.0%. Interest periods for loans based on a Eurodollar rate will be, at our option, one, three or six months, or, if available, nine or twelve months. Accrued interest is due quarterly in arrears for base rate loans, on the last date of each interest period for Eurodollar loans with interest periods of one or three months, and at three month intervals for Eurodollar loans with interest periods in excess of three months. Overdue amounts will bear additional interest at a default rate of 2.0%.
The bank facility includes certain limitations on, among other things, the ability of our subsidiaries to incur additional indebtedness, grant liens or encumbrances, declare or pay dividends or
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distributions, conduct asset sales or other dispositions, mergers or consolidations, conduct transactions with affiliates and amend, modify or change the scope of the projects, the project agreements or the budgets relating to the projects.
We are required to pay certain fees in connection with our bank facility, including a commitment fee equal to 0.50% per annum on the daily average unused portion of the construction loans and working capital loans and letter of credit fees.
Debt issuance fees and expenses of approximately $7.6 million ($6.9 million, net of accumulated amortization) have been incurred with the Senior Debt at June 30, 2007. These costs have been deferred and are being amortized over the term of the Senior Debt.
As of June 30, 2007, we had $5.0 million of outstanding borrowings under our bank facility.
Subordinated loan agreement
In September 2006, the LLC entered into a subordinated loan agreement with certain affiliates of Greenlight Capital, Inc. and Third Point LLC. The subordinated loan agreement provides for up to $50 million of non-amortizing loans, all of which must be used for general corporate purposes, working capital or the development, financing and construction of our Wood River and Fairmont Plants. The entire principal balance, if any, plus all accrued and unpaid interest will be due in March 2015.
The payments due under our subordinated loan agreement are secured by the subsidiary equity interests owned by the LLC and are fully and unconditionally guaranteed by all of the LLC’s subsidiaries. The guarantees are subordinated to the obligations of these subsidiaries under our bank facility.
Interest on outstanding borrowings under our subordinated loan agreement accrues at a rate of 15.0% per annum and is due on the last day of each calendar quarter. If an event of default occurs, interest will accrue at a rate of 17.0% per annum.
Debt issuance fees and expenses of approximately $5.4 million ($5.1 million, net of accumulated amortization) have been incurred in connection with the Subordinated Debt at June 30, 2007. Debt issuance costs associated with the Subordinated Debt are being deferred and amortized over the term of the agreement.
As of June 30, 2007, there was $50.0 million outstanding under our subordinated loan agreement. On July 10, 2007, we repaid $30.0 million of the outstanding borrowings under our subordinated loan agreement with a portion of the proceeds of our initial public offering and the concurrent private placement.
Tax increment financing
In February 2007, the subsidiary of the LLC constructing our Wood River plant received a grant of $6.0 million from the proceeds of a tax increment revenue note issued by the City of Wood River, Nebraska. The grant was provided to fund improvements to property owned by the subsidiary. The City of Wood River will pay the principal and interest of the note from the incremental increase in the property taxes related to the improvements made to the property. The proceeds of the grant have been recorded as a tax increment financing grant and will be amortized over the term of the financing grant. Amortization will begin in 2008 when the plant becomes operational.
The LLC has guaranteed the principal and interest of the tax increment revenue note if, for any reason, the City of Wood River fails to make the required payments to the holder of the note.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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Contractual obligations
The following summarizes our significant contractual obligations with respect to our Wood River and Fairmont plants, in thousands, as of June 30, 2007. No obligations relating to any third plant under development are reflected in the table because we have not yet entered into definitive agreements with respect to such plant.
