Attached files
file | filename |
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EX-31.1 - EX-31.1 - Western Dubuque Biodiesel, LLC | c92678exv31w1.htm |
EX-31.2 - EX-31.2 - Western Dubuque Biodiesel, LLC | c92678exv31w2.htm |
EX-32.2 - EX-32.2 - Western Dubuque Biodiesel, LLC | c92678exv32w2.htm |
EX-32.1 - EX-32.1 - Western Dubuque Biodiesel, LLC | c92678exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended September 30, 2009
OR
o | Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to
Commission file number 000-52617
WESTERN DUBUQUE BIODIESEL, LLC
(Exact name of registrant as specified in its charter)
Iowa | 20-3857933 | |
(State or other jurisdiction of organization) | (I.R.S. Employer Identification No.) |
904 Jamesmeier Rd.
P.O. Box 82
Farley, IA 52046
(Address of principal executive offices)
P.O. Box 82
Farley, IA 52046
(Address of principal executive offices)
(563) 744-3554
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: As of November 12, 2009, there were 29,779 membership units
outstanding.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTERN DUBUQUE BIODIESEL, LLC
BALANCE SHEET
BALANCE SHEET
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(UNAUDITED) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 3,210,777 | $ | 7,553,554 | ||||
Margin deposits |
226,150 | 5,000 | ||||||
Accounts receivable related party |
452,191 | 1,525,310 | ||||||
Other receivables |
47,444 | | ||||||
Incentive receivables |
222,948 | | ||||||
Inventory |
1,811,006 | 542,401 | ||||||
Derivative instruments |
85,159 | | ||||||
Prepaid expenses |
115,638 | 84,444 | ||||||
Total current assets |
6,171,313 | 9,710,709 | ||||||
PROPERTY, PLANT AND EQUIPMENT |
||||||||
Land and land improvements |
3,091,093 | 3,091,093 | ||||||
Office building and equipment |
407,203 | 407,203 | ||||||
Plant and process equipment |
37,799,987 | 37,758,600 | ||||||
Vehicles |
42,537 | 42,537 | ||||||
Total, at cost |
41,340,820 | 41,299,433 | ||||||
Less accumulated depreciation |
4,746,842 | 3,104,761 | ||||||
Total property, plant and equipment |
36,593,978 | 38,194,672 | ||||||
OTHER ASSETS |
||||||||
Restricted cash |
406,929 | 337,337 | ||||||
Loan origination fees, net of amortization |
309,267 | 380,637 | ||||||
Total other assets |
716,196 | 717,974 | ||||||
TOTAL ASSETS |
$ | 43,481,487 | $ | 48,623,355 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable: |
||||||||
Trade |
$ | 192,511 | $ | 506,615 | ||||
Related party |
35,484 | 241,545 | ||||||
Current portion of long-term debt |
25,676,225 | 28,097,365 | ||||||
Accrued interest |
| 16,346 | ||||||
Accrued liabilities |
69,244 | 141,348 | ||||||
Deferred rent |
8,050 | | ||||||
Total liabilities |
25,981,514 | 29,003,219 | ||||||
MEMBERS EQUITY |
||||||||
Contributed capital |
26,230,096 | 26,230,096 | ||||||
Accumulated deficit |
(8,730,123 | ) | (6,609,960 | ) | ||||
Total members equity |
17,499,973 | 19,620,136 | ||||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 43,481,487 | $ | 48,623,355 | ||||
See accompanying notes to financial statements.
1
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
STATEMENTS OF OPERATIONS (UNAUDITED)
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
September 30, 2009 | September 30, 2008 | September 30, 2009 | September 30, 2008 | |||||||||||||
REVENUES |
||||||||||||||||
Biodiesel and by product sales related party |
$ | 4,666,250 | $ | 15,157,704 | 7,076,150 | $ | 36,769,476 | |||||||||
Tolling services related party |
| 930,987 | 1,030,385 | 955,830 | ||||||||||||
Incentive funds |
351,407 | 3,217,380 | 777,659 | 7,765,862 | ||||||||||||
Total revenues |
5,017,657 | 19,306,071 | 8,884,194 | 45,491,168 | ||||||||||||
COST OF SALES |
||||||||||||||||
Materials, labor and overhead |
5,921,850 | 19,035,571 | 9,611,424 | 44,721,030 | ||||||||||||
Net losses (gains) on derivative instruments |
(177,812 | ) | 240,081 | 242,691 | 293,162 | |||||||||||
Total cost of sales |
5,744,038 | 19,275,652 | 9,854,115 | 45,014,192 | ||||||||||||
Gross profit (loss) |
(726,381 | ) | 30,419 | (969,921 | ) | 476,976 | ||||||||||
OPERATING EXPENSES |
||||||||||||||||
Consulting and professional fees |
63,228 | 73,218 | 207,409 | 220,013 | ||||||||||||
Office and administrative expenses |
62,534 | 103,781 | 213,730 | 355,146 | ||||||||||||
Total operating expenses |
125,762 | 176,999 | 421,139 | 575,159 | ||||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||||||
Other income |
650 | | 1,950 | 1,700 | ||||||||||||
Interest income |
6,684 | 5,970 | 49,268 | 41,459 | ||||||||||||
Interest expense |
(256,087 | ) | (412,877 | ) | (780,321 | ) | (1,370,255 | ) | ||||||||
Total other income (expense) |
(248,753 | ) | (406,907 | ) | (729,103 | ) | (1,327,096 | ) | ||||||||
NET LOSS |
$ | (1,100,896 | ) | $ | (553,487 | ) | $ | (2,120,163 | ) | $ | (1,425,279 | ) | ||||
BASIC AND DILUTED LOSS PER UNIT |
$ | (36.97 | ) | $ | (18.59 | ) | $ | (71.20 | ) | $ | (47.91 | ) | ||||
WEIGHTED AVERAGE UNITS OUTSTANDING,
BASIC AND DILUTED |
29,779 | 29,779 | 29,779 | 29,752 | ||||||||||||
See accompanying notes to financial statements.
2
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
STATEMENTS OF CASH FLOWS (UNAUDITED)
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2009 | September 30, 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (2,120,163 | ) | $ | (1,425,279 | ) | ||
Adjustments to reconcile net loss to net cash
provided by (used in) by operating activities |
||||||||
Depreciation |
1,642,081 | 1,636,652 | ||||||
Amortization |
71,370 | 71,370 | ||||||
Effects of changes in operating assets and liabilities |
||||||||
Margin deposits |
(221,150 | ) | 3,019,770 | |||||
Accounts receivable related party |
1,073,119 | (1,742,919 | ) | |||||
Other receivables |
(47,444 | ) | 150,186 | |||||
Incentive receivables |
(222,948 | ) | 322,737 | |||||
Inventory |
(1,268,605 | ) | 3,610,480 | |||||
Prepaid expenses |
(31,194 | ) | 211,276 | |||||
Derivative instruments |
(85,159 | ) | (2,533,251 | ) | ||||
Accounts payable |
(520,165 | ) | (171,195 | ) | ||||
Accrued liabilities |
(88,450 | ) | (202,887 | ) | ||||
Deferred rent |
8,050 | | ||||||
Net cash provided by (used in) by operating activities |
(1,810,658 | ) | 2,946,940 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Payments for property, plant and equipment,
including construction in progress |
(41,387 | ) | (54,402 | ) | ||||
Sales tax refund from construction in process |
| 286,190 | ||||||
Increase in restricted cash |
(69,592 | ) | (127,971 | ) | ||||
Net cash provided by (used in) investing activities |
(110,979 | ) | 103,817 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from long-term debt |
| 939,540 | ||||||
Payments on long-term debt |
(2,421,140 | ) | (1,754,286 | ) | ||||
Net cash used in by financing activities |
(2,421,140 | ) | (814,746 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(4,342,777 | ) | 2,236,011 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
7,553,554 | 2,011,841 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 3,210,777 | $ | 4,247,852 | ||||
See accompanying notes to financial statements.
3
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Western Dubuque Biodiesel, LLC located in Farley, Iowa was organized on November 14, 2005 to own
and operate a 30 million gallon annual production biodiesel plant for the production of fuel grade
biodiesel. The Companys fiscal year ends on December 31. Significant accounting policies
followed by the Company are presented below. The Company began its principal operations in August
2007. Prior to that date, the Company was considered to be in the development stage.
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Basis of Accounting
The Company uses the accrual basis of accounting in accordance with accounting principles generally
accepted in the United States of America. This method recognizes revenues as earned and expenses
as incurred.
In the opinion of management, all adjustments have been made that are necessary to fairly present
the financial position, results of operations and cash flows of the Company.
