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 650 million gallons with the 2009 biomass-based diesel requirement of 500 million 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%. However, biodiesel produced from animal fats was found to meet this greenhouse gas emissions reduction requirement. Lastly, 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 generate revenue and maintain positive cash flows should we reach the point where we begin operating the Mason City biodiesel production facility.
At April 30, 2010, we had total assets of approximately $22,411,000 consisting primarily of cash and equivalents and assets held for sale. At April 30, 2010, we had current liabilities of approximately $136,000 consisting of our accounts payable and other accrued expenses. Total members’ equity at April 30, 2010, was approximately $22,274,000. Since our inception, we have generated no revenue from operations. For the three and six months ended April 30, 2010, we had a net loss of approximately $895,000 and $1,061,000, respectively.
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Based upon the determination that building a biodiesel production facility would not likely be feasible, we now anticipate purchasing the Mason City biodiesel production facility from OSM for approximately $10,000,000 pursuant to the APA, with $6,000,000 of such purchase price to be financed pursuant to the Loan Agreement, and installing feedstock processing equipment on the plant for approximately $8,000,000. If we cannot complete this transaction as anticipated, we may be forced to dissolve our company, in which case, the assets of the company will be distributed according to our operating agreement, and may result in a loss of your investment.
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 receive approximately $6,000,000 in debt financing from OSM pursuant to the Loan Agreement and to be used towards the purchase price of the Mason City biodiesel production facility.
On April 2, 2010, we entered into a Loan Agreement with OSM. Subject to the terms of the Loan Agreement, OSM agreed to lend us $6,000,000 to be used to acquire the Mason City biodiesel production facility. The initial interest rate is 5%. In 2016, the interest rate will adjust to the 5-year LIBOR/swap rate plus 3.5%, but will not be less than 5%. During the first year of the loan, we will be required to only pay interest on outstanding amounts. Beginning after the first year of the loan, we will make principal and interest payments amortized over a ten-year period, with maturity of the note in 2021.
The Loan Agreement requires us to adhere to various covenants which restrict our operating flexibility. The Loan Agreement restricts our ability to make distributions to our members, to further pledge our assets for other financing that we might require, and to make payments on subordinated debt we acquire. In addition, the Loan Agreement requires us to maintain certain financial ratios and to obtain OSM’s permission before taking certain actions affecting our business and material contracts.
At closing, we will execute a mortgage in favor of OSM creating a first lien on all of the assets we acquire under the Asset Purchase Agreement and the proceeds from those assets. As a result, we must obtain OSM’s permission to sell these assets, which could limit our operating flexibility.
The Loan Agreement provides that certain actions will constitute defaults, which would allow OSM to terminate its commitment to loan the funds, or if already advanced, to demand immediate repayment of the entire loan amount and foreclose its security interest in our property. Defaults include the following events:
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• | our failure to make the required principal and interest payments; |
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• | if any representation or warranty made by us proves to be materially misleading or untrue; |
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• | our failure to comply with the terms of the Loan Agreement; |
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• | the destruction of the biodiesel plant; |
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• | cessation of making certain improvements to the biodiesel plant required by OSM; |
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• | our failure to comply with certain requirements of governmental bodies; |
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• | if we have unsatisfied judgments against us that exceed $150,000 for 30 days or more; |
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• | if we file for bankruptcy or cease to exist as a legal entity; |
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• | if we are unable to pay our debts when due; |
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• | if we are in default under a material contract or lose a permit or material contract necessary for our business; |
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• | if we are in default under any agreement with OSM; or |
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• | if we are in default with respect to any other indebtedness. |
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 production facility. Some combinations of programs are mutually exclusive. Funds that we have expended in applying for grants, loans and forgivable loan programs related to our construction of a facility in Marcus, Iowa, will likely be a loss, unless we can transfer those benefits as a result of our anticipated purchase of the Mason City biodiesel production facility. 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 assets held for sale valuation 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
Disclosure 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 April 30, 2010. Based upon this review and evaluation, these officers have concluded that our disclosure controls and procedures were effective.
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 April 30, 2010 and there has been no change that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
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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 April 30, 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 April 30, 2010.
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Net Proceeds | | $ | 31,782,000 | (1) |
Capital Expenditures and Construction Related Costs | | | (11,200,000 | ) |
Project Development Costs | | | (2,582,000 | )(2) |
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Balance | | $ | 18,000,000 | |
(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 April 30, 2010 on project development costs and does not include the approximately $1,364,000 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]
Item 5. Other Information
None.
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Item 6. Exhibits
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| (a) | The following exhibits are filed as part of this report. |
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| Exhibit No. | | Exhibit |
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| 10.1 | | Asset Purchase Agreement |
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| 10.2 | | Loan Agreement |
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| 10.3 | | Phase I Engineering Agreement |
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| 10.4 | | Termination and Settlement Agreement |
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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 | June 14, 2010 | | /s/ Charles Sand |
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| | | Charles Sand |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
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Date: | June 14, 2010 | | /s/ Dallas Thompson |
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| | | Dallas Thompson |
| | | Treasurer and Chief Financial Officer |
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