Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________.
Commission file number: 000-52614
Show Me Ethanol, LLC
(Exact name of small business issuer as specified in its charter)
Missouri |
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20-4594551 |
(State or other jurisdiction of |
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(IRS Employer |
incorporation or organization) |
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Identification No.) |
P. O. Box 9
26530 Highway 24 East, Carrollton, Missouri 64633
(Address of principal executive offices)
(660) 542-6493
(Issuers telephone number)
Check whether the small business issuer (1) 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 small business issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes o No x
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).
Yes o No o
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 definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of September 30, 2009, the latest practicable date, 1,498 of the issuers Class A Membership Units, were issued and outstanding.
Explanatory Note
This Amendment No. 1 to Show Me Ethanol, LLCs (the Company) Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, originally filed on November 16, 2009 (the Original Filing), is being filed to correct the net (loss) income per thousand dollars of capital contributed presented in the financial statements.
We have corrected the numbers presented in the net (loss) income per thousand dollars of contributed capital, presented in the Statement of Operations and note 1 related thereto. The Company does not view the change as material but has revised the figure for the three months ended September 30, 2009 from a gain of $114.09 to a gain of $96.42. The Company has revised the figure for the nine months ended September 30, 2009 from a loss of $5.19 to a loss of $4.62.
The Company became aware of a computational error on November 30, 2009. The number in the Original Filing did not include the results of a capital fundraising that occurred on March 31, 2009. The Companys audit committee consulted with its independent accountants. The audit committee concluded that the error was not material but the Companys Original Filing should be amended.
We have not modified or updated the disclosures presented in the Original Filing, except as provided above. Accordingly, this Amendment No. 1 on Form 10-Q/A does not reflect events occurring after the filing of our Original Filing and does not modify or update those disclosures affected by subsequent events. Information not affected by this amendment is unchanged and reflects the disclosures made at the time of the Original Filing.
2
TABLE OF CONTENTS
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PART I -FINANCIAL INFORMATION |
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4 | ||
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Item 1. |
Financial Statements (Unaudited) |
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4 |
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Balance Sheet |
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4 |
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Statements of Operations |
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5 |
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Statements of Members Equity |
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6 |
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Statements of Cash Flows |
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7 |
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Notes to Unaudited Financial Statements |
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8 |
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Item 2. |
Managements Discussion and Analysis of Financial Condition and Result of Operations |
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16 |
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Item 3. |
Quantitative and Qualitative Discussion of Market Risks |
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22 |
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Item 4. |
Controls and Procedures |
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22 |
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PART II - OTHER INFORMATION |
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24 | ||
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Item 1. |
Legal Proceedings |
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24 |
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Item 1a. |
Risk Factors |
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24 |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
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24 |
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Item 3. |
Defaults Upon Senior Securities |
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24 |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
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24 |
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Item 5. |
Other Information |
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24 |
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Item 6. |
Exhibits |
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25 |
3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SHOW ME ETHANOL, LLC
CONDENSED BALANCE SHEETS
September 30, 2009 and December 31, 2008
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September 30, 2009 |
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December 31, 2008 |
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(unaudited) |
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ASSETS |
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CURRENT ASSETS |
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Cash and Cash Equivalents |
$ |
4,823,218 |
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$ |
608,143 |
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Accounts receivable |
2,996,957 |
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1,710,916 |
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Accounts receivable - related party |
166,903 |
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593,939 |
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Prepaid expenses |
347,350 |
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537,141 |
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Inventory |
3,053,313 |
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4,101,379 |
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Total current assets |
11,387,741 |
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7,551,518 |
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PROPERTY, PLANT AND EQUIPMENT |
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Operating equipment |
69,831,020 |
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69,265,196 |
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Land and buildings |
11,732,018 |
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11,732,018 |
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Accumulated depreciation |
(10,807,186 |
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(4,822,163 |
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Property, plant and equipment, net |
70,755,852 |
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76,175,051 |
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OTHER ASSETS |
565,809 |
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616,665 |
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Total assets |
$ |
82,709,402 |
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$ |
84,343,234 |
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LIABILITIES AND MEMBERS' EQUITY |
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CURRENT LIABILITIES |
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Accounts payable, including related party; 2009 - $699,984, 2008 - $938,751 |
$ |
1,298,100 |
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$ |
1,361,804 |
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Accrued expenses, including related parties; 2009 - $219,889, 2008 - $129,540 |
415,461 |
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449,222 |
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Accrued loss on forward contracts |
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14,135,849 |
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Current portion of long term debt and revolving line of credit, |
7,440,855 |
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50,702,495 |
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Total current liabilities |
9,154,416 |
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66,649,370 |
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LONG-TERM DEBT, including related party debt; 2009 - $13,000,000, 2008 - $2,540,000 |
53,875,576 |
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3,711,465 |
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Total liabilities |
63,029,992 |
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70,360,835 |
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MEMBERS' EQUITY |
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Class A capital units, 1,498 issued |
26,132,300 |
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22,969,600 |
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Class B capital units, 422 issued |
8,317,365 |
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6,317,365 |
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Class C capital units, 213 issued |
3,889,386 |
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3,189,118 |
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Retained earnings (deficit) |
(18,659,641 |
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(18,493,684 |
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Total members' equity |
19,679,410 |
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13,982,399 |
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Total liabilities and members' equity |
$ |
82,709,402 |
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$ |
84,343,234 |
See Notes to Condensed Financial Statements
4
SHOW ME ETHANOL, LLC
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
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For the Three Months Ended September 30 |
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For the Nine Months Ended September 30 |
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2009 |
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2008 |
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2009 |
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2008 |
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SALES |
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Ethanol Sales |
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$ |
20,635,096 |
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$ |
29,984,160 |
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$ |
59,978,746 |
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$ |
36,847,154 |
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Distillers Sales to related party |
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3,685,879 |
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5,156,481 |
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12,539,284 |
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6,795,897 |
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Ethanol producer credit |
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2,542,570 |
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2,250,356 |
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2,752,494 |
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3,120,529 |
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Total sales |
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26,863,545 |
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37,390,997 |
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75,270,524 |
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46,763,580 |
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COST OF SALES |
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Cost of sales (related party cost of sales - Note 9) |
21,898,737 |
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37,540,519 |