These financial statements should be read in conjunction with the financial statements and notes
included in the Companys financial statements for the year ended December 31, 2008.
Revenue Recognition
Revenue from the production of biodiesel and related products is recognized upon delivery to
customers or under the terms of a tolling service agreement. Revenue is recorded upon the transfer
of the risks and rewards of ownership and delivery to customers. Interest income is recognized as
earned.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be cash equivalents.
The Company maintains its accounts primarily at one financial institution. At times during the
year, the Companys cash and cash equivalents balances exceed amounts insured by the Federal
Deposit Insurance Corporation.
Restricted Cash
The Company is required to maintain cash balances to be held at a bank as a part of their financing
agreement as described in Note 4.
Accounts Receivable
Accounts receivable are presented at face value, net of the allowance for doubtful accounts. The
allowance for doubtful accounts is established through provisions charged against income and is
maintained at a level believed adequate by management to absorb estimated bad debts based on
historical experience and current economic
conditions. Management believes all receivables will be collected and therefore the allowance has
been established to be $-0- at September 30, 2009 and December 31, 2008.
4
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
Account balances with invoices past stated terms are considered delinquent. No interest is charged
on trade receivables with past due balances. Payments of accounts receivable are applied to the
specific invoices identified on the customers remittance advice or, if unspecified, to the
customers total balances.
Derivative Instruments and Hedging Activities
SFAS No. 133, which was primarily codified into Topic 815, Derivatives and Hedging, in the ASC,
requires a company to evaluate its contracts to determine whether the contracts are derivatives.
Certain contracts that literally meet the definition of a derivative may be exempted from ASC 815
as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide
for the purchase or sale of something other than a financial instrument or derivative instrument
that will be delivered in quantities expected to be used or sold over a reasonable period in the
normal course of business. Contracts that meet the requirements of normal sales are documented as
such, and exempted from the accounting and reporting requirements of ASC 815. The Company has
entered into agreements to purchase soybean oil for anticipated production needs. These contracts
are considered normal purchase contracts and exempted from ASC 815.
Inventories
Inventory is stated at the lower of cost, determined on a first in, first out basis, or market
value.
Property and Equipment
Property and equipment are stated at cost. Significant additions are capitalized, while
expenditures for maintenance, repairs and minor renewals are charged to operations when incurred.
Depreciation and amortization are computed using the straight-line method over the estimated useful
lives of the assets determined as follows:
Years | ||||
Land improvements |
20 40 | |||
Office equipment |
5 10 | |||
Office building |
30 | |||
Plant and process equipment |
10 40 | |||
Vehicles |
5 7 |
The Company reviews its property and equipment for impairment whenever events indicate that the
carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum
of the future cash flows is less than the carrying amount of the asset. The amount of the loss is
determined by comparing the fair market values of the asset to the carrying amount of the asset.
Loan Origination Fees
Loan origination fees are stated at cost and will be amortized on the straight-line method over the
life of the loan agreements. Amortization commenced as the Company borrowed funds on the loans.
Amortization for the nine months ended September 30, 2009 and 2008 was $71,370.
Income Taxes
The Company is organized as a limited liability company under state law and is treated as a
partnership for income tax purposes. Under this type of organization, the Companys earnings pass
through to the partners and are taxed at the partner level. Accordingly, no income tax provision
has been calculated. Differences between financial statement basis of assets and tax basis of
assets is related to capitalization and amortization of organization and start-up costs for tax
purposes, whereas these costs are expensed for financial statement purposes.
5
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
Earnings (Loss) Per Unit
Earnings (loss) per unit are calculated based on the period of time units have been issued and
outstanding. For purposes of calculating diluted earnings per capital unit, units subscribed for
but not issued are included in the computation of outstanding capital units based on the treasury
stock method. As of September 30, 2009 and 2008, there was not a difference between basic and
diluted earnings per unit as there were no units subscribed.
Cost of Sales
The primary components of cost of sales from the production of biodiesel products under the tolling
services agreement are raw materials (hydrochloric acid, methanol, and other catalysts), energy
(natural gas and electricity), labor and depreciation on process equipment.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in the cost of sales.
Environmental Liabilities
The Companys operations are subject to federal, state and local environmental laws and
regulations. These laws require the Company to investigate and remediate the effects of the
release or disposal of materials at its location. Accordingly, the Company has adopted policies,
practices and procedures in the areas of pollution control, occupational health, and the
production, handling, storage and use of hazardous materials to prevent material, environmental or
other damage; and to limit the financial liability which could result from such events.
Environmental liabilities are recorded when the liability is probable and the costs can be
reasonably estimated.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument held by the Company:
Current assets and current liabilities The carrying value approximates fair value due to the
short maturity of these items.
Long-term debt The carrying amount of long-term obligations approximated fair value based on
estimated interest rates for comparable debt.
New Accounting Standards
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, which was primarily codified into Topic 105,
Generally Accepted Accounting Standards, in the ASC. This standard will become the single source of
authoritative nongovernmental U.S. generally accepted accounting principles (GAAP), superseding
existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task
Force (EITF), and related accounting literature. This standard reorganizes the thousands of GAAP
pronouncements into roughly 90 accounting topics and displays them using a consistent structure.
Also included is the relevant Securities and Exchange Commission guidance organized using the same
topical structure in separate sections. This guidance will be effective for financial statements
issued for reporting periods that end after September 15, 2009. Beginning in the third quarter of
2009,
this guidance impacts the Companys financial statements and related disclosures as all references
to authoritative accounting literature reflect the newly adopted codification.
6
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities - an amendment of SFAS No. 133, which was primarily codified into Topic 815, Derivatives
and Hedging, in the ASC. This guidance expands the disclosures about an entitys derivative and
hedging activities. The guidance was effective for fiscal years and interim periods beginning after
November 15, 2008, which was January 1, 2009 for the Company. The Companys enhanced disclosures
are included in Note 10.
In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments, which was primarily codified into Topic 825, Financial
Instruments, in the ASC. This standard extends the disclosure requirements concerning the fair
value of financial instruments to interim financial statements of publicly traded companies. This
guidance is effective for interim or annual financial periods ending after June 15, 2009. The
Company adopted the guidance as of April 1, 2009. The adoption of ASC 825 did not have a material
effect on its financial statements and related disclosures.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which was primarily codified into
Topic 855, Subsequent Events, in the ASC. This guidance establishes principles and requirements for
subsequent events. Specifically, it sets forth guidance pertaining to the period after the balance
sheet date during which management should consider events or transactions for potential recognition
or disclosure, circumstances under which an event or transaction would be recognized after the
balance sheet date and the required disclosures that should be made about events or transactions
that occurred after the balance sheet date. This guidance is effective for interim or annual
financial periods ending after June 15, 2009. The Company adopted the guidance as of April 1,
2009. The adoption of ASC 855 did not have a material effect on its financial statements and
related disclosures.
NOTE 2 INCENTIVE PAYMENTS AND RECEIVABLE
Revenue from federal incentive programs is recorded when the Company has sold blended biodiesel and
satisfied the reporting requirements under the applicable program. When it is uncertain that the
Company will receive full allocation and payment due under the federal incentive program, it
derives an estimate of the incentive revenue for the relevant period based on various factors
including the most recently used payment factor applied to the program. The estimate is subject to
change as management becomes aware of increases or decreases in the amount of funding available
under the incentive programs or other factors that affect funding or allocation of funds under such
programs. The amount of incentives receivable was $222,948 and $-0- at September 30, 2009 and
December 31, 2008, respectively.
NOTE 3 INVENTORY
Inventory consists of:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Raw material |
$ | 109,194 | $ | 186,306 | ||||
Work in progress |
1,638,999 | 146,334 | ||||||
Finished goods |
62,813 | 209,761 | ||||||
Total |
$ | 1,811,006 | $ | 542,401 | ||||
NOTE 4 LONG-TERM DEBT AND FINANCING
Long-term obligations of the Company are summarized as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Note payable to Beal Bank see details below |
$ | 25,412,499 | $ | 27,782,677 | ||||
Note payable to the Iowa Department of Economic
Development see details below |
255,000 | 300,000 | ||||||
Note payable to Hodge Material Handling see
details below |
8,726 | 14,688 | ||||||
Total |
25,676,225 | 28,097,365 | ||||||
Less current portion |
25,676,225 | 28,097,365 | ||||||
Long-term portion |
$ | | $ | | ||||
Due to going concern issues addressed in Note 11, the debt has been classified as current.
