We purchased approximately 35 acres for our plant site near Marcus, Iowa in Cherokee County. In August 2007, we commenced construction of our biodiesel plant. In November 2007, we suspended all construction related activities on our plant while we sought the debt financing we needed to complete construction of the plant. On April 10, 2008 our members approved reducing the initial production capacity of the biodiesel plant to 15 million gallons per year from 30 million gallons per year. Upon completing approximately 10% of the construction of our biodiesel plant in October 2008, Management determined that it would not likely be feasible to complete construction of the biodiesel plant due to current economic conditions and our lack of debt financing. We may be unable to sell the site and the construction completed at a profit, or at all. Due to the significant changes we made to our project, we recorded an impairment charge during our quarter ended October 31, 2008 in the value of constructed and construction in process assets of approximately $6,923,000, a portion of which is from the site we purchased.
We will be subject to industry-wide factors that affect our anticipated operation of the Mason City biodiesel plant and financial performance. These factors include, but are not limited to, the available supply and cost of feedstock from which biodiesel and glycerin will be processed; dependence on a biodiesel marketer and glycerin marketer to market and distribute our products, in the event we utilize outside marketers; the competitive nature of the biodiesel industry; possible legislation at the federal, state and/or local level; changes in federal tax incentives; and the cost of complying with extensive environmental laws that regulate the biodiesel industry.
We anticipate our revenues will consist of sales of biodiesel and glycerin. We expect biodiesel sales to constitute the bulk of our revenues. Although the price of diesel fuel has increased over the last several years, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. In addition, other more cost-efficient domestic alternative fuels may be developed and displace biodiesel as an environmentally-friendly alternative. If diesel prices do not continue to increase or a new fuel is developed to compete with biodiesel, it may be difficult to market biodiesel, which could result in the loss of some or all of the value of our units. Further, due to the increase in the supply of biodiesel from the number of new biodiesel plants scheduled to begin production and the expansion of current plants, the industry will need to continue to grow demand to offset the increased supply brought to the market place by additional production.
We expect to benefit from federal and state biodiesel supports and tax incentives, however, these benefits may be subject to the applicability of such supports and tax incentives to our operations. Biodiesel has generally been more expensive to produce than petroleum-based diesel and, as a result, the biodiesel industry depends on such incentives to be competitive. Changes to these supports or incentives could significantly impact demand for biodiesel. The most significant of these are the blenders tax credit and the RFS, as amended by the Energy Independence and Security Act of 2007 (the “EISA”). The American Jobs Creation Act of 2004 originally created the biodiesel blenders excise tax credit under the Volumetric Ethanol Excise Tax Credit (“VEETC”). Known as the blenders tax credit, it provides a tax credit of $1.00 per gallon for biodiesel. The blenders credit may be claimed in both taxable and nontaxable markets, including exempt fleet fuel programs and off-road diesel markets. The desired effect of the blenders tax credit is to streamline the use of biodiesel and encourage petroleum blenders to blend biodiesel as far upstream as possible, which will allow more biodiesel to be used in the marketplace. The blenders tax credit also streamlines the tax refund system for below-the-rack blenders to allow a tax refund of the biodiesel tax credit on each gallon of biodiesel blended with diesel (dyed or undyed) to be paid within 20 days of blending. Below-the-rack blenders are those blenders that market fuel that is for ground transportation engines and is not in the bulk transfer system. The blenders tax credit was set to expire on December 31, 2008, but was extended until December 31, 2009 as part of the Emergency Economic Stabilization Act of 2008 (“EESA”) and as of the date of this report has not been extended further. Legislation to reinstate the blenders tax credit, however, has been approved in both the House and Senate, but each version of the legislation must now be reconciled.