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70,212,152 |
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45,592,884 |
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Loss on forward contracts with a related party (Note 9) |
- |
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10,728,188 |
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1,364,152 |
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10,728,188 |
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Total cost of sales |
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21,898,737 |
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48,268,707 |
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71,576,304 |
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56,321,072 |
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Gross profit (loss) |
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4,964,808 |
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(10,877,710 |
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3,694,220 |
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(9,557,492 |
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GENERAL AND ADMINISTRATIVE |
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EXPENSES |
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General and administrative expenses |
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617,237 |
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801,016 |
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2,246,152 |
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1,620,828 |
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Total general and administrative expenses |
617,237 |
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801,016 |
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2,246,152 |
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1,620,828 |
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Operating (loss) income |
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4,347,571 |
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(11,678,726 |
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1,448,068 |
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(11,178,320 |
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OTHER INCOME (EXPENSE) |
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Interest expense |
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(491,997 |
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(762,354 |
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(1,556,212 |
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(990,442 |
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Interest expense - related party |
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(207,754 |
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(57,150 |
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(477,270 |
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(69,850 |
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Interest and other income |
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2,338 |
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26,527 |
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419,457 |
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62,964 |
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Net other income (expense) |
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(697,413 |
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(792,977 |
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(1,614,025 |
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(997,328 |
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Net (loss) income |
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$ |
3,650,158 |
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$ |
(12,471,703 |
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$ |
(165,957 |
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$ |
(12,175,648 |
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Net (loss) income per thousand dollars |
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$ |
96.42 |
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$ |
(389.80 |
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$ |
(4.62 |
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$ |
(380.55 |
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See Notes to Condensed Financial Statements
5
SHOW ME ETHANOL, LLC
CONDENSED STATEMENTS OF MEMBERS' EQUITY
For the Nine Months Ended September 30, 2009 (unaudited) and the Year Ended December 31, 2008
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Class A |
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Class B |
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Class C |
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Retained Earnings (Deficit) |
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Total |
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Balance January 1, 2008 |
1,498 |
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$ |
22,969,600 |
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422 |
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$ |
6,317,365 |
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213 |
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$ |
3,189,118 |
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$ |
488,670 |
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$ |
32,964,753 |
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Net loss |
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(18,982,354 |
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(18,982,354 |
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Balance, December 31, 2008 |
1,498 |
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$ |
22,969,600 |
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422 |
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$ |
6,317,365 |
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213 |
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$ |
3,189,118 |
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$ |
(18,493,684 |
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$ |
13,982,399 |
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Capital contribution |
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$ |
3,162,700 |
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$ |
2,000,000 |
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$ |
700,268 |
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5,862,968 |
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Net loss |
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(165,957 |
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(165,957 |
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Balance, September 30, 2009 |
1,498 |
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$ |
26,132,300 |
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422 |
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$ |
8,317,365 |
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213 |
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$ |
3,889,386 |
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$ |
(18,659,641 |
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$ |
19,679,410 |
See Notes to Condensed Financial Statements
6
SHOW ME ETHANOL, LLC
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
(unaudited)
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
$ |
(165,957 |
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$ |
(12,175,647 |
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Items not requiring (providing) cash: |
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Depreciation and amortization |
6,099,666 |
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2,832,772 |
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Loss on sale of property, plant and equipment |
943 |
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Changes in: |
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Accounts receivable |
(859,004 |
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(3,309,381 |
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Prepaid expenses |
189,791 |
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24,527 |
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Accounts payable and accrued expenses |
(97,465 |
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1,290,760 |
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Inventories |
1,048,066 |
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(3,128,829 |
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Accrued loss on forward contracts |
(135,849 |
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10,728,188 |
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Other assets and liabilities |
(50,863 |
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102,636 |
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Net cash provided by (used in) operating activities |
6,029,328 |
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(3,634,974 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property, plant and equipment |
(589,465 |
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(29,929,792 |
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Proceeds from disposal of property, plant and equipment |
16,275 |
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Net cash used in investing activities |
(573,190 |
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(29,929,792 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of long-term debt and revolving line of credit |
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34,142,288 |
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Payments on capital lease obligations |
(19,503 |
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Payments for financing costs |
(6,500 |
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Principal payments on long-term debt and revolving line of credit |
(5,078,027 |
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(34,214 |
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Voluntary capital contribution |
3,862,968 |
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Net cash provided by (used in) financing activities |
(1,241,062 |
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34,108,074 |
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Net change in cash |
4,215,076 |
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543,308 |
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Cash and cash equivalents, beginning of period |
608,143 |
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4,652,087 |
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Cash and cash equivalents, end of period |
$ |
4,823,219 |
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$ |
5,195,395 |
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Supplemental Cash Flow Information |
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Interest paid (net of amount capitalized) |
$ |
1,974,419 |
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$ |
718,512 |
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Settlement of accrued loss on forward contracts by |
12,000,000 |
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Settlement of accrued loss on forward contracts |
2,000,000 |
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Purchase of property, plant and equipment through |
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23,160 |
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Loan fees and interest capitalized in construction in progress |
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967,847 |
See Notes to Condensed Financial Statements
7
SHOW ME ETHANOL, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The accompanying condensed financial statements reflect all adjustments that are, in the opinion of the Company's management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. The results of operations for the period are not necessarily indicative of the results to be expected for a full year. The condensed balance sheet as of December 31, 2008 has been derived from the audited balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto in the Company's Form 10-K Annual Report for 2008 filed with the Securities and Exchange Commission.
