We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three month period ended January 31, 2011. This discussion should be read in conjunction with the financial statements and notes and the information contained in our annual report on Form 10-K for the fiscal year ended October 31, 2010.
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to, those business risks and factors described elsewhere in this report, in our other Securities and Exchange Commission filings, as well as those listed below.
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| • | Overcapacity within the biodiesel industry; |
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| • | Our ability to successfully install equipment to make the Mason City biodiesel production facility a multi-feedstock capable plant; |
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| • | Our ability to effectively operate the Mason City biodiesel production facility and manage our business; |
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| • | Changes in our business strategy, capital improvements or development plans; |
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| • | Availability and costs of feedstock, particularly soy oil, animal fats and corn oil; |
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| • | Changes in the price and market for biodiesel and glycerin; |
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| • | Actual biodiesel and glycerin production varying from expectations; |
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| • | Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices such as national, state or local energy policy; federal biodiesel tax incentives; or environmental laws and regulations that apply to the Mason City biodiesel production facility; |
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| • | Changes in the weather or general economic conditions impacting the availability and price of vegetable oils and animal fats; |
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| • | Total U.S. consumption of diesel; |
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| • | Weather changes, strikes, transportation or production problems causing supply interruptions or shortages affecting the availability and price of feedstock; |
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| • | Changes in plant production capacity or technical difficulties in operating the Mason City biodiesel production facility; |
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| • | Changes in interest rates or the availability of credit; |
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| • | Our ability to generate free cash flow to invest in our business; |
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| • | Our potential liability resulting from future litigation; |
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| • | General economic conditions; |
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| • | Ability to sell assets held for sale at their carrying value minus selling costs; |
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| • | Changes and advances in biodiesel production technology; |
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| • | Restrictive covenants in our Loan Agreement; |
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| • | Competition from other alternative fuels; and |
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| • | Other factors described elsewhere in this report. |
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We undertake no duty to update these forward looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements which speak only as of the date of this report. You should read this report completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward looking statements by these cautionary statements.
Overview
We are a development stage Iowa limited liability company with no prior operating history. We were organized as an Iowa limited liability company by filing articles of organization with the Iowa Secretary of State on December 15, 2005. We were in the process of developing a 15 million gallon per year biodiesel plant near Marcus, Iowa in Cherokee County. We originally planned to construct a 30 million gallon per year biodiesel plant, but due to changes in our business plan, our members voted to pursue construction of a smaller biodiesel plant.
When the economy went into a recession, management determined in October 2008 that building this smaller biodiesel plant was not likely feasible. Therefore, we then began exploring possibilities to use our assets to merge with or invest in a company that has already completed construction of a biodiesel plant, rather than constructing our own plant. Construction of the proposed 15 million gallon per year plant in Marcus, Iowa was approximately 10% complete when management determined completion of the construction was no longer feasible. Although we believe that we will be able to sell our long-lived assets at their current carrying value, we may not be able to sell them at a profit. If we do not sell these assets at the current carrying value or at all, it may result in a material loss to the financial statements of our company. Because we do not anticipate constructing the Marcus, Iowa plant, all funds we expended in our construction and plant development efforts were deemed a loss. From our inception to January 31, 2011, we have incurred accumulated losses of approximately $9,864,000.
On July 29, 2009, we entered into an Asset Purchase Agreement (“APA”) with Freedom Fuels, LLC, an Iowa limited liability company (“Freedom Fuels”), which was in Chapter 11 bankruptcy and owned a biodiesel plant in Mason City, Iowa (the “Mason City biodiesel production facility”). Pursuant to the APA, we would acquire substantially all of Freedom Fuels’ assets in exchange for $9,000,000 in cash, an agreement assigning to Freedom Fuels all of our right, title and interest in the debtor in possession loans and an agreement assigning to Freedom Fuels all of our right, title and interest in the dividend cash flow note of $2,000,000 issued by a to-be-created Freedom Fuels’ investor entity to us.
However, prior to closing on the APA with Freedom Fuels, it became clear that the financing needed to close on this transaction would not be able to be obtained. Freedom Fuels then transferred all of its assets to its bank and on February 2, 2010 the proceedings were converted from a Chapter 11 voluntary bankruptcy to a Chapter 7 involuntary bankruptcy.