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The amended RFS, known as RFS2, required the use of 9 billion gallons of renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022. The RFS further required at least 500 million gallons of biodiesel and biomass-based diesel fuel be blended into the national diesel pool in 2009, increasing to 1 billion gallons by 2012. However, in November 2008, the EPA announced that the RFS program in 2009 would continue to be applicable to producers and importers of gasoline only. This meant that the 500 million gallons of biomass-based diesel required by RFS2 did not have to be blended into U.S. fuel supplies in 2009. This is due to the fact that the regulatory structure of the original RFS program does not provide a mechanism for implementing the EISA requirement for the use of 500 million gallons of biomass-based diesel. On February 3, 2010 the EPA issued final rules under RFS2. The final rules addressed this issue by combining the 2010 biomass-based diesel requirement of 0.65 billion gallons with the 2009 biomass-based diesel requirement of 0.5 billion gallons to require that obligated parties meet a combined 2009/2010 requirement of 1.15 billion gallons by the end of the 2010 compliance year.
The RFS2 requires that biodiesel reduce greenhouse gas emissions by 50% when compared to conventional diesel in order to count towards the RFS2 mandate. The EPA preliminarily found soy-based biodiesel to reduce greenhouse gas emissions by only 22%. Biodiesel produced from animal fats was found to meet this greenhouse gas emissions reduction requirement. However, when the EPA issued its final determinations under the RFS2, it found that soy oil complies with the 50% greenhouse gas emission reduction requirements.
Thus, Management anticipates that under the EPA’s final RFS2 regulations, there may be increased demand for biodiesel. There can be no assurance, however, that demand for biodiesel will be increased by the RFS2, and any increase in demand may be offset by the loss of the blenders tax credit. In addition, it is already estimated that national biodiesel production capacity far exceeds the 2012 biodiesel and biomass-based diesel use RFS2 mandate. Accordingly, there is no assurance that additional production of biodiesel and biomass-based diesel will not continually outstrip any additional demand for biodiesel that might be created by the RFS2.
Biodiesel production grew as additional plants become operational, until 2009 when production reduced. In 2006 biodiesel production was approximately 250 million gallons. The National Biodiesel Board estimates that in 2008, biodiesel production reached 700 million gallons. Estimates for 2009 biodiesel production however, were approximately 450 million gallons. This reduction was likely largely related to the recession and the related credit crisis. In June 22, 2009, the most recently reported data, the National Biodiesel Board estimated there were 173 active plants with an annual production capacity of 2.69 billion gallons annually, with another 29 plants and 1 expansion in construction. We believe this increase in biodiesel supply, reduction in demand, and the loss of the blenders credit have forced some biodiesel producers to cut back production or cease production altogether. The combination of additional supply and stagnant or reduced demand may damage our ability to secure the debt financing we require and hurt our ability to generate revenue and maintain positive cash flows should our biodiesel plant become operational.
The global equity markets have been disrupted and have experienced significant volatility. The U.S. stock markets have tumbled since September 2008 upon the collapse of multiple major financial institutions, the federal government’s takeover of two major mortgage companies, Freddie Mac and Fannie Mae, and the enactment of various bail out plans, pursuant to which the federal government will directly invest in troubled financial institutions. Financial institutions across the country have lost billions of dollars due to the extension of credit for the purchase and refinance of over-valued real property. The collapse of these financial institutions and the continued volatility in the credit market may significantly decrease the availability of credit needed to fund our project.
Quarterly Financial Results
At January 31, 2010, we had total assets of approximately $23,298,000 consisting primarily of cash and equivalents and assets held for sale. At January 31, 2010, we had current liabilities of approximately $129,000 consisting of our accounts payable and other accrued expenses. Total members’ equity at January 31, 2010, was approximately $23,169,000. Since our inception, we have generated no revenue from operations. For the three months ended January 31, 2010, we had a net loss of approximately $167,000.
Based upon the determination that building the plant would not likely be feasible, we now anticipate purchasing an existing biodiesel plant from OSM for approximately $10,000,000 and installing feedstock processing equipment on the plant for approximately $8,000,000. If we cannot complete such a transaction, we may be forced to dissolve our company, in which case, the assets of the company will be distributed according to our operating agreement, which may result in a loss of your investment.
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Sources of Funds
In December 2005, we sold a total of 1,500 units to our founding members at a price of $333.33 per unit and received aggregate proceeds of $500,000. In addition, in April 2006 we issued 1,600 units to our seed capital members at a price of $500 per unit and received aggregate proceeds of $800,000. We sold 30,668 units at a price of $1,000 per unit in our Iowa registered offering and received aggregate proceeds of $30,668,000. We broke escrow on our Iowa registered offering in June 2007. We incurred costs of raising capital of approximately $186,000 related to the equity proceeds raised. These costs primarily consisted of legal fees, professional fees and printing costs. In July 2008, we executed a redemption agreement with Bratney pursuant to which Bratney agreed to return its 750 membership units.