7
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
On July 5, 2006, the Company entered into a $35,500,000 loan agreement with Marshall BankFirst, and
in July 2009, the loan agreement was acquired by Beal Bank. The loan commitment was the lesser of
$35,500,000 or sixty one percent of total project costs. The loan term is seventy-four months
which consists of the construction phase and a term phase. The construction phase ended March 1,
2008 and the term phase commenced thereafter. Monthly interest payments were required during
construction phase with monthly interest and principal required during the term phase to be based
on a ten year principal amortization. Monthly payments of $339,484 including interest at a
variable rate commenced March 1, 2008 under the term phase with the remaining principal and
interest due at maturity, January 1, 2013. The loan commitment also includes a provision for
additional payments during the term phase, based on one-third of all monthly earnings before
interest, taxes, depreciation and amortization (EBITDA) remaining after the regularly scheduled
principal and interest payments have been paid in full. The agreement also includes provisions for
reserve funds for capital improvements, working capital, and debt service. As of September 30,
2009, balances of $354,708 and $52,221 remain in the debt service reserve and capital reserve funds
as restricted cash. During the term phase, the Company has the option of selecting an interest
rate at 25 basis points over the prime rate as published in the Wall Street Journal or 300 basis
points over the five-year LIBOR/Swap Curve rate. On March 1, 2008, upon commencement of the term
phase the Company selected the variable rate option of 25 basis points over the prime rate (3.50%
and 3.25% at September 30, 2009 and December 31, 2008, respectively). The notes are secured by
essentially all of the Companys assets. Under the terms of the agreements, the Company is to
adhere to certain financial covenants. The Company is to adhere to minimum debt service coverage,
fixed charge coverage, and current ratio requirements, as well as a maximum debt as a percentage of
earnings before interest, taxes, depreciation and amortization (EBITDA) ratio. The Company was not
in compliance with certain covenants as of September 30, 2009 and December 31, 2008.
The Company has been awarded $400,000 from the Iowa Department of Economic Development consisting
of a $300,000 zero interest deferred loan and a $100,000 forgivable loan. The zero interest
deferred loan requires sixty monthly installments of $5,000 beginning December 2006. In January
2007, the zero interest deferred loan was amended, and deferred monthly installments until August
2007, with remaining principal due at maturity, May 2012. The Company must satisfy the terms of
the agreement, which include producing 30,000,000 gallons of biodiesel and wage and job totals, to
receive a permanent waiver of the forgivable loan. The loan is secured by a security agreement
including essentially all of the Companys assets.
The Company has an installment sales contract with Hodge Material Handling dated October 16, 2007.
The Company purchased a fork truck for $23,625, and must make 36 monthly installments of $770,
beginning 30 days after taking possession of the fork truck. Interest is implied at a rate of
10.69% per annum.
The Company has issued a $116,132 letter of credit through American Trust Bank in favor of Aquila,
Inc. The letter of credit is effective for the period February 6, 2007 through February 6, 2010.
The Company has available $116,132 to be borrowed at September 30, 2009.
NOTE 5 MEMBERS EQUITY
In December 2006, the Company entered into a written agreement to issue 2,500 units with the
Renewable Energy Group, Inc. (REG, Inc.) who was contracted to build the facility and provide
management and operational services for the Company (see Note 7). REG, Inc., is a related entity
formed by the Companys original general contractor (Renewable Energy Group, LLC) (See Note 7).
The agreement provided for the issuance of 2,500 membership units to the contractor upon completion
of construction. The $2,500,000 consideration for the units were to be deducted from the final
payments made by the Company relating to the construction agreement of the biodiesel facility. The
2,500 units were issued on January 4, 2008. This reduced the construction payable by $2,500,000
and increased contributed capital by the same amount.
8
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
The Companys operating agreement provides that the net profits or losses of the Company will be
allocated to the members in proportion to the membership units held. Members will not have any
right to take part in the management or control of the Company. Each membership unit entitles the
member to one vote on any matter which the member is entitled to vote. Transfers of membership
units are prohibited except as provided for under the operating agreement and require approval of
the board of directors.
NOTE 6 CASH FLOW DISCLOSURES
Supplemental disclosure for interest paid:
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2009 | September 30, 2008 | |||||||
Cash paid for interest |
$ | 725,298 | $ | 1,562,846 | ||||
The Company had the following noncash investing and financing transactions:
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2009 | September 30, 2008 | |||||||
Units issued in
exchange for
reduction in
construction
payable |
$ | | $ | 2,500,000 | ||||
Loan proceeds
transferred to debt
reserve fund
(restricted cash) |
$ | | $ | 75,344 | ||||
NOTE 7 RELATED PARTY TRANSACTIONS
The Companys general contractor (Renewable Energy Group, LLC) entered into an agreement to
construct the plant. On July 31, 2006 the general contractor formed a new related entity called
Renewable Energy Group, Inc. (REG, Inc.). The new entity, REG, Inc. is contracted to provide the
management and operational services for the Company. On August 9, 2006, REG, LLC assigned its
construction agreement to the newly formed entity REG, Inc., which became the general contractor.
The Company entered into an agreement with REG, Inc. to provide certain management and operational
services. The agreement provides for REG, Inc. to place a general manager and operations manager,
acquire substantially all feed stocks and basic chemicals necessary for production, and perform
substantially all the sales and marketing functions for the Company. The agreement with REG, Inc.
requires a per gallon fee, paid monthly, based on the number of gallons of biodiesel produced or
sold. In addition, an annual bonus based on a percentage of the plants profitability with such
bonus not to exceed $1,000,000 per year.
Payments shall be due the tenth of the month following the month for which such fees are computed
or payable. The agreement shall remain in force for three years after the end of the first month
in which product is produced for sale. The agreement shall continue until one party gives written
notice of termination to the other of a proposed termination date at least twelve months in advance
of a proposed termination date.
The Company incurred management and operational service fees, feed stock procurement fees, and
sales fees with REG, Inc. For the nine months ending September 30, 2009 and 2008, the Company
incurred fees of $253,493 and $658,869, respectively. The amount payable to REG, Inc. as of
September 30, 2009 and December 31, 2008 was $35,484 and $241,545, respectively.
In August 2008, the Company entered into a tolling service agreement with REG, Inc. to process a
specified number of gallons of biodiesel from September to February 2009. Under the terms of the
agreement, REG, Inc. was to provide the raw material feedstock and pay a specified price per gallon
for processing. This agreement was completed in February 2009.
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WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
The Company has given notice to REG, Inc. that they intend to proceed with arbitration in order to
resolve disputes related to the management and operational services agreement.
On June 5, 2009, the Company received from REG, Inc., a notice of termination of its management and
operational services agreement. The notification from REG, Inc. states that it shall constitute
such twelve month advance termination notice required by the terms of the agreement.
A member of the board of directors is also a member of the board of directors of the Companys
depository bank.
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Company has received refunds of $154,376 from an industrial new jobs training program. The
Company funds the program through diverting their state payroll tax withholdings. In the event
these withholdings arent enough to cover the bond payments, the Company will need to advance the
funds to cover the program costs.
NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective January 1, 2008, the Company adopted FASB Statement No. 157 (FAS 157), Fair Value
Measurements, which was primarily codified into Topic 820, Fair Value Measurements and Disclosures,
in the ASC. This guidance provides a comprehensive framework for measuring fair value and expands
disclosures which are required about fair value measurements. Specifically, the guidance sets
forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation
techniques, giving the highest priority to quoted prices in active markets for identical assets and
liabilities and the lowest priority to unobservable value inputs. The adoption of this guidance
had an immaterial impact on the Companys financial statements. The guidance defines levels within
the hierarchy as follows:
| Level 1Unadjusted quoted prices for identical assets and liabilities in active
markets; |
| Level 2Quoted prices for similar assets and liabilities in active markets (other
than those included in Level 1) which are observable for the asset or liability, either
directly or indirectly; and |
| Level 3Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. |
The following table sets forth financial assets and liabilities measured at fair value in the
statement of financial position and the respective levels to which the fair value measurements are
classified within the fair value hierarchy as of September 30, 2009:
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
September 30, | Identical Assets | Inputs | Inputs | |||||||||||||
2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial assets: |
||||||||||||||||
Commodity derivatives |
$ | 85,159 | $ | 85,159 | $ | | $ | | ||||||||
The Company enters into various commodity derivative instruments, including forward contracts,
futures, options and swaps. The fair value of the Companys derivatives are determined using
unadjusted quoted prices for identical instruments on the applicable exchange in which the Company
transacts. When quoted prices for identical instruments are not available, the Company uses forward
price curves derived from market price quotations. Market price quotations are obtained from
independent brokers, exchanges, direct communication with market participants and actual
transactions executed by the Company.
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WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTE 10 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2009, the company prospectively implemented the provisions of SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No.
133 (SFAS 161), which was primarily codified into Topic 815, Derivatives and Hedging, in the ASC.