On April 2, 2010, we entered into an Asset Purchase Agreement with OSM-REO FF, LLC, a Minnesota limited liability company (“OSM”). OSM was previously assigned certain assets related to the biodiesel production facility of Freedom Fuels. Under the Asset Purchase Agreement, we agreed to pay OSM $10,000,000 to acquire the biodiesel production facility and related assets (the “Transaction”). The assets were transferred to Soy Energy “as-is.” However, the purchase price may be reduced up to $250,000 for expenses incurred by Soy Energy to make certain specified repairs and such repairs are currently in process. The Asset Purchase Agreement provided that we would not assume liabilities of Freedom Fuels or OSM, with the exception of certain taxes, certain liabilities under contracts we assumed, and obligations under existing confidentiality agreements.
We and OSM made customary representations, warranties and covenants in the Asset Purchase Agreement. Among other conditions, the closing of the Transaction was conditioned upon a $6,000,000 loan to us from OSM to use to purchase the assets. The terms of the financing are described below. In addition, the Transaction was subject to approval by our unitholders before the closing on the Transaction and such unitholder approval was obtained at our annual member meeting on June 24, 2010.
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On August 13, 2010, we entered into an Amendment to the Asset Purchase Agreement with OSM (the “Amendment”). The purpose of the Amendment was to modify the definition of Closing Deadline to extend such date to September 27, 2010.
On September 27, 2010, we entered into a Second Amendment to the Asset Purchase Agreement with OSM (the “Second Amendment”). The purpose of the Second Amendment was to modify the definition of Closing Deadline to extend such date to September 30, 2010.
We entered into a Construction and Design Agreement (the “Construction Agreement”) with Ball Industrial Services, LLC and Ball Construction Services, LLC (collectively, “Ball”) effective August 11, 2010. Under the Construction Agreement, Ball will provide design, engineering, procurement, testing, training, and construction services and labor, materials, supplies and equipment for modifications to the Mason City biodiesel production facility to allow it to produce biodiesel using multiple feedstocks.
Ball guaranteed that all of the work will be new (unless otherwise approved by us), of good quality, in conformance with the Construction Agreement and all legal requirements, and free of defects in materials and workmanship. For one year from substantial completion, Ball will correct any work that does not conform to the requirement of the Construction Agreement. If the biodiesel production facility fails to perform due to defective work, the one-year period will be extended one day for each day that the biodiesel production facility is not operating due to the defective work. The Construction Agreement states that Ball will not be liable to the Company for any special, punitive, incidental, indirect or consequential damages arising from the breach of any warranty.
On September 23, 2010, we entered into an amendment to the Construction and Design Agreement with Ball. The purpose of this amendment was to extend the time the Company had to close on its proposed purchase of the Mason City biodiesel production plant, without the Construction Agreement terminating, to October 1, 2010.
On April 2, 2010, we entered into a Loan Agreement with OSM (the “Loan Agreement”). 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 October 2016, the interest rate will adjust to the 5-year LIBOR/swap rate plus 3.5%, with a floor of 5%. During the first year of the loan, we will be required to only pay interest on outstanding amounts. Beginning in November 2011, we will make principal and interest payments amortized over a ten-year period, with maturity of the note in 2021.
On September 30, 2010, we entered into an Amended and Restated Loan Agreement with OSM. The purpose of amending and restating the Loan Agreement was to address certain items related to closing on the loan and to address additional details related to the Construction Agreement and our anticipated biodiesel production facility modifications to make it multi-feedstock capable.
On September 30, 2010 we closed on the Transaction. We gave Ball notice on October 1, 2010 to proceed with the construction and installation of front end equipment to make the Mason City biodiesel production facility multi-feedstock capable. As of January 31, 2011, there was approximately $3,491,000 in construction-in-progress.
On March 18, 2011, we entered into a first amendment to the loan agreements with OSM, whereby certain defined terms related to a covenant calculation were clarified.
To date, we have not generated any revenues and we do not anticipate generating any revenues until we complete the modifications at the Mason City biodiesel production facility and begin operations. Since we have not commenced any operations, we do not yet have comparable income, production or sales data.
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Liquidity and Capital Resources
We expect to spend the next 12 months (i) installing equipment on the Mason City biodiesel production facility to make it multi-feedstock capable; and (ii) beginning our operations of the Mason City biodiesel production facility. We do not anticipate raising additional equity capital in the next 12 months. However, in the event our equity reserves and debt are not adequate to recommence and continue operations of the Mason City biodiesel production facility, we may be forced to do so. We also plan to use approximately $8,350,000 of our equity reserves to install the front end equipment on the Mason City biodiesel production facility so that it will be multi-feedstock capable. As of January 31, 2011 there is approximately $3,491,000 in construction-in-progress towards this equipment installation. Should we be unsuccessful in our operation of the Mason City biodiesel production facility, our project may fail and we may be dissolved. If we are dissolved, our assets will be distributed pursuant to our operating agreement.