Description of business: Show Me Ethanol, LLC is a limited liability company organized in the State of Missouri for the purpose of developing, owning and operating a 55 million gallon per year dry-mill ethanol plant and related co-products processing facility in west central Missouri. Show Me Ethanol, LLC was organized on January 24, 2006 and began operations May 22, 2008 and ceased reporting as a development stage company as of that date. The total deficit accumulated during the development stage amounted to approximately $57,000. The financial statements are presented in accordance with generally accepted accounting principles in the United States of America.
Fiscal reporting period: The Company has adopted a fiscal year ending December 31st for reporting financial operations.
Management estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from the estimates that were used.
Cash and Cash Equivalents: The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consists principally of a collateralized interest bearing repurchase account which provides the Company security on balances that exceed the FDIC insurance limit on demand deposit accounts.
Property, plant and equipment: Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over their estimated useful lives of three to twenty years.
Accounts receivable: Accounts receivable are stated at the amount billed to customers. The Company, if necessary, provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are ordinarily due in 15 and 7 days for distillers and ethanol products, respectively after the issuance of the invoice. Accounts past due more than 30 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
Capitalized interest: Interest costs incurred on borrowings during the construction period were capitalized as part of the cost of the ethanol plant. Total interest and fees capitalized during the three and nine months ended September 30, 2008 were $-0- and $967,847, respectively. No interest was capitalized during 2009. Capitalized interest from inception through startup at May 22, 2008, was $1,532,303.
Income taxes: The Company is organized as a limited liability company under Missouri law. As a limited liability company that has elected to be taxed as a partnership, the Companys earnings pass through to the members and are taxed at the member level. Accordingly, no income tax provision has been included in these financial statements. Differences between the financial statement basis of assets and the tax basis of assets is related to depreciation and the capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs were expensed for financial statement purposes.
8
Capital contributions: On March 31, 2009 the Company completed a fundraising totaling $3,862,968 in cash and $2,000,000 in settlement of corn forward contract liability as part of a voluntary capital fundraising from current members. As part of the fundraising, participating members capital accounts were credited by the amount of each members capital contribution, resulting in such contributing members owning a greater percentage of the business in the form of voting rights and economic interests than before the fundraising, however no additional membership units were issued. As a result, subsequent to March 31, 2009, earnings are allocated pro rata based on each members capital contributed to the total contributed capital, and earnings per unit has been replaced with net income (loss) per thousand dollars of capital contributed. Since each membership unit (A, B, and C units) was issued at $15,000 per unit, the change in allocation has no affect on prior periods.
The net income (loss) per thousand dollars of capital contributed was based on the weighted average capital contributed for the periods presented. The weighted average capital contributed for the three and nine months ended September 30, 2008 was $31,995,000. The weighted average capital contributed for the three and nine months ended September 30, 2009 was $37,857,968 and $35,925,121 respectively.
The financial statements for the three and nine month period ended September 30, 2009 have been reissued to reflect the correction of a computational error in the net income (loss) per thousand dollars of capital contributed as follows:
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As Restated |
As Previously Reported |
Effect of Change |
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Net income (loss) per thousand dollars of capital contributed for the three months ended September 30, 2009 |
96.42 |
114.09 |
(17.67) |
Net income (loss) per thousand dollars of capital contributed for the nine months ended September 30, 2009 |
(4.62) |
(5.19) |
0.57 |
Revenue recognition: Revenue from the production of ethanol and related products is recorded at the time title to the goods and all risks of ownership transfers to the customers. This generally occurs upon shipment to customers. Interest income is recognized as earned. Income from government incentive programs is recognized as ethanol is produced and requests for reimbursement are filed by the Company.
Missouri tax credits: The Company has recognized $371,021 in Missouri Enhanced Enterprise Zone tax credits in other income on the condensed statement of operations during the nine months ended September 30, 2009.
Fair value of financial instruments: Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2009, and December 31, 2008. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due primarily to their short-term nature or variable interest rate terms. These financial instruments include cash, accounts receivable, accounts payable, and long-term debt. Fair values were assumed to approximate carrying values for these financial instruments.
Recently issued accounting pronouncements: FASB ASC 815-10-50 (transitional:815-10-65-1 (Derivatives and Hedging) - enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB ASC 815-10 and (c) derivative instruments and related hedged items effect an entitys financial position, financial performance, and cash flows. Specifically, FASB ASC 815-10-50 requires:
Disclosure of the objective for using derivative instruments be disclosed in terms of underlying risk and accounting designation;
Disclosure of the fair values of derivative instruments and their gains and losses in a tabular format;
Disclosure of information about credit-risk related contingent features; and
Cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed.
FASB ASC 815-10-50 is effective for fiscal years and interim periods beginning after November 15, 2008. As of September 30, 2009, the Company does not hold any instruments that qualify for application of this pronouncement. As a result, the adoption of this statement had no impact on the financial statements of the Company.
9
FASB ASC 855-10 Subsequent Events - establishes principles and requirements for subsequent events. In particular, this statement sets forth: (a) the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements,( b) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date, and (c) the disclosures that an entity shall make about events or transactions that occur after the balance sheet date.
FASB ASC 855-10 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this statement had no impact on the financial statements of the Company.
Subsequent events: Subsequent events have been evaluated through November 16, 2009, which is the date the financial statements were issued.
Forward contracts: The Company uses corn forward purchase and ethanol forward sales contracts to manage the exposure to price risk related to corn purchases and ethanol sales. Settlement of forward sales contracts occurs through delivery of quantities expected to be sold by the Company over a reasonable period in the normal course of business. As a result, these forward contracts qualify for the normal sales exception under the provision of FASB ASC 815 Derivatives and Hedging. This exception exempts these contracts from being recorded at fair value and instead subjects them to a lower of cost or market evaluation. Should the cost of forward contracts exceed the market value of contracts that qualify for the normal purchases and sales exception, an unrealized loss will be recognized by the Company in results of operations in the period the loss occurs. The Company recorded losses on forward contracts totaling $10,728,188 for the quarter and nine month period ended September 30, 2008, and $-0- and $1,364,152 for the three and nine months ended September 30, 2009, respectively. As of December 31, 2008, the Company had accrued losses on forward contracts totaling $14,135,849. See also Note 9 for a discussion of the Companys use of corn forward purchase and ethanol forward sales contracts.