Type of obligation
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | Thereafter | | | Total |
| Construction contracts(1) | | | | $ | 98,436 | | | | | $ | 22,184 | | | | | $ | — | | | | | $ | — | | | | | | | | | | | $ | — | | | | | $ | 120,620 | |
| Construction contracts(2) | | | | | 482 | | | | | | 1,407 | | | | | | 1,407 | | | | | | 1,056 | | | | | | — | | | | | | — | | | | | | 4,352 | |
| Operating leases(3) | | | | | 767 | | | | | | 10,120 | | | | | | 10,284 | | | | | | 10,284 | | | | | | 10,284 | | | | | | 77,177 | | | | | | 118,916 | |
| Capital lease obilgation(4) | | | | | 50 | | | | | | 300 | | | | | | 300 | | | | | | 300 | | | | | | 300 | | | | | | 7,750 | | | | | | 9,000 | |
| Minimum energy purchases(4) | | | | | 50 | | | | | | 300 | | | | | | 300 | | | | | | 300 | | | | | | 300 | | | | | | 7,750 | | | | | | 9,000 | |
| Purchase obligations(5) | | | | | 772 | | | | | | 2,100 | | | | | | 2,400 | | | | | | 2,400 | | | | | | 2,400 | | | | | | 38,700 | | | | | | 48,772 | |
| Loan commitment fees(6) | | | | | 397 | | | | | | 90 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 487 | |
| Minimum commissions(7) | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Total contractual obligations | | | | $ | 100,954 | | | | | $ | 36,501 | | | | | $ | 14,691 | | | | | $ | 14,340 | | | | | $ | 13,284 | | | | | $ | 131,377 | | | | | $ | 311,147 | |
| (1) | We have entered into engineering, procurement and construction contracts covering the construction of our Wood River and Fairmont plants. The obligations reported are the remaining amounts payable under the existing contracts and include the retainage reported in our consolidated balance sheet. We are responsible for the construction of certain infrastructure outside the Wood River and Fairmont plants, such as water treatment facilities, a rail loop and rail connections, natural gas interconnect pipelines and grain elevator improvements. |
| (2) | We have entered into construction contracts with Cornerstone Energy, Inc. and an affiliate of Bear Cub Energy for the construction of natural gas lateral pipelines at our Wood River and Fairmont plants, respectively. Construction on both projects is currently expected to be completed in the fourth quarter of 2007. The contract price for each pipeline is payable in installments over 36 months following completion of the pipelines, beginning in the fourth quarter of 2007. Either obligation may be repaid early without penalty. |
| (3) | We have entered into agreements with Cargill to lease corn storage facilities adjacent to our Wood River and Fairmont plants. We expect to pay Cargill approximately $800,000 per year to lease each of these storage facilities provided the applicable corn supply agreement remains in effect. We have also entered into agreements to lease a total of 1,065 railroad cars. Pursuant to these lease agreements, beginning in 2008 we will pay approximately $8.7 million annually for ten years. Monthly rental charges escalate if modifications of the cars are required by governmental authorities or mileage exceeds 30,000 miles in any calendar year. |
| (4) | We have entered into an agreement for electrical service for our Fairmont plant under which we will pay, beginning in the fourth quarter of 2007, a monthly facilities charge of approximately $25,000 and a minimum monthly electric service charge of $25,000 for the 30-year term of the agreement to cover the investment expected to be made by the utility in order to provide electrical service to the plant. |
| (5) | We have corn supply agreements with Cargill for our Wood River and Fairmont plants under which we will pay Cargill minimum origination fees of $1.2 million annually for each plant. |
| (6) | Under our bank facility we will pay a commitment fee of 0.50% per annum, payable quarterly, on the daily average unused portion of the facility. The obligations are based on estimated timing of funding under bank facilities for the remainder of 2007 and 2008. |
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| (7) | We have marketing agreements with Cargill for the ethanol and distillers grain that will be produced by our Wood River and Fairmont plants. Pursuant to these agreements we are required to pay a minimum commission to the extent either plant fails to produce 82.5 million gallons of ethanol or 247,500 tons of distillers grain for the twelve-month period beginning with the start of commercial operations and each anniversary thereafter. If the number of gallons of ethanol actually produced by a plant is less than 82.5 Mmgy, the minimum commission will be the deficiency multiplied by the average selling price of our ethanol during such period, multiplied by 1%. If the number of tons of distillers grain produced is less than 247,500 tons, the minimum commission will be equal to the sum of the deficiency applicable to dry dist illers grain multiplied by $2.00 per ton and the deficiency applicable to wet distillers grain multiplied by $3.00 per ton. The deficiency volume applicable to dry and wet distillers grain will be determined based on the ratio of dry products to wet products produced at the relevant plant during the applicable year. |
Summary of critical accounting policies
The consolidated financial statements of BioFuel Energy Corp. included in this Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States. Note 2 to these financial statements is a summary of our significant accounting policies, certain of which require the use of estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based on judgments by management using its knowledge and experience about the past and current events and assumptions regarding future events, all of which we consider to be reasonable. These judgments and estimates reflect the effects of matters that are inherently uncertain and that affect the carrying value of our assets and liabilities, the disclosure of contingent liabilities and reported amounts of expenses during the reporting period.