Currently, progress on the construction at the Mason City biodiesel production facility includes the pouring of the footings for the addition and the pouring of the containment dike. Two field tanks have been erected and are being constructed. We estimate approximately 37% of the work is complete as of February 28, 2011. We estimate we will begin production in August 2011.
On February 3, 2011, we entered into a development agreement with the City of Mason City, Iowa this agreement provides for the payment of semi-annual tax increments to us for 5 years, beginning December 1, 2012, related to the initial construction of the Mason City biodiesel production facility and 8 years, beginning December 1, 2013, based on the equipment installation at the Mason City biodiesel production facility, totaling up to, but not to exceed, approximately $623,000. The agreement provides for a new water main extension to our site estimated to cost approximately $120,000, of which 25% of the cost will be paid by the City of Mason City and the remaining 75% will be paid using funds held in our Holdback Escrow Account. Additionally under the development agreement, we have agreed to meet certain employment requirements related to hiring and retention through December 31, 2021.
We anticipate the success of our operation of the Mason City biodiesel production facility will be dependent upon several factors. First, we will be dependent upon Ball to successfully install the front end equipment on the Mason City biodiesel production facility, so that we can effectively utilize a variety of feedstocks, and, specifically, corn oil. We may have difficulties getting the additional equipment to operate smoothly with the current plant technology. Then we will need to be able to find an adequate and cost-effective supply of corn oil to use to produce our biodiesel. We anticipate that we will be able to obtain corn oil largely from local ethanol plants. However, this will require us to enter into agreements with such ethanol plants and we may be unable to enter into the necessary number of agreements or such agreements may be on terms unfavorable to us. Additionally, ethanol plants that are presently producing corn oil as a by-product may cease such production in the future as a result of patent infringement litigation related to the corn oil technology many ethanol plants are currently using. We may decide to enter into joint ventures with ethanol plants to encourage them to install corn oil equipment on their plants, but this means we will also assume some of the risk.
Finally, we will be dependent upon our marketer to sell our biodiesel at profitable prices. On August 12, 2010, we entered into a biodiesel marketing agreement with RPMG (“Marketing Agreement”). Pursuant to the terms of the Marketing Agreement, we agreed that RPMG will market all of the biodiesel we may produce at the Mason City biodiesel production facility during the term of the Marketing Agreement, subject to our right to enter into tolling arrangements that will not be subject to the Marketing Agreement. If we have not commenced operations at the Mason City biodiesel production facility on or before July 15, 2011, then either party may terminate the Marketing Agreement upon twenty-one (21) days written notice to the other party.
RPMG will be responsible for and shall bear the risk of loss of all biodiesel marketed for us from the time the biodiesel crosses the loading flange at the Mason City biodiesel facility and the common carrier or customer accepts for loading the biodiesel at the Mason City biodiesel facility in either a railcar, tank truck or other transport vehicle.
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Site Acquisition and Development
We purchased approximately 35 acres for our plant site near Marcus, Iowa in Cherokee County. In August 2007, we commenced construction of our 30 million gallon per year 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. We may be unable to sell the Marcus 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. Additionally, as we have not sold the assets being held, we recorded an additional impairment charge of approximately $631,000 during the fiscal year ended October 31, 2010. We feel the Marcus site is an attractive site for development and we are actively looking for a buyer for the Marcus site. We have made some contacts with potential buyers.
In connection with our purchase of the Mason City biodiesel production facility, we purchased approximately forty-five acres upon which the biodiesel production facility sits. Mason City is in north central Iowa. The site was a portion of the purchase price under the Asset Purchase Agreement with OSM.
Trends and Uncertainties Impacting the Biodiesel Industry and Our Future Operations
We will be subject to industry-wide factors that affect our anticipated operation of the Mason City biodiesel production facility 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 RPMG and a glycerin marketer (if we decide to use a glycerin marketer) to market and distribute our products; 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 from the Mason City biodiesel production facility. 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, many biodiesel production facilities have ceased production due to lack of demand for biodiesel, and the industry will need to continue to grow demand to offset the increased supply brought to the market place if and when these facilities re-start production in the future.
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 operation of the Mason City biodiesel production facility. 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.