This guidance enhances the disclosure requirements of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), to provide users of financial statements with a
better understanding of the objectives of a companys derivative use and the risks managed.
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the company enters into contractual arrangements (derivatives)
as a means of managing exposure to changes in biodiesel prices and feedstock costs under
established procedures and controls. The company has established a variety of approved derivative
instruments to be utilized in each risk management program, as well as varying levels of exposure
coverage and time horizons based on an assessment of risk factors related to each hedging program.
As part of its trading activity, the Company uses option and swap contracts offered through
regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market value of
biodiesel inventories and input costs.
Commodity Risk Management
Commodity price risk management programs serve to reduce exposure to price fluctuations on
purchases of feedstocks and biodiesel prices. The company enters into over-the-counter and
exchange-traded derivative commodity instruments to hedge the commodity price risk associated with
feedstocks and commodity exposures. These agreements had expiration dates in 2009.
Accounting for Derivative Instruments and Hedging Activities
All derivatives are designated as non-hedge derivatives. Although the contracts may be effective
economic hedges of specified risks, they do not meet the hedge accounting criteria of ASC 815. At
September 30, 2009, the Company had net derivative assets of $85,159 related to these instruments,
with the related mark-to-market effects included in Cost of sales in the statements operations.
At December 31, 2008, the Company had no derivative instruments.
The following tables provide information on the location and amounts of derivative fair values in
the consolidated balance sheet and derivative gains and losses in the statement of operations:
Fair Value of Derivative Instruments
Balance Sheet | Asset Derivatives | Liability Derivatives | ||||||||||
Classification | September 30, 2009 | September 30, 2009 | ||||||||||
Derivatives not
designated as
hedging: |
||||||||||||
Commodity
contracts
Heat
oil swaps |
Current Assets | $ | 85,159 | $ | |
During the nine months ended September 30, 2009, net realized and unrealized losses on derivative
transactions were recognized in the statement of income as follows:
Location of net loss | Net income (loss) | |||||
recognized in | recognized in income on | |||||
Derivatives not designated as | earnings on | derivative | ||||
hedging instruments | derivative activities | activities | ||||
Commodity contracts Heat oil swaps |
Cost of sales | $ | (242,691 | ) |
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WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
The Company recorded an increase to cost of sales of $293,162, related to derivative contracts for
the nine months ending September 30, 2008.
NOTE 11 UNCERTAINTY
The accompanying financial statements have been prepared assuming that the Company will continue
as a going concern. For the nine months ended September 30, 2009, the Company generated
significant net losses of $2,120,163 and experienced significant increases in the input costs for
its products. The Company has also received from REG, Inc., a notice of termination of its
management and operational services agreement (See Note 7). In an effort to increase profit
margins and reduce losses, the Company anticipates producing biodiesel from refined animal fat, as
animal fats are currently less costly than soybean oil. The Company also plans to seek to produce
biodiesel on a toll basis where biodiesel would be produced using raw materials provided by
someone else. Finally, the Company plans to scale back on its production or temporarily shut down
the biodiesel plant depending on the Companys cash situation and its ability to purchase raw
materials to operate the plant.
The Company has also undertaken significant borrowings to finance the construction of its
biodiesel plant. The loan agreements with the Companys lender contain restrictive covenants,
which require the Company to maintain minimum levels of working capital, and minimum financial
ratios including; debt service coverage, fixed charge coverage and debt as a percentage of
earnings before interest, taxes, depreciation, and amortization (EBITDA). The Company was not in
compliance with certain restrictive covenants at September 30, 2009 and December 31, 2008, and it
is projected the Company will fail to comply with one or more loan covenants, including the
working capital covenant throughout the Companys 2009 fiscal year. This raises doubt about
whether the Company will continue as a going concern. These loan covenant violations constitute
an event of default under the Companys loan agreements which, at the election of the lender,
could result in the acceleration of the unpaid principal loan balance and accrued interest under
the loan agreements or the loss of the assets securing the loan in the event the lender elected to
foreclose its lien or security interest in such assets. The Companys ability to continue as a
going concern is dependent on the Companys ability to comply with the loan covenants and the
lenders willingness to waive any non-compliance with such covenants.
Management anticipates that if additional capital is necessary to comply with its loan covenants
or to otherwise fund operations, the Company may issue additional membership units through one or
more private placements. However, there is no assurance that the Company would be able to raise
the desired capital.
NOTE 12 SUBSEQUENT EVENTS
Management evaluated subsequent events through November 16, 2009, the date the financial statements
were available to be issued. Events or transactions occurring after September 30, 2009 but prior
to November 16, 2009 that provided additional evidence about conditions that existed at September
30, 2009, have been recognized in the financial statements for the period ended September 30, 2009.
Events or transactions that provided evidence about conditions that did not exist at September 30,
2009 but arose before the financial statements were available to be issued have not been recognized
in the financial statements for the period ended September 30, 2009.
NOTE 13 GAIN CONTINGENCY
In September 2009, the Company received notification of a fund award from the United States
Department of Agriculture under the Advanced Biofuel Producers Program. Due to the uncertainty of
the allocation of the funding, no estimate can be made at this time as to the amount of ultimate
recovery. As such no revenues have been recorded in the
accompanying statement of operations for the nine months ended September 30, 2009 relating to the funds awarded.
Revenues will be recorded at which time the fund award is determinable, which will likely occur upon receipt.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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 and nine
month periods ended September 30, 2009. 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 December 31, 2008.
Cautionary Statements Regarding Forward-Looking Statements
This report contains forward-looking statements that involve known and unknown risks and
relate to future events, our future financial performance and our expected future operations and
actions. In some cases, you can identify forward-looking statements by terminology such as may,
will, should, expect, plan, anticipate, believe, estimate, future, intend,
could, hope, predict, target, potential, or continue or the negative of these terms or
other similar expressions. These forward-looking statements are only our predictions based upon
current information and involve numerous assumptions, risks and uncertainties. Our actual results
or actions may differ materially from these forward-looking statements for many reasons, including
the reasons described in this report. While it is impossible to identify all such factors, factors
that could cause actual results to differ materially from those estimated by us include, without
limitation:
| The availability and terms and conditions of credit or equity financing needed to
continue our operations if income from operations is insufficient for us to continue
biodiesel production; |
| Our ability to generate free cash flow to invest in our business and service our debt; |
| Our ability to comply with our loan covenants and the response of our lender to our
failure to comply with such covenants; |
| Fuel prices, consumption of diesel and biodiesel and consumer attitudes regarding the
use of biodiesel; |
| Prices of vegetable oils (particularly soybean oil), animal fats and/or other feedstock; |
| Our ability to enter into toll manufacturing agreements or other arrangements that shift
responsibility for feedstock procurement and costs to other parties; |
| Our relationship with Renewable Energy Group, Inc. (REG), our manager and marketer,
and our ability to obtain a new marketer upon termination of our agreement with REG. |
| The continued imposition of tariffs or other duties on biodiesel exported to Europe; |
| Overcapacity within the biodiesel industry resulting in increased competition and costs
for feedstock and/or decreased prices for our biodiesel and glycerin; |
| Changes in soy-based biodiesels qualification under the Renewable Fuel Standard (RFS)
and similar legislation; |
| Decreased availability of soybean oil, animal fat or other feedstock for any reason; |
| Our ability to locate alternative feedstock to respond to market conditions,
particularly since we lack pretreatment capabilities to enable us to process raw animal
fats or other crude vegetable oils at our plant; |
| Our ability to market our products and our reliance on our marketer to market our
products; |
| Changes in or elimination of 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; and the ability of the biodiesel industry to
successfully lobby for mandates or other legislation beneficial to the biodiesel industry; |
| Changes in plant production capacity or technical difficulties in operating the plant
for any reason, including changes due to events beyond our control or as a result of
intentional reductions in or halting of production; |
||
| Changes and advances in biodiesel production technology, including the ability of our
competitors to process raw animal fats or other feedstock which we are unable to process; |
| Competition from alternative fuels; and |
| 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
Western Dubuque Biodiesel, LLC (the Company, we or us) was formed on November 14, 2005
as an Iowa limited liability company. We own and operate a 30 million gallon per year biodiesel
production plant near Farley, Dubuque County, Iowa and engage in the production and sale of
biodiesel and its primary co-product, glycerin. Under our Management and Operational Services
Agreement (MOSA) with REG, REG is required to provide for the management of our plant, acquire
feedstock and chemicals necessary for the plants operation and to perform administrative, sales
and marketing functions. As discussed in further detail in Part II, Item 1 Legal Proceedings, in
March 2009, we gave notice to REG that we intended to proceed with arbitration to resolve disputes
arising under the MOSA. On June 5, 2009, we received from REG a notice of termination of the MOSA,
pursuant to which we expect the MOSA to terminate on August 1, 2010. If not settled earlier,
arbitration is scheduled to begin in March 2010.