The accounting estimates and assumptions discussed in this section are those that involve significant judgments and the most uncertainty. Changes in these estimates or assumptions could materially affect our financial position and results of operations and are therefore important to an understanding of our consolidated financial statements.
Recoverability of property, plant and equipment
We are in the process of making a significant investment in property, plant and equipment and will continue to make significant investments over the next several years. We are currently developing three ethanol production facilities. Two facilities are under construction, and we have acquired land options and are permitting the property on which up to four additional plants may be constructed. We evaluate the recoverability of property, plant and equipment whenever events or changes in circumstances indicate that the carrying value of our property, plant and equipment may not be recoverable.
Management must exercise judgment in assessing whether or not circumstances require a formal evaluation of the recoverability of our property, plant and equipment. If an impairment test is required, management must estimate future sales volume, prices, inflation and capital spending, among other factors. These estimates involve inherent uncertainties, and the measurement of the recoverability of the cost of our property, plant and equipment is dependent on the accuracy of the assumptions used in making the estimates and how these estimates compare to our future operating performance. Certain of the operating assumptions will be particularly sensitive to the development of the ethanol industry.
We have not recognized an impairment loss on any of our property, plant and equipment from our inception through June 30, 2007.
Share-based compensation
We account for the exchanges of equity instruments for employee services in accordance with Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payments (‘‘SFAS 123R’’). For the period from inception of the LLC to December 31, 2006, we issued
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425,000 Class M units, 2,103,118 Class C units and 676,039 Class D units to our founding members and key employees and recorded compensation expense of $6,094,600. During the first quarter of 2007, we issued 85,000 Class C Units and 30,000 Class D Units to two officers and recorded compensation expense of $588,000. During the second quarter of 2007, we issued 27,507 Class C Units and 7,503 Class D Units to certain officers and employees and recorded compensation expense of $267,100. An additional $33,400 of compensation expense related to stock options and restricted grants was recorded during the second quarter. Other than the Units issued in the second quarter of 2007 and the expenses associated with the stock options and restricted stock grants, compensation expense was determined based on the estimated fair value of the Class M, C and D Units at the date of grant. The non-contemporaneous valuation of the membership units required an estimation of the fair value of the company’s total invested capital at each date the membership units were awarded to management. These estimates of the fair value of the company’s total invested capital were made by discounting projected cash flows through December 2014. These cash flows were based on estimates made by management of future sales volume, prices, inflation and capital spending requirements. The rates used to discount the cash flows at each valuation date were based on a projected weighted average cost of capital. The projected weighted average cost of capital required estimates of the required rates of return on equity and debt and projections of our capital structure. Once the fair value of the total invested capital at each valuation date was determined, it was allocated among our debt and equity holders through a series of call options. The Black-Scholes option pricing model was used to value these call options. The key assumptions used in the Black-Scholes calculation were the expected time to a liquidity event, the implied volatilities of comparable companies and the risk-free rate of return during the expected term of the options.
The amount of compensation expense recorded as a result of the issuance of equity membership units to members of management involved a significant number of estimates. Due to the uncertainties inherent in these estimates, the accuracy of the amount of compensation expense recorded is dependent on the accuracy of the assumptions used in making the estimates and how these estimates compare to the company’s future operating performance and our ability to raise debt and additional equity. Certain of the operating assumptions will be particularly sensitive to the development of the ethanol industry and the attractiveness of ethanol companies to the capital markets.
Inflation
Due to our lack of operating history, inflation has not yet affected our operating results. However, construction costs, costs of goods sold, taxes, repairs, maintenance and insurance are all subject to inflationary pressures and could adversely affect our ability to construct our planned ethanol production facilities, our ability to maintain our facilities adequately once built and our business and results of operations.