We determined the offering price for our founding members, seed capital and general offering units based upon the capitalization requirements necessary to fund our development, organization and financing activities as a development-stage company with plans to construct and operate a biodiesel plant. We did not rely upon any independent valuation, book value or other valuation criteria in determining the founding member, seed capital or general offering sales prices per unit.
Debt Financing
In October 2008, Management determined it would not likely be feasible to obtain the necessary debt financing to complete construction of our biodiesel plant. We now plan to purchase an existing biodiesel plant in Mason City, Iowa from OSM. We plan to install additional feedstock equipment on this plant. We anticipate we will need to obtain debt financing to complete our purchase of the plant, equipment installation and start-up of operations.
Grants and Government Programs
Currently, there are limited numbers of grants, loans and forgivable loan programs available to biodiesel producers. We are uncertain what grants, loans and forgivable loan programs, if any, will be available if we complete the purchase of the Mason City biodiesel plant. Some combinations of programs are mutually exclusive. Funds that we have expended in applying for grants, loans and forgivable loan programs will likely be a loss, unless we can transfer those benefits as a result of our anticipated purchase of the Mason City biodiesel plant. Any benefits we may have already received may have to be repaid because we no longer plan to complete construction of our plant.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The carrying value of long lived assets held for sale and any assumptions used in the impairment analysis of assets held for sale included in significant estimates is based on the ability to sell or utilize these assets.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is not required to provide the information required by this item because it is a smaller reporting company.
Item 4T. Controls and Procedures
Our management, including our Chief Executive Officer (the principal executive officer) Charles Sand, along with our Chief Financial Officer (the principal financial officer) Dallas Thompson, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of January 31, 2010. Based upon this review and evaluation, these officers have concluded that our disclosure controls and procedures were effective.
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Changes in Internal Control Over Financial Reporting
Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred during the period ended January 31, 2010 and there has been no change that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes. We are not currently subject to any material legal proceeding or claims. Management does not believe that there are currently any material unasserted claims against us.
Item 1A. Risk Factors.
The Company is not required to provide the information required by this item because it is a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any membership units during the three months ended January 31, 2010. None of our membership units were purchased by or on behalf of the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) of the Exchange Act) of the Company during the three months ended January 31, 2010.
| | | | |
Net Proceeds | | $ | 31,782,000 | (1) |
Capital Expenditures and Construction Related Costs | | | (11,259,000 | ) |
Project Development Costs | | | (2,308,000 | )(2) |
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Balance | | $ | 18,861,000 | |
(1)This amount is our total equity proceeds less the redemption agreement for 750 units we executed with Bratney and our offering costs of approximately $186,000. The primary costs we incurred in raising capital included legal fees, accounting fees, printing and distribution costs, and meeting costs.
(2)This amount only reflects the funds we have expended as of January 31, 2010 on project development costs and does not include the approximately $1,354,000 we have received from interest on investments. The amount we have received from interest has offset the amount we expended, as reflected on our statement of cash flows and in the table “Estimated Use of Proceeds” above.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Reserved]
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Item 5. Other Information
None.
Item 6. Exhibits
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| (a) | The following exhibits are filed as part of this report. Exhibits previously filed are incorporated by reference, as noted. |
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| Exhibit No. | | Exhibit |
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| 31.1 | | Certificate Pursuant to 17 CFR 240.13a-14(a). |
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| 31.2 | | Certificate Pursuant to 17 CFR 240.13a-14(a). |
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| 32.1 | | Certificate Pursuant to 18 U.S.C. § 1350. |
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| 32.2 | | Certificate Pursuant to 18 U.S.C. § 1350. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | SOY ENERGY, LLC |
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Date | March 17, 2010 | | /s/ Charles Sand |
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| | | Charles Sand |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
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Date: | March 17, 2010 | | /s/ Dallas Thompson |
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| | | Dallas Thompson |
| | | Treasurer and Chief Financial Officer |
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