Reclassifications: Certain reclassifications have been made to the 2008 financial statements to conform to the 2009 financial statement presentation. These reclassifications had no effect on the net earnings (losses).
2. RELATED PARTIES
On April 30, 2007 the Company entered into an agreement of right of first purchase and right of first refusal with Ray-Carroll Grain Growers, Inc. (herein Ray-Carroll), an investor (the buy-sell agreement). Pursuant to the buy-sell agreement, the Company has granted a right of first purchase and a right of first refusal to purchase all or any part of the property comprising the ethanol plant. In exchange, Ray-Carroll has granted the Company a right of first purchase and a right of first refusal to purchase all or any part of certain grain elevator property. The buy-sell agreements term is through April 30, 2027.
The Company also has multiple agreements in place with Ray-Carroll, as noted in Note 9 and has sold subordinated secured notes to members as more fully described in Note 6(E).
3. INVENTORIES
Inventories are physically counted at each month end and are valued using the lower of first-in first-out (FIFO) cost or market. They consisted of the following at September 30, 2009:
Ethanol |
$ 853,938 |
Corn |
437,508 |
Distillers dried grains |
58,375 |
Work in process |
820,255 |
Production chemicals |
377,300 |
Other |
505,937 |
Total |
$ 3,053,313 |
4. INTANGIBLE ASSETS
Intangible assets are recorded at cost. Loan origination costs are being amortized over the term of the related loans using the interest method. Permits are being amortized over a 5 year period. The carrying basis and accumulated amortization of recognized intangible assets recorded in other assets at September 30, 2009 and December 31, 2008, were:
10
|
September 30, 2009 |
December 31, 2008 | ||
Amortized intangible assets |
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
Loan origination costs |
$537,717 |
$165,608 |
$531,217 |
$86,036 |
Permits |
100,522 |
28,648 |
95,857 |
|
Total |
$638,239 |
$194,256 |
$627,074 |
$86,036 |
Amortization expense for the three and nine months ended September 30, 2009 was $67,022 and $108,220, respectively. Amortization for the three and nine months ended September 30, 2008 was $23,587 and $35,316, respectively. Estimated amortization expense for each of the following five years is:
2010 |
$106,163 |
2011 |
85,354 |
2012 |
77,068 |
2013 |
59,574 |
2014 |
41,056 |
5. REVOLVING CREDIT AGREEMENT
On November 6, 2007, the Company entered into a revolving credit agreement with FCS for up to $5,000,000. Borrowings under the revolving credit agreement are subject to availability under a borrowing base calculation based on accounts receivable, inventory and accounts payable. Each borrowing, at the option of the Company, can be a revolving base rate loan or a revolving LIBOR rate loan plus 3.5% at December 31, 2008, and 2.5% at September 30, 2009. The interest rates at September 30, 2009 and December 31, 2008 were 2.76% and 5.4%, respectively. The revolving credit agreement includes a 0.50% closing fee, paid at closing on the entire amount of the revolving loan commitment and an unused commitment fee of 0.30% of the unused portion of the revolving loan commitment, payable monthly. The revolving credit agreement is secured by all of the Companys real property and personal property now owned or hereafter acquired by the Company. On March 31, 2009, the Company amended its revolving credit agreement among the Company and the Senior Lender executed on November 6, 2007 to reestablish a maximum borrowing amount of $5,000,000 (subject to borrowing base availability) and modify the maturity date of the revolving loan to be due in full on June 2, 2010. As of September 30, 2009 and December 31, 2008, the amount borrowed under the credit agreement was $-0- and $2,652,245, respectively.
Under the terms of the revolving credit agreement, the Company may request that FCS issue one or more letters of credit, subject to borrowing availability. The Company agrees to pay FCS a fee of 2.5%, payable quarterly, on the face amount of each letter of credit issued. As of September 30, 2009, a $120,000 undrawn letter of credit was issued by FCS on behalf of the Company to cover bonding provisions. The letter of credit expires January 2010. If the letter of credit is drawn against, then the amount of the letter of credit would become a borrowing under the revolving credit agreement. At December 31, 2008 there were no letters of credit outstanding.
6. FINANCING ARRANGEMENTS
Construction note and Term Loan(A) |
$45,600,000 |
Subordinated related party note (B) |
12,000,000 |
Equipment notes (C) |
57,452 |
Capital lease obligations (D) |
68,978 |
Subordinated related party notes (E) |
3,590,000 |
Total long term debt |
$61,316,430 |
Less current maturities |
7,440,855 |
|
$53,875,575 |
(A) On March 1, 2007, the Company entered into a credit agreement with FCS Financial, PCA (herein FCS) under which FSC will perform agent and servicing responsibilities in the closing and funding of a $48 million construction and term loan agreement for the Company. The construction loan was converted to a term loan October 7, 2008 and is being repaid over ten years until it matures on October 7, 2018. The term loan requires quarterly principal payments of $1,200,000, which began February 1, 2009, with interest payable monthly at the prime rate at December 31, 2008, and at LIBOR plus 3.5% at September 30, 2009 (3.76% and 4.00% at September 30, 2009 and December 31, 2008, respectively). The Company will also be required to pay fifty percent of its excess cash flow, as defined in the loan agreement, on an annual basis.
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On March 31, 2009, the term and revolving credit agreements were amended. The amendments permit the Company to defer up to four term loan principal payments, delay the excess cash flow sweep until January 1, 2011, require the Company to comply with new cash flow reporting and hedging policy obligations, require the Company to hire a plant manager and a risk manager and require the Company to make a commercially reasonable inquiry into amending its existing air permit. The amendment also deleted the Minimum Equity and the Minimum Net Worth covenants after March 31, 2009 until the maturity date of the loan. The Third Term Amendment also reset the financial requirements of the Minimum Working Capital and the Minimum Fixed Charge Coverage covenants. Pursuant to the term loan amendment, the Company deferred its February 1, 2009 term loan payment. The loan is secured by all of the Companys real property and personal property now owned or hereafter acquired by the Company.