Forward-looking statements
Certain information included in this report, other materials filed or to be filed by the Company with the Securities and Exchange Commission (‘‘SEC’’), as well as information included in oral statements or other written statements made or to be made by the Company contain or incorporate by reference certain statements (other than statements of historical or present fact) that constitute ‘‘forward-looking statements’’ within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All statements other than statements of historical fact are ‘‘forward-looking statements’’, including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as ‘‘may’’, ‘‘will’’, ‘‘should’’, ‘‘could’’, ‘‘would’’, ‘‘predicts’’, ‘‘potential’’, ‘‘continue’’, ‘‘expects’’, ‘‘anticipates’’, ‘‘fut ure’’, ‘‘intends’’, ‘‘plans’’, ‘‘believes’’, ‘‘estimates’’ and similar expressions, as well as statements in the future tense, identify forward-looking statements.
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These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business. Furthermore, industry forecasts are likely to be inaccurate, especially over long periods of time and in relatively new and rapidly developing industries such as ethanol.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings ‘‘Risk factors’’ and ‘‘Management’s discussion and analysis of financial condition and results of operations’’ in this Form 10-Q and in our Registration Statement on Form S-1.
Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q or in the Registration Statement on Form S-1 occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages.
All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We will be subject to significant risks relating to the prices of four commodities: corn and natural gas, our principal production inputs, and ethanol and distillers grain, our principal products. In recent years, ethanol prices have been primarily influenced by gasoline prices, the availability of other gasoline additives and federal, state and local laws and regulations. Distillers grain prices tend to be influenced by the prices of alternative animal feeds. However, in the short to intermediate term, logistical issues may have a significant impact on ethanol prices. In addition, the anticipated sharp increase in distillers grain production as new ethanol plants become operational could significantly depress its price.
Higher corn prices will tend to result in lower profit margins, as it is unlikely that such an increase in costs can be passed on to ethanol customers. The availability as well as the price of corn is subject to wide fluctuations due to weather, carry-over supplies from the previous year or years, current crop yields, government agriculture policies, international supply and demand and numerous other factors. We estimate that corn will represent approximately 63% of our operating costs. Over the period from May 1997 through May 2007, corn prices (based on the CBOT daily futures data) have ranged from a low of $1.83 per bushel in July 2000 to a high of $4.48 per bushel in February 2007, with prices averaging $2.44 per bushel during this period. As of June 29, 2007, the CBOT spot price of corn was $3.17 per bushel.
Higher natural gas prices will tend to reduce our profit margin, as it is unlikely that such an increase in costs can be passed on to ethanol customers. Natural gas prices and availability are affected by weather, overall economic conditions, oil prices and numerous other factors. We estimate that natural gas will represent approximately 15% of our operating costs. The price of natural gas over the period from May 1997 through May 2007, based on the NYMEX daily futures data, has ranged from a low of $1.66 per Mmbtu in February 1999 to a high of $15.36 per Mmbtu in December 2005, averaging $4.92 per Mmbtu during this period. As of June 29, 2007, the NYMEX spot price of natural gas was $6.36 per Mmbtu.
To reduce the risks implicit in price fluctuations of the four principal commodities we will use or sell and variations in interest rates, we plan to continuously monitor these markets and to hedge a portion of our exposure. Specifically, when we can reduce volatility through hedging on an attractive basis, we expect to do so. It is unlikely that we will enter into material commodity hedging until production at our plants begins or is imminent. Thereafter, we currently anticipate hedging between 40% and 80% of our commodity price exposure on a rolling 12 to 36 month basis. This range would include the effect of intermediate to longer-term purchase and sales contracts we may enter into, which act as de facto hedges. In hedging, we may buy or sell exchange-traded commodities futures or options, or enter into swaps or other hedging arrangements. In doing so, we may access Cargill’s risk management and futures advisory services and utilize its trading capabili ties. It should be recognized that while there is an active futures market for corn and natural gas, the futures market for ethanol is still in its infancy and we do not believe a futures market for distillers grain currently exists. Consequently, our hedging of ethanol and distillers grain may be limited by the market.
We believe that managing our commodity price exposure will reduce the volatility implicit in a commodity-based business. However, it will also tend to reduce our ability to benefit from favorable commodity price changes. Finally, hedging arrangements expose us to risk of financial loss if the counterparty defaults. Furthermore, if geographic basis differentials are not hedged, they could cause our hedging programs to be ineffective or less effective than anticipated.