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 545 million gallons. According to Reuters, 2010 production decreased by 20%, posting only fifty percent (50%) of the 2008 biodiesel output. This reduction was likely largely related to the recession and the related credit crisis. We believe this increase in biodiesel supply, reduction in demand, and the loss of the biodiesel tax credit (until it was reinstated at the end of 2010 for 2011 and made retroactive for 2010) 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.
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Renewable Fuels Standard
The Energy Policy Act of 2005 created the Renewable Fuel Standard (RFS) which required refiners to use 7.5 billion gallons of renewable fuels by 2012. The Energy Independence and Security Act of 2007 (EISA) expanded the existing RFS to require the use of 9 billion gallons of renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022 (RFS2). The RFS2 requires that 600 million gallons of renewable fuel used in 2009 must come from advanced biofuels other than corn-based ethanol, such as ethanol derived from cellulose, sugar or crop residue and biomass-based diesel (which includes biodiesel and renewable diesel), increasing to 21 billion gallons in 2022. The RFS2 further includes a requirement that 500 million gallons of biodiesel and biomass-based diesel fuel be blended into the national diesel pool in 2009, gradually increasing to one billion gallons by 2012. However, in November 2008, the EPA announced that the RFS2 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 the 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 did 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. We anticipate that there will again be a roll-over of some of the 2010 requirement into 2011 and also that some of the cellulosic requirements that cannot be achieved due to lack of technology may be allowed to be filled by biodiesel. Thus, we anticipate that biodiesel requirements under the 2011 RFS2 may exceed the previously set 800 million gallon requirement for 2011. According to The Biodiesel Magazine website, cellulosic biofuel and biomass-based diesel consumed beyond the 2011 minimum thresholds will be credited towards the advanced biofuel and total renewable fuel volume requirements.
Part of RFS2 required that advanced biofuels reduce life cycle greenhouse gas emissions by 50% relative to gasoline sold or distributed in transportation. In May 2009, the EPA proposed rules that took into account indirect land use changes when calculating greenhouse gas emissions. Based on the EPA’s preliminary findings, soy-based biodiesel was found to reduce greenhouse gas emissions by only 22%, which would disqualify it from counting towards the RFS2. Biodiesel from animal fat was found to reduce greenhouse gas emissions by approximately 80%. The EPA did not measure biodiesel produced from corn oil. 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.
The RFS2 program gained additional certainty when on December 21, 2010, a lawsuit challenging the RFS2 regulations was dismissed. We anticipate that the RFS2 may increase demand for biodiesel in the long-term, as it sets a minimum usage requirement for biodiesel and other types of biomass-based diesel. However, there can be no assurances that demand for biodiesel will be increased by the RFS2. As of March 7, 2011, the Biodiesel Magazine website estimated that national biodiesel production capacity was approximately 2.84 billion gallons per year, which already exceeds the 2012 biodiesel and biomass-based diesel use mandate contained in the EISA. 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 this new law. We also anticipate that the expanded RFS2 will be primarily satisfied by ethanol, including both corn-based and other types of ethanol. The amount of corn-based ethanol that may be used to satisfy the RFS2 requirements is capped at 15 million gallons starting in 2015 and, accordingly, other types of ethanol, including cellulose-based ethanol, will likely be used to satisfy any requirements over and above the 15 million gallon corn-based ethanol cap. Because the biodiesel tax credit was only recently reinstated and extended, we are still not certain if these measures in conjunction with each other will be enough to re-stimulate the biodiesel market.
Biodiesel Tax Credit
The American Jobs Creation Act of 2004 originally created the biodiesel blender’s excise tax credit under the Volumetric Ethanol Excise Tax Credit (“VEETC”). Known as the biodiesel tax credit, it provided a tax credit of $1.00 per gallon for biodiesel. The biodiesel 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 biodiesel tax credit was 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 biodiesel tax credit also streamlined 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 biodiesel credit expired on December 31, 2009. Only in December 2010 was the biodiesel tax credit reinstated retroactively for 2010 and extended through December 31, 2011. Due to the recent nature of this change, it remains uncertain whether a one year extension of the biodiesel tax credit will be sufficient to stimulate demand for biodiesel. Moreover, we will not benefit from the retroactive application of the biodiesel tax credit in 2010, because we did not operate during 2010.