(B) Simultaneous with the closing of the capital contribution fundraising and financing amendments, the Company entered into a Conversion Agreement, dated as of March 31, 2009 with Ray-Carroll to settle the outstanding forward corn purchase contracts at $15.5 million, make payment to Ray-Carroll on the corn contracts in the amount of $1.5 million, provide settlement of $2.0 million of the corn contracts liability in exchange for a $2.0 million capital contribution and settle the remaining liability through the Companys issuance of a $12 million subordinated secured promissory note to Ray-Carroll. Ray-Carroll is the largest equity owner of the Company, the Companys sole distributor of distillers grains and the Companys sole supplier of corn (See Note 9). In addition, the Conversion Agreement also establishes certain financial conditions whereby a previously issued $1 million 9% subordinated secured promissory note issued by the Company to Ray-Carroll on June 5, 2008 may mature on June 5, 2011 instead of June 5, 2010 (see section E). In return for the potential delayed maturity of the $1 million note, the Company may not make financial distributions to its members until such $1 million note is repaid.
The $12 million note will mature on March 31, 2014 and bears interest, payable quarterly, at the rate of LIBOR plus 4.5% (4.815% at September 30, 2009). Principal is due at maturity; however, the note also contains an excess quarterly cash sweep that is effective upon the end of the first quarter in 2011, granting Ray-Carroll 50% of all such excess quarterly cash as defined. The $12 million note is secured by a leasehold deed of trust pledged by the Company to Ray-Carroll as defined for the ethanol plants real property. The $12 million note is also secured by a security agreement which grants a security interest to Ray-Carroll over substantially all the Companys current or future personal property as collateral for the $12 million note. Interest expense totaled $150,604 and $299,571 for the three and nine months ended September 30, 2009.
In connection with the settlement of the outstanding corn contracts with Ray-Carroll and the credit agreement amendments with FCS, on March 31, 2009, Ray-Carroll, FCS and the Company entered into an intercreditor agreement to contractually establish that the obligations of the term loan and revolving loan to FCS are senior to the obligations of the $12 million Note to Ray-Carroll. The Intercreditor Agreement also establishes the rights and obligations of each party should the Company declare bankruptcy or default under its existing agreements.
(C) In March 2007, the Company purchased a piece of equipment for $113,800 with $106,300 being financed by the equipment manufacturer. The Company is required to make five annual payments of $23,383, including interest at 5.0% with the last payment being due in March 2011. As of September 30, 2009, the outstanding balance on this loan is $43,466. The Company also has an equipment note payable totaling $13,986. This note is due in 36 monthly installments of principal and interest of $701, with the final installment due July, 2011. The note accrues interest at a variable rate of Citibank, N. A. prime plus 0.60% (3.85% at September 30, 2009). These loans are collateralized by the equipment.
(D) The Company leases office equipment under a capital lease for a term of four years expiring in February 2012. The lease obligation is payable in monthly installments of $636 with a final installment of $2,891 at maturity. The Company also leases lab equipment under a capital lease for a term of four years expiring March, 2012. The lease obligation is payable in monthly installments of $1,507 with a final installment of $8,210 at maturity.
(E) On June 5, 2008, the Company issued $3,590,000 of 9% subordinated secured notes (the Subordinated Notes) to accredited investors and related entities totaling $2,540,000, and to unrelated creditors, totaling $1,050,000. The Subordinated Notes bear interest at 9% per annum computed on the basis of a 360-day year for the actual number of days elapsed and will mature on June 4, 2010. Principal of $3,590,000 is due at maturity; however as disclosed in section (B), $1 million of the principal amount due Ray-Carroll may be extended to June 5, 2011 based on the cash flow position of the Company. Interest is payable annually, with the first installment being payable on June 5, 2009. The Subordinated Notes are
12
secured pursuant to a loan and security agreement among the Company as debtor, the State Bank of Slater as agent and the holders from time to time as a party thereto as lenders dated June 5, 2008, whereby the Company granted a second lien security interest over substantially all of Companys personal property in support of the obligation to repay the subordinated notes. The Subordinated Notes are also secured by a leasehold deed of trust, assignment of rents and security agreement, among the Company as grantor, Thomas Kreamer as trustee and the Bank of Slater as grantee dated June 5, 2008. The Company also agreed that debt created by the issuance of the Subordinated Notes is subordinate to loans provided primarily by FCS Financial, PCA, as specified in the Intercreditor/Subordination Agreement executed on June 5, 2008 among the Company, the Senior Lender and the investors. In connection with the issuance of subordinated notes, the Company amended its construction term loan agreement among the Company and the Senior Lender, as administrative agent and the other lenders thereto, executed on March 7, 2007. The term loan was amended on June 2, 2008 by the Company and the Senior Lender, as administrative agent and the other lenders thereto, to permit the issuance of Subordinated Notes by the Company. Interest expense for the three and nine months ended September 30, 2009 was $80,775 and $242,325, respectively. Interest expense for the three and nine months ended September 30, 2008 was $82,570, and $183,090, respectively. The Company made interest payments on the subordinated notes on June 5, 2009 in the amount of $327,587, (including approximately $231,775 to accredited investors and related parties).
The estimated maturities of long-term debt during the years ending September 30 are as follows:
|
|
Revolving line of credit and Long Term Debt |
Capital Lease Obligations | |
|
|
|
|
|
2010 |
|
$ 7,418,363 |
|
$ 25,720 |
2011 |
|
5,829,087 |
|
25,720 |
2012 |
|
4,800,000 |
|
27,610 |
2013 |
|
4,800,000 |
|
- |
2014 |
|
16,800,000 |
|
- |
Thereafter |
21,600,000 |
|
- | |
|
Total long-term debt |
$ 61,247,450 |
|
79,050 |
|
Less amount representing interest |
|
(10,015) | |
|
present value of future minimum lease |
|
$ 69,035 |
As of September 30, 2009 property, plant, and equipment included equipment under capital lease totaling $105,520 with accumulated depreciation of $26,199.