We will be subject to interest rate risk in connection with our bank facility. Under the facility, our bank borrowings will bear interest at a floating rate based, at our option, on LIBOR or an alternate base rate. Pursuant to our bank facility, we are required to hedge no less than 50% of our interest rate risk until all obligations and commitments under the facility are paid and terminated. Borrowings under our subordinated loan agreement bear interest at a fixed annual rate of 15%. As of June 30, 2007, we had borrowed $5.0 million under our bank facility and $50.0 million under our subordinated loan agreement. Consequently, a hypothetical 100 basis points increase in interest rates under our bank facility would result in an increase of $50,000 on our annual interest expense.
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| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or furnishes to the SEC under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s ‘‘disclosure controls and procedures,’’ as such term is defined in Rule 13a-15(e) and 15d-15(c) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon the ir evaluation, they have concluded that the Company’s disclosure controls and procedures are effective.
In designing and evaluating the Company’s disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company’s controls will succeed in achieving their goals under all potential future conditions.
Internal Control over Financial Reporting
In addition, the Company is continuously seeking to improve the efficiency and effectiveness of its internal controls. This results in periodic refinements to internal control processes throughout the Company. However, there have been no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect these controls that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. During the second quarter, the Company implemented an integrated accounting and financial reporting system and hired a Controller.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The Company is subject to various risks and uncertainties that could affect the Company’s business, future performance or financial condition. These risks include the following:
Risks relating to our business and industry
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| • | We do not have an operating history and our business may not succeed. |
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| • | We may not be able to implement our strategy as planned or at all. |
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| • | We may encounter unanticipated difficulties in constructing our plants. We are dependent on TIC and its partner Delta-T, and delays, defaults or non-performance by TIC or Delta-T could adversely affect us. |
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| • | We may not be able to secure sites for future plants. |
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| • | We may not be able to obtain the approvals and permits that will be necessary in order to construct and operate our facilities as planned. |
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| • | We may be unable to secure construction services or supplies for our additional plants under development and evaluation on acceptable terms. |
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| • | We may be unable to reach definitive agreements relating to the construction of and/or the technology to be used in our proposed future plants. |
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| • | We may not be able to obtain the financing necessary to complete construction of our plants under development or to complete future acquisitions. |
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| • | Competition for qualified personnel in the ethanol industry is intense, and we may not be able to hire and retain qualified personnel to operate our ethanol plants. |
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| • | Delays and defects may cause our costs to increase to levels that would make our new facilities too expensive to construct or unprofitable. |
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| • | Excess production capacity in our industry resulting from new plants under construction or decreases in the demand for ethanol or distillers grain could adversely affect our business. |
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| • | Increased acceptance of ethanol as a fuel and construction of additional ethanol production plants could lead to shortages of availability and increases in the price of corn. |
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| • | We are dependent upon our officers for management and direction, and the loss of any of these persons could adversely affect our operations and results. |
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| • | We will be dependent on our commercial relationship with Cargill and will be subject to various risks associated with this relationship. |
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| • | Our operating results may suffer if Cargill does not perform its obligations under our contracts. |
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| • | Cargill may terminate the marketing and supply agreements relating to each of our Wood River and Fairmont plants if provisional acceptance of the plants does not occur by December 31, 2009. |
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| • | Cargill may terminate its arrangements with us in the event that certain parties acquire 30% or more of our common stock or the power to elect a majority of the Board. |
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| • | If we do not meet certain quality and quantity standards under our marketing agreements with Cargill, our results of operations may be adversely affected. |
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| • | We will be subject to certain risks associated with Cargill’s ethanol marketing pool in which we will participate. |
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| • | We are subject to certain risks associated with our corn supply agreements with Cargill. |
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| • | Cargill has commercial relationships with other ethanol producers, including at least one of our competitors, and has announced plans to develop four 100 Mmgy ethanol plants in the Midwestern United States. Cargill may favor its own interests or those of its other business partners over ours. |
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| • | We may not be able to reach definitive agreements with Cargill with respect to our additional plants under development. |
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| • | New, more energy-efficient technologies for producing ethanol could displace corn-based ethanol and materially harm our results of operations and financial condition. |
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| • | We expect to incur a significant amount of indebtedness to construct our facilities, a substantial portion of which will be secured by our assets. |
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| • | Our substantial indebtedness could have important consequences by adversely affecting our financial position. |