We are subject to industry-wide factors that affect our operating and financial performance.
Our operating results are largely driven by the prices at which we sell our biodiesel and glycerin
and the cost of feedstock and other operating costs. In addition, our revenues are impacted by
such factors as our dependence on one or a few major customers who market and distribute our
products; the intensely competitive nature of our industry; the extensive environmental laws that
regulate our industry; legislation at the federal, state and/or local level; and changes in federal
biodiesel supports and incentives. Current feedstock costs, combined with decreased biodiesel
prices and demand, have contributed to the net losses for the period covered by this report.
As of the date of this report, we have the outstanding sales contracts for our biodiesel
described in Part II, Item 5 Other Information. We continue to process feedstocks other than
soybean oil, including animal fats and canola oil, when possible. We directly receive animal fat
that does not need additional pretreatment at another plant. If additional pretreatment is needed,
we contract with a biodiesel plant in Newton, Iowa to pre-treat the animal fat before shipment to
us for use in biodiesel production. Animal fats were used to produce 73% of the biodiesel produced
at our plant during the nine months ending September 30, 2009.
For the three months covered by this report, we produced approximately 1,241,082 gallons of
biodiesel at our plant. Based upon our nameplate production capacity of 30,000,000 gallons of
biodiesel per year (2,500,000 gallons per month), we operated at approximately 16.54% of our
capacity during the quarter ended September 30, 2009. For the three months covered by this report,
we generated net losses of $1,100,896. Due to our net losses and reduced production, we terminated
three supervisory employees effective August 1, 2009. For the nine months covered by this report,
we have generated net losses of $2,120,163. These net losses, combined with the notice of
termination of the MOSA from REG and our failure to satisfy the covenants of our loan agreements,
have raised doubts as to our ability to continue as a going concern.
Our future operations will depend upon our ability to continue processing animal fats and
REGs ability to procure feedstock contracts and sales or tolling services agreements that allow us
to maintain positive cash flow. Under tolling services agreements, we produce biodiesel using
feedstock provided by another party. The other party is required to pay for the feedstock, and we
pay for all of the other production costs, receiving a flat fee per gallon on biodiesel produced.
For the quarter ended September 30, 2009, we did not produce any biodiesel under tolling services
agreements. We anticipate that we will continue to operate substantially below our capacity
primarily due
to a combination of the current price of feedstocks and decreased biodiesel demand and price,
which are described throughout this report.
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Results of Operations for the Three Months Ended September 30, 2009
The following table shows the results of our operations and the percentage of revenues, costs
of goods sold, operating expenses and other items in relation to total revenues in our statements
of operations for the quarters ended September 30, 2009 and 2008:
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Income Statement Data | Amount | Percent | Amount | Percent | ||||||||||||
Revenues |
$ | 5,017,657 | 100.00 | % | $ | 19,306,071 | 100.00 | % | ||||||||
Cost of Sales |
5,744,038 | 114.48 | % | 19,275,652 | 100.16 | % | ||||||||||
Gross Profit (loss) |
(726,381 | ) | (14.48 | )% | 30,419 | 0.16 | % | |||||||||
Operating Expenses |
125,762 | 2.50 | % | 176,999 | 0.92 | % | ||||||||||
Other Income (Expense) |
(248,753 | ) | (4.96 | %) | (406,907 | ) | (2.11 | %) | ||||||||
Net Loss |
(1,100,896 | ) | (2.19 | %) | (553,487 | ) | (2.87 | %) |
Revenues
The following table shows the sources of our revenues for the quarters ended September 30,
2009 and 2008:
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||
Revenue Source | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
Biodiesel/Glycerin Sales |
$ | 4,666,250 | 93.00 | % | $ | 15,157,704 | 78.51 | % | ||||||||
Tolling Services |
0 | 0.0 | % | 930,987 | 4.82 | % | ||||||||||
Incentive funds |
351,407 | 7.00 | % | 3,217,380 | 16.67 | % | ||||||||||
$ | 5,017,657 | 100.00 | % | $ | 19,306,071 | 100.00 | % | |||||||||
Our revenues from operations for the quarter ended September 30, 2009 came from sales of
biodiesel and crude glycerin and from government incentives. For the period covered by this
report, we operated at approximately 16.54% of our capacity compared to operating at 66% of
capacity for the three month period ending September 30, 2008. Our revenues are significantly
lower in the three months ended September 30, 2009 than in the same period in 2008 primarily due to
reduced production levels and lower biodiesel prices. Average B100 biodiesel prices for the Upper
Midwest, as reported by the Jacobsen Publishing Company, for the months of July, August and
September 2009 were $2.94, $3.14, and $3.09, respectively, as compared to the respective average
prices of $5.22, $4.78 and $4.59 for the same periods in 2008. We received incentive funds in the
amount of $351,407 for the quarter ended September 30, 2009, which is significantly lower than the
amount of incentive funds received last year for the same period.
Because biodiesel is primarily used as an additive to petroleum-based diesel, biodiesel prices
have generally correlated to diesel fuel prices. Diesel fuel prices per gallon remain at levels
below or equal to the price of biodiesel, and current economic conditions have resulted in
decreased demand for biodiesel and other fuels. Demand for biodiesel has been reduced as a result.
Combined with the lack of demand for biodiesel is an increased supply of biodiesel and increased
competition for and costs of our inputs, which has also led to difficulty in marketing our
biodiesel at profitable prices. Further, we expect even lower demand in the winter months because
blenders decrease their blend percentages due to cold flow concerns. Additionally, there is lower
demand for
biodiesel in European markets due to tariffs imposed on biodiesel imported from the U.S. We
expect these trends to continue for the remainder of our fiscal year and to continue in 2010.
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Moreover, the EPA recently issued preliminary findings that soy-based biodiesel fails to meet
targets for reducing greenhouse emissions, as required under the RFS. If these findings are
implemented into the proposed revisions to the RFS (RFS-2) such that soy-based biodiesel is not
counted toward the RFS, demand for our biodiesel could be reduced as a result. Additionally, the
EPA has delayed comments on and implementation of the RFS-2, although as of the date of this report
the EPA expects to issue its final rule by the end of the calendar year. According to the National
Biodiesel Board, this continuing delay works to further disadvantage the biodiesel producers who
would have benefited from the RFS-2 requirements for biomass-based diesel use in 2009. We have
submitted comments to William Rice, EPA Deputy Regional Administrator for Region 7 (Iowa, Kansas,
Missouri and Nebraska) in support of the use of soy-based biodiesel to satisfy the RFS-2
requirements.
Cost of Sales
The primary components of cost of sales from the production of biodiesel products are raw
materials (animal fat, soybean oil and other feedstock; hydrochloric acid; methanol; and sodium
methylate), energy (natural gas and electricity), labor and depreciation on process equipment.
Our costs of sales for the three month period ending September 30, 2009 are substantially less
than our costs of sales for the same period in 2008 due primarily to decreased production.
However, due to decreased incentive revenues, lower biodiesel production and sales and our
inability to obtain tolling agreements during the quarter, costs of sales were a greater percentage
of our total revenues in 2009. Feedstock prices are lower than the prices from last year during
the same period but did not decline enough to result in profitable production and sale of
biodiesel. Jacobsen Publishing Company reported that the central Illinois average July, August and
September 2009 soybean oil prices were $0.3180, $0.3373 and $0.3105 per pound respectively, as
compared to $0.6084, $0.5096 and $0.4626 per pound for the same three months in 2008. According to
the USDAs October 13, 2009 Oil Crop Outlook report, lard and edible tallow prices for September
2009 were down approximately 10 cents per pound and 5 cents per pound respectively, from the
September 2008 average prices. Animal fat prices may increase if the demand for biodiesel produced
from animal fats increases rapidly as a result of the EPAs findings that soy-based biodiesel does
not meet the greenhouse emission reduction requirements to be counted towards the RFS.
Although our plant is able to process certain feedstocks other than soybean oil and refined
animal fats, our ability to utilize different types of feedstock depends on our ability to gain
access to a consistent supply of feedstock at competitive prices and to obtain feedstock that has
been pretreated for use at our plant if necessary. We expect to purchase feedstock based only upon
scheduled sales and available working capital and to continue to seek production of biodiesel on a
toll basis as we have done in prior periods. If, however, the price of feedstock or natural gas
increases in the future, the costs of sales on a per-gallon sold basis will likely increase with
regard to biodiesel not produced under a toll manufacturing agreement. If we cannot obtain
adequate supplies of feedstock at affordable costs for sustained periods of time, we expect to
continue to experience brief temporary shutdowns, and we may be forced to permanently shut down the
plant.