7. CHAPTER 100 BONDS
In September 2006, the Company entered into an Economic Development Agreement with the County of Carroll, Missouri to implement a tax abatement plan under Missouri Statutes Chapter 100. The plan provides for 100% abatement of real property taxes for twenty years (through December 2028) to improve the Companys cash flow and savings of expenses. Under the plan, legal title of the Companys real property will be transferred to the County. On April 29th, 2008 the County issued bonds under Chapter 100 of the Missouri Revised Statutes in the aggregate amount of $88.5 million. The bonds were issued to the Company, so no cash exchanged hands. The County then leased the real estate back to the Company. The lease payments will equal the amount of the payments on the bonds. All of the Companys right, title, and interest in the bonds are pledged to their finance company as additional security for the term loan. At any time, the Company has the option to purchase the real property by paying off the bonds, paying the trustee fees, plus $1,000.
In return for the abatement of property taxes by the County, the Company has agreed to pay the County an issuance fee of $10,000 and an additional $10,000 on each anniversary date thereafter until the bonds are no longer outstanding. In addition, the Company has agreed to make annual grant payments in lieu of property taxes beginning in 2009 in the amount of $90,000 for twenty years, the expected term of the bonds. The Company also agrees to pay the fees of the bond counsel for the transaction and any financial advisor selected by the County. Due to the form of the transaction, the Company has not recorded the bond or the capital lease associated with sale lease-back transaction. The original cost of the Companys property and equipment is being recorded on the balance sheet and will be depreciated accordingly. To correlate with the mortgaged debt, the bond has also been assigned to the senior lender as collateral.
13
8. REGULATION
The construction of the plant requires various state and local permits to comply with existing governmental regulations designed to protect the environment and worker safety. The Company is subject to regulation on emissions of the United States Environmental Protection Agency (EPA) which require the Company to obtain air, water and other permits or approvals in connection with the construction and operation of the Companys business. State and federal rules can and do change and such changes could result in greater regulatory burdens on the Company.
The ethanol production will require the Company to emit a significant amount of carbon dioxide into the air. Current Missouri law regulating emission does not restrict or prevent the Company from emitting carbon dioxide in to the air, but this could change in the future.
The Company has obtained the necessary air and water permits to operate the plant, including a permit to discharge wastewater from the plant.
In addition to the foregoing regulations affecting air and water quality, the Company is subject to regulation for fuel storage tanks. If the Company is found to have violated federal, state or local environmental regulations in the future, the Company could incur liability for clean-up costs, damage claims from third parties and civil and criminal penalties that could adversely affect its business.
9. COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
The Company has a month-to-month agreement with U.S. Energy Services, Inc. for energy management and engineering services. The agreement provides for fees of $3,262 per month with an annual increase of 4% each year. Total fees for the three and nine months ended September 30, 2009, and 2008 were $9,786 and $29,358 and $9,411 and $28,233, respectively.
In March 2006, the Company entered into a grain supply agreement with Ray-Carroll. Under the agreement, the Company agrees to purchase all corn needed to operate a 50-65 million gallon per year ethanol facility, up to twenty-two million bushels per year. The Company agreed to pay $0.116 per bushel over Ray-Carrolls posted bid at their Carrollton facility, with the rate increasing annually by 3.0%. At September 30, 2009 and December 31, 2008, the rate was $0.1268 and $0.1231, respectively. The term of this agreement is twenty years from the first delivery of the product by the supplier to the Company. Corn purchases related to the agreement for the three and nine months ended September 30, 2009 were approximately were approximately $16,097,000 and $51,681,000, respectively. Corn purchases included in cost of sales related to the agreement for the three and nine months ended September 30, 2008 were approximately $26,170,000, and $35,181,000, respectively..
As of September 30, 2009 and December 31, 2008, amounts due Ray-Carroll included in accounts payable totaled approximately $700,000 and $939,000, respectively.
The Company uses corn forward purchase contracts to manage the exposure to price risk associated with corn purchases and to ensure adequate supply of corn for production. During the quarter ended September 30, 2008, corn forward purchase contracts were utilized to lock in the cost of corn during an inflationary period and to ensure an adequate corn supply at a time when there was some doubt as to the adequacy of local and national markets ability to meet corn demand. Due to unforeseen market declines in corn prices and ample supply of corn, this strategy resulted in significant losses to the Company. At September 30, 2008, the Company had entered into forward purchase contracts under the aforementioned agreement with Ray-Carroll totaling 5.8 million bushels for delivery through May, 2009 at prices ranging from $5.13 to $7.20 per bushel with the market price of corn equal to $4.20 per bushel. These contracts were written down to the lower of cost or market which resulted in recording a loss on forward purchase contracts of $10,728,188 at September 30, 2008. As a result of continued declines in corn prices, the accrued loss on forward contracts grew to $14,135,849 as of December 31, 2008. As part of the Companys negotiations with FCS related to debt covenant solutions, the Company was required to settle the corn forward purchase contracts. The Company entered into a conversion agreement with Ray-Carroll to settle the corn forward purchase contracts for $15.5 million resulting in an additional loss of $1,364,151 for the nine months ended September 30, 2009. For terms of settlement on the corn forward purchase contracts, see Note 6. Subsequent to December 31, 2008 the Companys strategy is to contract for no more than two weeks of corn consumption and to ensure an adequate corn supply for uninterrupted ethanol production. On September 30, 2009, the Company had no corn purchased on forward contracts with Ray-Carroll.