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| • | We are subject to risks associated with our existing debt arrangements. |
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| • | Our future debt facilities will likely be secured by substantially all our assets. |
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| • | Our profit margins may be adversely affected by fluctuations in the selling price and production cost of gasoline. |
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| • | Any facility that we complete may not operate as planned. A disruption in our operations could result in a reduction of sales volume and could cause us to incur substantial losses. |
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| • | Our business will be highly dependent on commodity prices, which are subject to significant volatility and uncertainty, and on the availability of raw materials supplies, so our results of operations, financial condition and business outlook may fluctuate substantially. |
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| • | Our business will be highly sensitive to corn prices, and we generally cannot pass along increases in corn prices to our customers. |
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| • | The price spread between ethanol and corn can vary significantly. |
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| • | The market for natural gas is subject to market conditions that create uncertainty in the price and availability of the natural gas that we will use in our manufacturing process. |
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| • | Our results may be adversely affected by hedging transactions and other strategies. |
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| • | We may not be able to compete effectively. |
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| • | Growth in the sale and distribution of ethanol depends on changes to and expansion of related infrastructure which may not occur on a timely basis, if at all. |
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| • | Transportation delays, including as a result of disruptions to infrastructure, could adversely affect our operations. |
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| • | Disruptions in the supply of oil or natural gas could materially harm our business. |
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| • | Our business may be influenced by seasonal fluctuations. |
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| • | The price of distillers grain is affected by the price of other commodity products, such as soybeans, and decreases in the price of these commodities could decrease the price of distillers grain. |
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| • | Our financial results may be adversely affected by potential future acquisitions or sales of our plants, which could divert the attention of key personnel, disrupt our business and dilute stockholder value. |
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| • | The domestic ethanol industry is highly dependent upon a myriad of federal and state legislation and regulation and any changes in legislation or regulation could adversely affect our results of operations and financial position. |
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| • | The elimination of, or any significant reduction in, the blenders’ credit could have a material impact on our results of operations and financial position. |
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| • | The elimination of or significant changes to the Freedom to Farm Act could reduce corn supplies. |
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| • | Ethanol can be imported into the United States duty-free from some countries, which may undermine the domestic ethanol industry. |
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| • | The effect of the Renewable Fuels Standard in the recent Energy Policy Act is uncertain. |
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| • | We may be adversely affected by environmental, health and safety laws, regulations and liabilities. |
Risks relating to our organizational structure
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| • | Our only material asset is our interest in BioFuel Energy, LLC, and we are accordingly dependent upon distributions from BioFuel Energy, LLC to pay dividends, taxes and other expenses. |
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| • | We will be required to pay our historical LLC equity investors for a portion of the benefits relating to any additional tax depreciation or amortization deductions we may claim as a result of tax basis step-ups we receive in connection with future exchanges of BioFuel Energy, LLC membership interests for shares of our common stock. |
Risks relating to the ownership of our common stock
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| • | The price of our common stock may be volatile. |
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| • | Our historical equity investors, including some of our officers and Directors, will exert significant influence over us. Their interests may not coincide with yours and they may make decisions with which you may disagree. |
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| • | We do not intend to pay dividends on our common stock. |
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| • | Provisions in our charter documents and our organizational structure may delay or prevent our acquisition by a third party or may reduce the value of your investment. |
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| • | Management and our auditors have identified material weaknesses in the design or operation of our internal control over financial reporting that, if not properly remediated, could result in material misstatements in our financial statements in future periods. |
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| • | The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner. |
A complete description of these risk factors appears in our Registration Statement on Form S-1 relating to our initial public offering. Those risk factors are hereby incorporated in Part II, Item 1A of this Form 10-Q. Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q or in the Registration Statement on Form S-1 relating to the Company’s initial public offering occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In connection with our initial public offering, our Registration Statement on Form S-1 (Registration No. 333-139203) became effective on June 14, 2007. Pursuant to the Registration Statement, we registered 6,037,500 shares at a proposed maximum offering price per share of $10.50 for a total maximum aggregate offering price of $63,393,750. The initial public offering was completed on June 19, 2007. We sold an aggregate of 5,250,000 shares of common stock at $10.50 per share in our initial public offering. The underwriters for the offering were J.P. Morgan Securities Inc., Citigroup Global Markets Inc., A.G. Edwards & Sons, Inc., Bear, Stearns & Co. Inc., and Cowen and Company, LLC. We sold an additional 787,500 shares of common stock at $10.50 per share pursuant to the exercise of the underwriters’ over-allotment option on July 12, 2007.