Operating Expenses
Operating expenses for the three months ended September 30, 2009 totaled $125,762 and $176,999
for the same period in 2008. Our operating expenses are primarily due to expenses for consulting
and professional fees and office and administrative expenses. We expect that going forward our
operating expenses will remain fairly consistent if plant production levels remain consistent or as
projected.
Other Income (Expenses)
Our other income and expenses for the three months ended September 30, 2009 resulted primarily
from interest expense of $256,087. We expect our other income (expenses) to remain steady if plant
production levels remain consistent or as projected.
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Results of Operations for the Nine Months Ended September 30, 2009
The following table shows the results of our operations and the percentage of revenues, costs
of goods sold, operating expenses and other items in relation to total revenues in our statements
of operations for the nine months ended September 30, 2009 and September 30, 2008:
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Income Statement Data | Amount | Percent | Amount | Percent | ||||||||||||
Revenues |
$ | 8,884,194 | 100.00 | % | $ | 45,491,168 | 100.00 | % | ||||||||
Cost of Sales |
9,854,115 | 110.92 | % | 45,014,192 | 98.95 | % | ||||||||||
Gross Profit (Loss) |
(969,921 | ) | (10.92 | %) | 476,976 | 1.05 | % | |||||||||
Operating Expenses |
421,139 | 4.74 | % | 575,159 | 1.26 | % | ||||||||||
Other Income (Expense) |
(729,103 | ) | (8.21 | %) | (1,327,096 | ) | (2.92 | %) | ||||||||
Net Income (Loss) |
(2,120,163 | ) | (23.87 | %) | (1,425,279 | ) | (3.13 | %) |
Revenues
Our revenues for the nine months ended September 30, 2009 and September 30, 2008 came from
three primary sources, as shown below.
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||
Revenue Source | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
Biodiesel/Glycerin Sales |
$ | 7,076,150 | 79.65 | % | $ | 36,769,476 | 80.83 | % | ||||||||
Tolling Services |
1,030,385 | 11.60 | % | 955,830 | 2.60 | % | ||||||||||
Incentive funds |
777,659 | 8.75 | % | 7,765,862 | 17.07 | % | ||||||||||
$ | 8,884,194 | 100.00 | % | $ | 45,491,168 | 100.00 | % | |||||||||
Our revenues are significantly lower in the nine months ended September 30, 2009 than the same
period in 2008, primarily due to reduced production and lower prices for our biodiesel in 2009.
Additionally, our income from incentives in the nine months ended September 30, 2009 was
significantly lower than incentive income for the same period in 2008.
Cost of Sales
Our costs of sales for the nine months ended September 30, 2009 are substantially less than
our costs of sales for the same period in 2008 due primarily to decreased production, in addition
to lower or steady prices of feedstock. However, due to our decreased revenues and market
conditions, costs of sales were a greater percentage of our total revenues in 2009.
Operating Expenses
Our operating expenses were $421,139 and $575,159 for the nine months ended September 30, 2009
and 2008, respectively. Our operating expenses are primarily due to expenses for consulting and
professional fees and office and administrative expenses. We expect that going forward our
operating expenses will remain fairly consistent, even if production and sales of biodiesel further
declines.
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Other Income (Expenses)
Our other expenses of $729,103 for the nine months ended September 30, 2009 resulted primarily
from interest expense of $780,321, partially offset by our other income and interest income. We
expect our other income (expenses) to remain steady for the remainder of the 2009 fiscal year.
Changes in Financial Condition for the Nine Months Ended September 30, 2009
The following table sets forth our sources of liquidity for the nine months ended September
30, 2009 compared to the fiscal year ended December 31, 2008:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Current Assets |
$ | 6,171,313 | $ | 9,710,709 | ||||
Current Liabilities |
25,981,514 | 29,003,219 | ||||||
Long-Term Liabilities |
0 | 0 | ||||||
Total Members Equity |
17,499,973 | $ | 19,620,136 |
Current Assets
The decrease in current assets is primarily due to a decrease in cash which was used for
principal payments and reduced margins from sales resulting in a loss for the period.
Current Liabilities
Our long-term debt has been classified as a current liability, due to our failure to meet
certain financial covenants under our term loan. These loan covenant violations constitute an
event of default under the Companys loan agreements which, at the election of the lender, could
result in the acceleration of the unpaid principal loan balance and accrued interest or a loss of
the assets securing the loan if the lender elects to foreclose the loan. The change to our current
liabilities from December 31, 2008 to September 30, 2009 is due to payments on our debt financing
and reduced accounts payables.
Members Equity
The change in the members equity was due to an increase in the accumulated deficit from
$6,609,960 to $8,730,123 as a result of our net loss.
Plan of Operations for the Next 12 Months
Plant Operations
As of the date of this report, we have the outstanding sales contracts for biodiesel described
in Part II, Item 5 Other Information. In an effort to increase profit margins and reduce losses,
we plan to continue producing our biodiesel primarily from refined animal fat to the extent
feasible because of its lower price as compared to soybean oil. For the remainder of 2009, and
continuing into 2010, we also anticipate that we will continue to operate substantially below our
capacity. Management is directing its efforts towards increasing production and operating
efficiencies while maintaining or decreasing operating costs. The price of inputs combined with
lower prices for our biodiesel, however, may make it difficult or impossible to satisfy these
objectives.
Operating Budget and Financing of Plant Operations
We have exhausted the funds available under our debt facilities and do not have further
commitments for funds from any lender. We intend to rely on cash flow from continuing operations
to fund our operations during the next twelve months. Additionally, in September 2009, we received
notification of a fund award from the United States Department of Agriculture under the Advanced
Biofuel Producers Program; however there is currently uncertainty of the allocation of the funding,
so we are unsure of the amount that we may receive under this
program. We anticipate that we will continue to seek tolling services agreements.
Additionally, we may seek third parties to procure feedstock for us in exchange for a fee, similar
to the transaction described in Part II, Item 5 Other Information. We anticipate that we will need
to seek debt and/or equity financing if cash flow from our ongoing operations and from incentive
funds is insufficient to continue operations. However, the economic crisis has contributed to a
generally unfavorable credit environment. If we cannot purchase the feedstock required to operate
the biodiesel plant at a price which would allow us to operate profitably, or if we cannot secure
tolling services agreements that allow us to operate the plant without paying for feedstock, and
additional funds are unavailable, it may be necessary for us to continue to temporarily suspend
production or to shut down our plant.
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Pursuant to the MOSA, REG provides us with overall management, sales and marketing and
feedstock procurement services. In exchange, we pay REG a management fee based upon the number of
gallons of biodiesel produced. Additionally, we may be obligated to pay a yearly income bonus
equal to a certain percentage of our net income if REG meets certain conditions. For the nine
months ended September 30, 2009 and 2008 we have incurred management and operational fees,
feedstock procurement fees and marketing fees under the MOSA of $253,493 and $658,869,
respectively. The amount payable as of September 30, 2009 and December 31, 2008 was $35,484 and
$241,545, respectively.
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. These policies are described in the notes to the financial
statements.
Liquidity and Capital Resources
Cash Flows
Cash Flow from Operating Activities. Net cash used in operating activities for the nine
months ended September 30, 2009 totaled $1,810,658, compared to net cash provided by operating
activities for the nine months ended September 30, 2008 of $2,946,940. This was primarily the
result of reduced margins from biodiesel.
Cash Flow from Investing Activities. Net cash used in investing activities for the nine
months ended September 30, 2009 totaled $110,979, which was due primarily to an increase in
restricted cash. For the nine months ended September 30, 2008 we received $103,817 in cash from
investing activities due to a sales tax refund from construction in process.
Cash Flow from Financing Activities. Net cash used in financing activities for the nine
months ended September 30, 2009 totaled $2,421,140 due to payments on our long-term borrowings.
For the nine months ended September 30, 2008 we used $814,746 in financing activities, which
represent our payments on long-term debt offset by proceeds from long-term debt in that period.
Sources of Funds
Equity Financing. We have used all of the proceeds from our equity offerings to fund the
construction and start-up of our plant and for our ongoing operations. Our board of directors
continues to evaluate alternatives for raising capital.