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Commodity Credit Corporation Bioenergy Program
The Farm, Nutrition and Bioenergy Act of 2008 reauthorized the Commodity Credit Corporation, or CCC, Bioenergy Program. The program provides $55.0 million in funding in both 2009 and 2010, $85.0 million in funding in 2011 and $105.0 million in funding in 2012 for producers of advanced biofuels derived from renewable biomass, including biodiesel, other than corn kernel. Biodiesel producers must apply for this credit and will be paid based on the quantity and duration of advanced biofuels production and on net nonrenewable energy content of the advanced biofuel. Funding to a single eligible producer may be limited to ensure equitable distribution of funding. Producers with production capacity of less than 150 million gallons will be eligible for 95% of the funds provided under the program.
State Legislation
Several states, including Iowa, are currently researching and considering legislation to increase the amount of biodiesel used and produced in their states. Minnesota was the first state to mandate biodiesel use. The Minnesota legislation, which became effective in September 2005, required that all diesel fuel sold in the state contain a minimum of 2% biodiesel. In 2008, Minnesota passed additional legislation to increase biodiesel content of diesel fuel sold in the state from 2% to 20%, which is the highest in the nation, by 2015. In 2009, Minnesota increased its biodiesel blend requirements to mandate all diesel fuel contain a minimum of 5% biodiesel, however; the state has occasionally had to suspend this requirement during winter months, due to cold flow concerns. Similarly, in July 2008, Massachusetts signed a law that requires all home heating oil and diesel fuel in the state to consist of 2% biodiesel by 2010 and 5% biodiesel by 2013. However, the Massachusetts Department of Energy Resources will be entitled to delay those requirements if it determines that fuels are not available to meet these requirements.
Originally passed in May 2006, and updated in 2009, Iowa passed legislation that creates a renewable fuels standard (IRFS) that requires 10% of the fuel used in Iowa to be from renewable sources by 2009 and increasing the renewable fuel standard to 25% by 2021. While this does not require biodiesel use, it may significantly increase renewable fuels use in Iowa, which may include increased biodiesel use in Iowa. The Iowa legislation includes tax credits to help retailers meet this requirement.
For example, Iowa provides for an incentive of three cents per gallon of biodiesel sold for retailers who sell at least 50% biodiesel blends. This incentive, known as the Biodiesel Blended Fuel Tax Credit, is also expected to support biodiesel sales and production. This incentive is set to expire in 2012.
In addition, in 2009, Iowa passed the Ethanol Promotion Tax Credit, which began in 2009 and ends after calendar year 2020. The incentive each site is eligible for will be directly tied to the IRFS schedule with amounts to be paid only for “pure” ethanol gallons (E100). The law allows “pure” biodiesel gallons (B-100) to count toward achieving the threshold schedule. However, biodiesel gallons are not eligible for these credits; as they are covered by the Biodiesel Blended Fuel Tax Credit. The schedule is based on E-100 plus B-100 divided by total gasoline gallons. The amount of the credit will be determined each year using:
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| o | 6.5 cents per gallon of E100 if retailer meets the biofuel standard threshold percentage |
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| o | 4.5 cents per gallon of E100 if retailer is within 1-2% of threshold percentage |
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| o | 2.5 cents per gallon of E100 if retailer is within 3-4% of threshold percentage |
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| o | 0 cents if more than 4% below the threshold percentage |
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| We anticipate this program may also support biodiesel demand and growth in our industry. |
Other states have enacted legislation to encourage (but not require) biodiesel production and use. Several states provide tax incentives and grants for biodiesel-related studies and biodiesel production, blending, and use. In addition, several governors have issued executive orders directing state agencies to use biodiesel blends to fuel their fleets.
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Future Legislation
Environmental regulations that may affect our company change frequently. It is possible that the government could adopt more stringent federal or state environmental rules or regulations, which could increase our operating costs and expenses. The government could also adopt federal or state environmental rules or regulations that may have an adverse effect on the use of biodiesel. Furthermore, the Occupational Safety and Health Administration (OSHA) governs our plant operations. OSHA regulations may change such that the costs of the operation of the plant may increase. Any of these regulatory factors may result in higher costs or other adverse effects on our operations, cash flows and financial performance. These adverse effects could decrease or eliminate the value of our units.
Quarterly Financial Results
At January 31, 2011, we had total assets of approximately $28,896,000 consisting primarily of cash and equivalents, property, plant and equipment, assets held for sale and escrow deposits. At January 31, 2011, we had current liabilities of approximately $1,794,000 consisting of our accounts payable, current maturities of long-term debt, and other accrued expenses. Total members’ equity at January 31, 2011 was approximately $21,167,000. Since our inception, we have generated no revenue from operations. For the three months ended January 31, 2011, we had a net loss of approximately $208,000.