Concurrently with the initial public offering, the Company also sold 4,250,000 shares of common stock to certain pre-existing stockholders in a private placement. Entities affiliated with Greenlight, Inc. (Greenlight Capital L.P., Greenlight Capital Qualified, L.P., Greenlight Capital Offshore, Ltd, and Greenlight Reinsurance, Ltd.), entities affiliated with Third Point funds (Third Point Partners LP, Third Point Partners Qualified LP, Third Point Offshore Fund Ltd. and Third Point Ultra Ltd.) and Thomas J. Edelman purchased 2,500,000, 1,250,000 and 500,000 shares of our common stock, respectively, at a price per share equal to the initial public offering price. The securities were issued in transactions exempt from registration under Section 4(2) of the Securities Act.
The Company received total proceeds from the public offering, including the exercise of the over-allotment option and the concurrent private placement of $103.6 million, after deduction of underwriting discounts and commissions of $4.4 million. Other expenses payable by the Company related to the initial public offering and the concurrent private placement were approximately $2.7 million.
We expect that the net proceeds will ultimately be used to fund the equity portion of the construction costs of a third plant. However, prior to the time funds are required for this plant, we may use them to repay subordinated debt or defer borrowings under our bank construction loans for the Wood River and Fairmont plants. We have used $30.0 million of the net proceeds to repay outstanding subordinated debt.
None of the foregoing payments were to our directors or officers, or their associates, or to our affiliates or persons owning ten percent or more of our common stock.
Immediately prior to the consummation of the offering and the concurrent private placement, the LLC amended and restated its limited liability company agreement to replace the various classes of its existing membership interests with a single class of membership interests. As part of the amendment and restatement of the limited liability company agreement, BioFuel Energy Corp. became the sole managing member of the LLC. Our historical LLC equity investors and BioFuel Energy Corp. exchanged their existing membership interests in the LLC for new membership interests in amounts determined in accordance with the old limited liability company agreement and based on the initial public offering price of our shares of common stock issued in the offering and the concurrent private placement. BioFuel Energy Corp. issued to each historical LLC equity investor shares of our Class B common stock, which will entitle each holder to a number of votes that is equal to the total number of shares of common stock issuable upon exchange of all of such holder’s membership interests in the LLC. For a detailed description of this recapitalization transaction, please refer to our Registration Statement on Form S-1 under ‘‘Organizational structure.’’
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
The Company announced that effective August 31, 2007, Eric D. Streisand, the Company’s Vice President – Corporate Development, would be leaving the Company to pursue other business opportunities. The Company and Mr. Streisand have entered into a consulting agreement to facilitate an orderly transition of his duties.
ITEM 6. EXHIBITS
The information required by this Item 6 is set forth in the Index to Exhibits accompanying this quarterly report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| | | | BIOFUEL ENERGY CORP. |
| Date August 14, 2007 | | | /s/ David J. Kornder |
| | | | David J. Kornder |
| | | | Executive Vice President and
Chief Financial Officer |
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INDEX TO EXHIBITS
| | | | | | |
| Exhibit Number | | | Exhibit |
| 10 | .1 | | | | Second Amended and Restated Limited Liability Company Agreement of BioFuel Energy, LLC dated June 19, 2007. |
| 10 | .2 | | | | Registration Rights Agreement between BioFuel Energy Corp. and the parties listed on the signature page thereto dated June 19, 2007. |
| 10 | .3 | | | | Tax Benefit Sharing Agreement between BioFuel Energy Corp. and the parties listed on the signature page thereto dated June 19, 2007. |
| 10 | .4 | | | | Stockholders Agreement between BioFuel Energy Corp. and Cargill Biofuel Investments, LLC dated June 19, 2007. |
| 10 | .5 | | | | Separation, Consulting and Mutual Release Agreement between the Company and Eric D. Streisand dated August 9, 2007. |
| 31 | .1 | | | | Certification of the Company’s Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241). |
| 31 | .2 | | | | Certification of the Company’s Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241). |
| 32 | .1 | | | | Certification of the Company’s Chief Executive Officer Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
| 32 | .2 | | | | Certification of the Company’s Chief Financial Officer Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
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