Debt Financing. In October 2006, we closed on our term loan with Marshall Bankfirst
(Bankfirst). The requirements of our term loan are more specifically described in the loan
documents we executed with Bankfirst. The loan term is seventy-four months, which consists of a
construction phase and a term phase. The construction phase ended March 1, 2008, and the term
phase commenced thereafter. On March 1, 2008, we selected the variable rate option for the loan of
0.25% over the prime rate (3.50% at September 30, 2009). Monthly payments under the term phase are
$339,484 including interest at a variable rate. Payments will be calculated in an amount necessary
to amortize the principal amount of this note plus interest thereon over a 10 year period. The
remaining unpaid principal balance, together with all accrued but unpaid interest, is due and
payable in full on January 1, 2013. As of
September 30, 2009, the outstanding balance on our term loan was $25,412,499. We have
exhausted the funds available under our debt facilities and do not have further commitments for
funds from any lender.
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We executed a mortgage in favor of Bankfirst creating a first lien on substantially all of our
assets, including our real estate, plant, all personal property located on our property and all
revenues and income arising from the land, plant or personal property for the loan and credit
agreements discussed above. Due to Bankfirsts security interest in our assets, we are not free to
sell our assets without the permission of Bankfirst, which could limit our operating flexibility.
In July 2009, state banking regulators shut down BankFirst, and named the FDIC as its
receiver. The FDIC advised us to continue to make our payments as usual. Moreover, the FDIC
indicated that the closure of BankFirst would not alter the terms of our loan. We have received
notice that Beal Bank Nevada is our new lender. Pursuant to discussions with them, Beal Bank
Nevada verbally agreed to accept a reduced November 2009 payment, and they have indicated that they might be
willing to allow similar reductions in the future. However, there is no binding agreement for
lower payments and no guarantee that we will be able to use a reduced
payment plan or that Beal Bank Nevada will not exercise its remedies
for our failure to comply with the terms of the loan agreement.
The term loan agreement imposes various covenants upon us which may restrict our operating
flexibility. The term loan requires us to: maintain up to $125,000 in a capital improvements
reserve fund that must be replenished as we use these funds for capital improvement expenditures;
maintain certain financial ratios which may limit our operating flexibility; and obtain our
lenders permission before making any significant changes in our material contracts with
third-party service providers. The term loan requires us to certify to our lender at intervals
designated in the term loan that we are meeting the financial ratios required by the loan
agreement.
We are not in compliance with certain of these restrictive covenants as of September 30, 2009,
including the debt service ratio, fixed charge coverage ratio and current ratio, and it is
projected that we will fail to comply with one or more loan covenants through the remainder of our
2009 fiscal year. We may fail to comply with additional covenants in the future. Failure to
comply with such covenants constitutes a default under our loan agreements. While we continue to
be in default, our lender is entitled to elect to take any one or more actions, including, without
limitation, acceleration of the unpaid principal balance under the loan agreements and all accrued
interest thereon, or foreclosure on its mortgage on our real estate and its security interest in
our personal property securing our loans. Such actions would have a material adverse impact on our
financial condition and results of operations and could result in the loss of the assets securing
our loans and a permanent shutdown of our plant. In addition, our loan agreement contains an event
of default if our lender reasonably deems itself insecure at any time.
While BankFirst did not elect to exercise its remedies under the loan agreements, our new
lender may choose to accelerate our existing obligations. Moreover, although our new lender has
not elected to exercise its remedies as of the date of this report, our lender may not continue to
refrain from accelerating the principal and interest due under our loans or foreclosing on and
taking possession of the collateral securing our loans. Our lender has not provided us a waiver of
our failure to satisfy the covenants of otherwise agreed not to take action. As described below in
the section entitled Risk Factors, our default has caused doubts about our ability to continue as
a going concern.
Government Programs and Grants. We have entered into a loan agreement with the Iowa
Department of Economic Development (IDED) for $400,000. This loan is part of the IDEDs Value
Added Program and $100,000 of the loan is forgivable. As of September 30, 2009 we owe $255,000.
The loan requires us to maintain production rates at our nameplate capacity and maintain certain
employment levels. Effective September 17, 2009, IDED agreed to amend the requirements of our loan
to extend the project completion date to May 31, 2011 and the project maintenance date to May 31,
2013. This means that beginning on the amended project completion date, we will be required to
have 30 full time employees and maintain those positions through the project maintenance date. Any
failure to satisfy these requirements constitutes a default, and may result in acceleration of the
loan, as well as partial or full repayment of the forgivable portion if IDED exercises the remedies
available to it.
On July 1, 2009 we received notification that the USDA has preliminarily approved our
application for financial assistance. If finalized as proposed, the arrangement would allow us to
secure a new $20 million loan from a third-party lender which we expect would be used to replace
our existing debt financing, with a $10 million guarantee by the USDA. However, final approval and
receipt of the funds is contingent upon a number of
conditions, some of which are outside of our control. For example, we do not have an agreement
with any third-party lender to lend us the funds we anticipate. As a result, it is possible that
the USDA guarantee will not be finalized on the terms we currently anticipate, if at all, or if it
is finalized, we may not be able to obtain third-party funding or satisfy the requirements for
receipt of funds under the USDA guarantee.
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Commodity Price Risk Protection
We are exposed to the impact of market fluctuations associated with interest rates and
commodity prices as discussed below. We have no exposure to foreign currency risk as all of our
business is conducted in U.S. Dollars. We use derivative financial instruments as part of an
overall strategy to manage market risk. We do not enter into these derivative financial
instruments for trading or speculative purposes, nor do we designate these contracts as hedges for
accounting purposes pursuant to the requirements of SFAS 133, Accounting for Derivative Instruments
and Hedging Activities.
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as
soybean oil, and finished products, such as biodiesel, through the use of derivative instruments.
In practice, as markets move, we actively manage our risk and adjust hedging strategies as
appropriate. Although we believe our hedge positions accomplish an economic hedge against our
future purchases, they do not qualify for hedge accounting, which would match the gain or loss on
our hedge positions to the specific commodity purchase being hedged. We treat our hedge positions
as non-hedge derivatives, which means as the current market price of our hedge positions changes,
the gains and losses are immediately recognized in our cost of goods sold. The immediate
recognition of hedging gains and losses under our treatment of our hedge positions can cause net
income to be volatile from quarter to quarter due to the timing of the change in value of the
derivative instruments relative to the cost and use of the commodity being hedged.
At September 30, 2009, the Company had net derivative assets of $85,159 related to home
heating oil swaps commodity contracts, with the related mark-to-market effects included in Cost of
Sales in the statements operations. At December 31, 2008, the Company had no derivative
instruments. For the nine months ended September 30, 2009, the Company recorded an increase to
cost of sales of $242,691 related to derivative contracts.
There are several variables that could affect the extent to which our derivative instruments
are impacted by price fluctuations in the cost of soybean oil, natural gas or biodiesel. However,
it is likely that commodity cash prices will have the greatest impact on the derivative instruments
with delivery dates nearest the current cash price. As we move forward, additional protection may
be necessary. As the prices of these hedged commodities move in reaction to market trends and
information, our statement of operations will be affected depending on the impact such market
movements have on the value of our derivative instruments. Depending on market movements, crop
prospects and weather, these price protection positions may cause immediate adverse effects, but
are intended to produce long-term positive growth for the Company. As of the date of this report,
we have the outstanding sales contracts for our biodiesel described in Part II, Item 5 Other
Information.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk
results primarily from holding a term loan which bears a variable interest rate. Specifically, we
have approximately $25,412,499 outstanding in variable rate debt as of September 30, 2009.
Distribution to Unit Holders
As of September 30, 2009, the board of directors of the Company had not declared any
dividends.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risks
The Company is not required to include this information due to its status as a smaller
reporting company.
Item 4. Controls and Procedures
Our management, including our Chief Executive Officer (the principal executive officer), along
with our Chief Financial Officer (the principal financial officer), 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 September 30, 2009. Based upon this review and
evaluation, these officers have concluded that our disclosure controls and procedures are effective
to ensure that information required to be disclosed in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods required by
the forms and rules of the Securities and Exchange Commission; and to ensure that the information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
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 as of September 30, 2009 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
In March 2009, we gave notice to REG that we intended to proceed with arbitration to resolve
disputes arising under the MOSA. On or about June 10, 2009 we delivered our Statement of Claims to
REG and the selected arbitrator alleging breach of contract, breach of the covenant of good faith
and fair dealing, breach of fiduciary duty, fraudulent misrepresentation, fraudulent
non-disclosure, and negligent misrepresentation. On or about
August 31, 2009, REG responded to these claims and also asserted
counterclaims for breach of contract and unjust enrichment. As of the date of this report, we are in the
discovery phase of the arbitration and continue to engage in discussions with REG regarding
settlement of the matter. If not settled earlier, arbitration is scheduled to begin in March 2010.
Item 1A. Risk Factors
Risk factors are discussed in our annual report on Form 10-K. The risks described
in our annual report are not the only risks facing us. The following Risk Factors are provided to
supplement and update the Risk Factors previously disclosed in our annual report and should be read
in conjunction with the considerations set forth above in the section entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations and the risk factors in
our annual report.