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At September 30, 2009, the Company had fixed priced ethanol forward sales contracts totaling 144,000 gallons at prices ranging from $1.55 to $1.73 per gallon and variable priced ethanol forward sales contracts totaling 6,008,000 gallons for delivery through December, 2009. The Company uses these contracts to manage the exposure to price risk with ethanol sales and to ensure uninterrupted production by guaranteeing a limited amount of ethanol distribution. As of September 30, 2009, the current market price of ethanol equaled $1.65 per gallon. The Company subjected these contracts to lower of cost or market analysis and determined no lower of cost or market adjustment was required.
The Company has a marketing agreement with Eco-Energy, Inc. for the exclusive rights to market, sell and distribute the entire ethanol inventory produced by the Company. The agreement extends for a period of five years from the time the Company originally shipped ethanol. The Company pays the marketing company 1% per net gallon for each gallon of ethanol sold by the marketing company. Marketing expense recorded by the Company related to the agreement totaled $207,672 and $617,628 for the three and nine months ended September 30, 2009. Marketing expense for the three and nine months ended September 30, 2008 was $434,670, and 449,072, respectively.
In June, 2009, in accordance with requirements of the amended term and revolving credit agreements, referred to in Note 6(A), the Company entered into an agreement with UBE Services, Inc to provide risk management services. The agreement has a term of six months. Under the agreement, the Company will pay UBE Services Inc. $6,000 monthly.
In August 2007, the Company entered into a marketing agreement with Ray-Carroll that specifies that Ray-Carroll will be the exclusive marketer of all distiller grain products produced by the Company. The Company agrees to pay a marketing fee to Ray-Carroll of 2.5% to 4.5% of the net price of the distiller grains, depending on type, however the fee shall not be less than $1 per ton. The contract began May 22, 2008 and has an initial term of three years. Amounts totaling approximately $167,000 and $594,000 are due the Company for distiller grains marketed under this agreement are included in accounts receivable as of September 30, 2009 and December 31, 2008, respectively.
10. Ethanol Producer Credit
The State of Missouri sponsors the Missouri Qualified Fuel Ethanol Producer Incentive Program that pays $0.20 per gallon produced for the first 12,500,000 gallons and then $0.05 per gallon produced for the next 12,500,000 gallons for a total incentive payment of $3,125,000 during a program year beginning July 1st. Our production reached the 25,000,000 gallon limit in February, 2009. The new program began on July 1, 2009, with the same rates as the previous program. Our production for the three months ended September 30, 2009 was 13,264,094 gallons. Generally, we will be qualified to participate in this program for a total of 60 months. Credits totaling approximately $669,000 and $197,000 are included in accounts receivable as of September 30, 2009 and December 31, 2008, respectively.
11. Managements Consideration of Going Concern Matters
In an effort to cure financing covenant defaults, the Company negotiated amendments to its existing credit agreements with FCS Financial, PCA. The amendments reset the financial requirements of the minimum working capital and the minimum fixed charge coverage covenants and deletes the minimum equity and the minimum net worth covenants after March 31, 2009 until the maturity date of each loan. The amendment permits the Company to defer up to four principal payments (one such deferral was exercised in February, 2009), delays the excess cash flow sweep until January 1, 2011, requires the Company to comply with new cash flow reporting and hedging policy obligations.
The Company obtained additional capital in a fundraising simultaneously with the amendment to the credit agreements, totaling $3,862,968 in cash from current members. The Company also received additional capital in exchange for settlement of $2,000,000 of the amount due on forward purchase corn contracts with Ray-Carroll as part of a conversion agreement (the Conversion Agreement).
The Conversion Agreement required the settlement of the outstanding forward corn purchase contracts. The agreement fixed the value of outstanding forward purchase contracts of corn at $15.5 million, and required the Company to make payment to Ray-Carroll on the corn contracts in the amount of $1.5 million, settle $2.0 million of the amount due on forward purchase contracts in exchange for a $2.0 million capital contribution and settle the remaining debt by the Companys issuance of a $12 million secured promissory note to Ray-Carroll. In addition, the Conversion Agreement also establishes certain financial conditions of the Company upon which the $1 million 9% subordinated secured promissory note previously issued by the Company to Ray-Carroll may mature on June 5, 2011 instead of June 5, 2010. In return for the potential delayed maturity of the $1 million note, the Company may not make financial distributions to its members until such $1 million note is repaid.
15
The Companys consideration of its ability to continue as a going concern is based on cash flow projections, working capital, financial performance and debt payment requirements. As a result of the additional capital raised, the amended financing agreements, financial performance, and cash flow projections, the Company believes it has adequate equity, working capital and financing arrangements to meet its current needs.
Item 2: Managements Discussion and analysis of financial condition and results of operations
Forward Looking Statements
This Quarterly Report on Form 10-Q/A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. This Quarterly Report includes statements regarding our plans, goals, strategies, intent, beliefs or current expectations. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished. These forward-looking statements can be identified by the use of terms and phrases such as believe, plan, intend, anticipate, target, estimate, expect, and the like, and/or future-tense or conditional constructions (will, may, could, should, etc.). Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements.
Although forward-looking statements in this Quarterly Report reflect the good faith judgment of management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. This discussion should be read in conjunction with the financial statements including the related footnotes. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected. Such risks and factors include, but are not limited to, the risk factors set forth in the section entitled RISK FACTORS in the Companys quarterly report on Form 10-Q for the period ended March 31, 2009, as amended.
The following discussion should be read in conjunction with the accompanying unaudited financial statements and footnotes and our December 31, 2008 audited financial statements included in the Companys Form 10-K. Those financial statements include additional information about our significant accounting policies and practices and the events that underlie our financial results. Except for the historical information contained herein, the matters discussed below are forward-looking statements that involve certain risks and uncertainties.
Overview
Show Me Ethanol, LLC (the Company) is a Missouri limited liability company currently processing corn into fuel grade ethanol and distillers grains for sale. Our plant has an approximate production capacity of 55 million gallons per year (mgpy) and is located in Carroll County, Missouri (the Ethanol Plant). We began construction of the Ethanol Plant in June 2007 and began operations in late May 2008. The total cost of our Ethanol Plant was about $81 million and we currently employ thirty-seven full time employees.