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
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 October 2016, the interest rate will adjust to the 5-year LIBOR/swap rate plus 3.5%, with a floor of 5%. During the first year of the loan, we will be required to only pay interest on outstanding amounts. Beginning in November 2011, 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 executed a mortgage and security agreement 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.
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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 Mason City biodiesel production facility; |
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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 fail to comply with all covenants; |
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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. |
On September 30, 2010, we entered into an Amended and Restated Loan Agreement with OSM. The purpose of amending and restating the Loan Agreement was to address certain items related to closing on the loan and to address additional details related to the Construction and Design Agreement and our anticipated biodiesel production facility modifications to make it multi-feedstock capable.
On March 18, 2011, we entered into a first amendment to the loan agreements with OSM, whereby certain defined terms related to a covenant calculation were clarified.
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 to us in the event we begin operations at the Mason City biodiesel production facility. Some combinations of programs are mutually exclusive.
Critical Accounting Estimates
Management uses various 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. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. We review assets held for sale at each reporting date to determine that the carrying value is equal to or greater than the estimated net selling price. The carrying value of assets held for sale is based on the ability to sell or utilize these assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which do not reflect unanticipated events and circumstances that may occur.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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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 4. 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 January 31, 2011. 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 January 31, 2011 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.
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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, 2011. 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, 2011.
ESTIMATED USE OF PROCEEDS
| | | | |
Use of Proceeds | | Amount | |
| |
| |
Equity Proceeds Raised | | $ | 31,782,000 | (1) |
Estimated Proceeds Used in Development and Construction of biodiesel facility in Marcus, Iowa. | | | (8,593,000 | )(2) |
Estimated Proceeds Used in Development and Purchase of biodiesel facility in Mason City, Iowa. | | | (7,254,000 | ) |
Proceeds used to purchase the Mason City biodiesel production facility | | | (4,000,000 | )(3) |
Estimated Proceeds Used in Construction of Improvements at Mason City biodiesel production facility | | | (1,323,000 | ) |
Proceeds required to complete related improvements on the Mason City biodiesel production facility | | | (6,677,000 | ) |
Interest income earned on cash and equivalents | | | 1,406,000 | |
Estimated proceeds remaining for start-up of Mason City plant and related expenditures (does not include debt financing from OSM) | | $ | 5,341,000 | (4) |
| |
|
| |
(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 offering costs we incurred in raising capital included legal fees, accounting fees, printing and distribution costs, and meeting costs.
(2) We believe these amounts represent the proceeds we used as of January 31, 2011 on construction, building and facilities, purchase of machinery and equipment and purchases of real estate related to our attempt to construct a biodiesel facility in Marcus, Iowa.
(3) This figure does not include the $6,077,595 we obtained from OSM under the Loan Agreement, or the $375,000 paid to New Equity under the Settlement and Termination Agreement.
(4) This number is our current cash and equivalents, less: our accounts payable; and accrued expenses. It does not include amounts owed for improvements to the Mason City biodiesel production facility, as those will be paid by the escrow deposit. If we sell some of the assets we have held for sale, then this will increase the proceeds remaining to invest in the Mason City biodiesel production facility. Additionally, this figure does not include the $6,077,595 in debt financing that we obtained from OSM pursuant to the Loan Agreement, or the $375,000 paid to New Equity under the Settlement and Termination Agreement.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information
None.
Item 6. Exhibits
| |
(a) | The following exhibits are filed as part of this report. Exhibits previously filed are incorporated by reference, as noted. |
| | | | |
Exhibit
No. | | Description | | Method of
Filing |
| |
| |
|
10.1 | | First Amendment to Amended and Restated Loan Agreement between OSM-REO FF, LLC and Soy Energy, LLC dated March 18, 2011. | | * |
| | | | |
31.1 | | Certificate pursuant to 17 CFR 240 13a-14(a) | | * |
| | | | |
31.2 | | Certificate pursuant to 17 CFR 240 13a-14(a) | | * |
| | | | |
32.1 | | Certificate pursuant to 18 U.S.C. Section 1350 | | * |
| | | | |
32.2 | | Certificate pursuant to 18 U.S.C. Section 1350 | | * |
| | | | |
(*) | | Filed herewith. | | |
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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.
| | | | |
| SOY ENERGY, LLC | |
| | |
Date March 22, 2011 | /s/ Charles Sand | |
|
| |
| |
| Charles Sand | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| | |
Date: March 22, 2011 | /s/ Dallas Thompson | |
|
| |
| |
| Dallas Thompson | |
| Treasurer and Chief Financial Officer | |
| | |
| | |
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