There are doubts about our ability to continue as a going concern and if we are unable to
continue our business, our units may have little or no value. As discussed in Note 11 to the
accompanying financial statements, our non-compliance with one or more of the loan covenants
contained in our financing agreements with our lender has raised doubts about our ability to
continue as a going concern. We are not in compliance with certain of our restrictive covenants at
September 30, 2009, including the debt service ratio, fixed charge coverage ratio and current
ratio, and it is projected that we will fail to comply with one or more loan covenants through the
remainder of our 2009 fiscal year. We may fail to comply with additional covenants in the future.
Failure to comply with such covenants constitutes a default under our loan agreements.
Additionally, our loan agreement contains an event of default if our lender reasonably deems itself
insecure at any time. For so long as we continue to be in default, our lender is entitled to elect
to take any one or more actions, including, without limitation, acceleration of the unpaid
principal balance under the loan agreements and all accrued interest thereon, or foreclosure on its
mortgage on our real estate and its security interest in our personal property securing our loans.
If such an event occurs, we may be forced to shut down the plant and our members could lose some or
all of their investment.
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Additionally state regulators closed Bankfirst in July and appointed a receiver. We recently
received notification of our new lender. While BankFirst did not elect to exercise its remedies
under the loan agreements, our new lender may choose to accelerate our existing obligations which
could greatly affect our ability to continue as a going concern.
Doubts about our ability to continue as a going concern may make it difficult to obtain
additional funds in the future. As discussed in the accompanying financial statements, our
non-compliance with one or more of the loan covenants contained in our financing agreements has
raised doubts about our ability to continue as a going concern. To comply with our loan covenants
or to otherwise fund our operations, our board of directors may attempt to sell additional units or
obtain debt financing. The board of directors also intends to explore and evaluate additional
options for raising capital; however, those alternatives may not be available. The doubts relating
to our ability to continue as a going concern may make it difficult to raise the necessary capital
or obtain additional debt financing. Additionally, the economic crisis has contributed to a
generally unfavorable credit environment. If we are unable to raise any additional capital or
procure additional funds deemed necessary by our board of directors, our business may fail and
members could lose some or all of their investment.
Liquidity issues could require us to cease operations. We may experience liquidity issues
associated with the cost of our raw materials, lower prices for our products, and the ordinary
delay between when we purchase those raw materials and when we receive payments from REG for our
finished products. This is most likely to occur at times when we produce biodiesel for sale not
subject to a tolling services agreement since we would procure and pay for feedstock. We have
exhausted the funds available under our debt facilities and do not have further commitments for
funds from any lender. We are already not operating at full capacity. Our lack of funds could
cause continued temporary shutdowns at our biodiesel plant, or require us to cease operations
altogether. Should we not be able to secure the cash we require to operate the plant and pay our
obligations as they become due, we may have to cease operations, either on a permanent or temporary
basis, which could decrease or eliminate the value of our units.
An increase in animal fat prices could damage our profitability. Although animal fat prices
are not currently as high as soybean oil prices, animal fat prices have nonetheless increased well
above their historical average. The prices for animal fats tend to move in relation to the price
of other feedstocks such as soybean oil. Accordingly, as soybean oil prices increase, animal fat
prices will also likely increase and adversely affect our profit
margins. Additionally, animal fat prices could increase if animal
fat-based biodiesel is determined to meet the RFS requirement and say
oil-based biodiesel is not. An increase in animal
fat prices could also narrow the margin between procurement and processing fees, thereby decreasing
our profit margins should we continue to send animal fats off-site for treatment and processing.
We are highly dependent upon REG. We depend upon REG to manage our plant, procure our inputs
and market our products pursuant to our MOSA. Additionally, we depend on REGs assessment of the
cost and feasibility of operating our plant, REGs experience in the biodiesel industry and its
knowledge regarding the operation of the plant. If our plant does not operate to the level
anticipated by us in our business plan, we will also rely on REG to adequately address such
deficiency.
Our reliance on REG may place us at a competitive disadvantage. REG has a number of potential
conflicts of interest with us due to its ownership and management of competing biodiesel plants.
We have given notice to REG that we intend to proceed with arbitration to resolve disputes that we
have with REG under the MOSA. Additionally, REG has provided us with a notice of termination of
the MOSA, which we anticipate will terminate on August 1, 2010. REG has proposed that the parties
cooperate to negotiate a new contract on terms mutually beneficial to us and REG; however, it is
possible that a new agreement will not be entered into between the parties. Should our
relationship with REG terminate, significant costs and delays would likely result from the need to
find other consultants or marketers or sources of feedstock, for any reason. Any loss of our
relationship with REG or failure by REG to perform its obligations may reduce our ability to
generate revenue and may significantly damage our competitive position in the biodiesel industry
such that our business could fail and members could lose all or substantially all of their
investment. Moreover, because of our substantial dependence upon REG, our business could fail if
REG is unable to continue its business.
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The imposition of duties or tariffs by the European Commission on biodiesel imported into
Europe could cause a significant decrease in our revenues. International sales, particularly sales
in Europe, make up a portion of REGs revenues from selling our biodiesel. Based on complaints
from the European Biodiesel Board (EBB), on March 12, 2009 the European Commission applied
temporary duties on imports of biodiesel from the United States,
while it continued to investigate the evidence of unfair subsidies and dumping of United
States biodiesel imports into the EU. Beginning on July 13, 2009, the European Union decided to
impose tariffs on biodiesel imported from the United States for a period of five years. The United
States has stated its opposition and that it will review this decision, but it is unclear what, if
anything, can be done in response. This could have the effect of significantly increasing the cost
at which REG can sell our biodiesel in European markets, making it difficult or impossible for our
biodiesel to compete with biodiesel produced by European biodiesel producers.
If implemented, the EPAs recent preliminary findings could reduce demand for soy-based
biodiesel and reduce our profitability. The EPA recently issued findings that soy-based biodiesel
fails to meet targets for reducing greenhouse emissions, as required under the RFS. The RFS
requires that biodiesel reduce greenhouse gas emissions by 40 to 50% when compared to conventional
biodiesel to count towards the RFS mandate. The EPA found soy-based biodiesel to reduce greenhouse
gas emissions by only 22%. These findings were open to comment through September 25, 2009.
However, if it is determined that soy based biodiesel does not satisfy the RFS, demand for
biodiesel made from soy oil will likely be reduced. The results could significantly harm our
revenues.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
As described in Part II, Item 2 Liquidity and Capital Resources, for the period covered by
this report, we were in default of certain covenants contained in our loan agreement with our
lender, which is now Beal Bank Nevada. Our failure to comply with these covenants constitutes an
event of default under our agreement, entitling our lender to exercise any one or more of its
remedies provided under the loan documents and applicable law, including, but not limited to,
acceleration of the unpaid principal balance under the loan agreements and all accrued interest
thereon, or foreclosing on its mortgage and security interests in the collateral which secures our
debt financing. Although Bankfirst, our prior lender, notified us of our default, it did not
exercise its remedies. Moreover, as of the date of this report, Beal Bank Nevada has also chosen
not to exercise its remedies. However, if we continue to be in default, our lender may not
continue to forebear from exercising such additional remedies.
Item 4. Submission of Matters to Security Holders
None.
Item 5. Other Information
Following the period covered by this report, we agreed upon terms for the purchase of canola
oil feedstock and sale of approximately 1,475,000 gallons of biodiesel produced using such
feedstock. We have engaged Innovative Ag Services Co. (IAS) to provide financing for and to
purchase the canola oil feedstock directly from Archer Daniels Midland Company (ADM). In exchange,
we will pay IAS interest on the outstanding amount, as well as a fee per gallon of biodiesel
produced with the feedstock. Moreover, IAS will have a security interest in our inventory of
biodiesel and feedstock. ADM has agreed to purchase 1,475,000 gallons of biodiesel from us
produced with the feedstock.
Jack Friedman, one of our directors and a member of our audit committee, is the Chief
Executive Officer of IAS.
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Item 6. Exhibits
The following exhibits are filed as part of, or are incorporated by reference into, this
report:
Exhibit | Method of | |||||
No. | Description | Filing | ||||
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. |
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.
WESTERN DUBUQUE BIODIESEL, LLC |
||||
Date: November 16, 2009 | /s/ Bruce Klostermann | |||
Bruce Klostermann | ||||
Vice Chairman and Director (Principal Executive Officer) |
||||
Date: November 16, 2009 | /s/ George Davis | |||
George Davis | ||||
Treasurer and Director (Principal Financial and Accounting Officer) |
25