16
Selected Financial Information
Results of Operations for the Three Months Ended September 30, 2009 and 2008.
The following table shows some results of operations for the three months ended September 30, 2009 and 2008:
|
Quarter Ended September 30, 2009 (Unaudited) |
|
Quarter Ended September 30, 2008 (Unaudited) |
| |||
| |||
Sales |
$ 24,320,975 |
|
$ 35,140,641 |
Ethanol Producer Credit |
2,542,570 |
|
2,250,355 |
Total Sales |
26,863,545 |
|
37,390,996 |
|
|
|
|
Cost of Sales |
21,898,737 |
|
37,540,518 |
Cost of Sales - Loss on Forward Contracts |
|
|
10,728,188 |
General and Administrative Expenses |
617,237 |
|
801,016 |
Interest Expense |
699,751 |
|
819,504 |
Interest and other income |
2,338 |
|
26,527 |
|
|
|
|
Net Income (Loss) |
$ 3,650,158 |
|
$ (12,471,703) |
Sales
Our sales are divided into two categories: sales of fuel ethanol and sales of distillers grains. For the three months ended September 30, 2009, we received approximately 85% of our sales from the sale of fuel ethanol and approximately 15% of our sales from the sale of distillers grains. The division was approximately the same for the three months ended September 30, 2008. We expect the sale price of our fuel ethanol to remain relatively consistent with current levels based on information from our marketer and other factors, including the price of gasoline and petroleum.
Ethanol Producer Credit
The State of Missouri sponsors the Missouri Qualified Fuel Ethanol Producer Incentive Program that pays $0.20 per gallon produced for the first 12,500,000 and then $0.05 per gallon produced for the next 12,500,000 gallons for a total incentive payment of $3,125,000 during a program year beginning July 1st. Our production for the three months ended September 30, 2009 was 13,264,094 gallons, and our production during the three months ended September 30, 2008 was 11,253,129 gallons. We expect that we will be qualified to participate in this program for a total of 60 months.
Cost of Sales
Our cost of sales as a percentage of total sales was 81.5% for the three months ended September 30, 2009, and 100.4% during the same period of 2008. Our average cost paid for corn per bushel was $3.34 for the three months ended September 30, 2009, and $6.21 for the same period of 2008. Our two largest costs of production are corn and natural gas. Both of these costs are affected by factors largely out of our control.
We do not have any views as to the projected cost of natural gas.
Please see the analysis below under Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Future Cost of Goods Sold.
General and Administrative Expenses
Our general and administrative expenses decreased $183,779 for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to a decrease in marketing expense offset by increases in professional fees and salary expense. We expect that general and administrative expenses will remain relatively constant for the rest of the fiscal year.
17
Interest Expense
Interest expense as a percentage of total sales was 2.6% for the three months ended September 30, 2009, as compared to 2.2% for the same period of 2008. Interest expense decreased $120,000 in the period ended September 30, 2009 compared to three months ended September 30, 2008, primarily because the revolving line of credit facility was unused for a part of the quarter ended September 30, 2009. On October 7, 2008 our construction loan, which we refer to below as the Term Loan, was converted to a variable rate loan based on the prime rate. Subsequent to December 31, 2008, the interest rate was changed to LIBOR + 3.5%. The current rate applied to outstanding term loan balances is approximately 3.8%.
Results of Operations for the Nine Months Ended September 30, 2009 and 2008
Since we became operational on May 22, 2008, we do not have comparable income, production or sales data for the nine months ended September 30, 2009. Accordingly, we do not provide a comparison of our financial results between reporting periods in this report. If you undertake your own comparison of the first nine months of 2008 and the first nine months of 2009, it is important that you keep this in mind.
The following table shows some results of our operations for the nine months ended September 30, 2009:
|
Nine Months Ended September 30, 2009 (Unaudited) |
Percent |
| ||
| ||
Sales |
$ 72,518,030 |
96.3% |
Ethanol Producer Credit |
2,752,494 |
3.7% |
Total Sales |
75,270,524 |
100.0% |
|
|
|
Cost of Sales |
70,212,152 |
93.3% |
Cost of Sales - Loss on Forward Contracts |
1,364,152 |
1.8% |
General and Administrative Expenses |
2,246,152 |
3.0% |
Interest Expense |
2,033,482 |
2.7% |
Interest and other income |
419,457 |
0.6% |
|
|
|
Net Loss |
(165,957) |
0.2% |
Sales
Our sales are divided into two categories: sales of fuel ethanol and sales of distillers grains. For the nine months ended September 30, 2009, we received approximately 83% of our sales from the sale of fuel ethanol and approximately 17% of our sales from the sale of distillers grains. We expect the sale price of our fuel ethanol to remain relatively consistent with current levels based on information from our marketer and other factors, including the price of gasoline and petroleum.
We continue to explore, through our ethanol marketer, ways to expand into market areas in the southeastern United States. Should we be successful in selling our product into a new geographical region we believe we will attain higher margins for our product than we are currently getting. At this time, our efforts have only been preliminary and we cannot predict the likelihood of expanding our sales into the southeastern United States nor predict what profit levels we may be able to attain.
Ethanol Producer Credit
The State of Missouri sponsors the Missouri Qualified Fuel Ethanol Producer Incentive Program that pays $0.20 per gallon produced for the first 12,500,000 and then $0.05 per gallon produced for the next 12,500,000 gallons for a total incentive payment of $3,125,000 during a program year beginning July 1st. Our production reached the 25,000,000 gallon limit in February, 2009. The new program began on July 1, 2009, with the same rates as the previous program. Our production since July 1, 2009 was 13,264,094 gallons. We expect that we will be qualified to participate in this program for a total of 60 months.
18
Cost of Sales
Our cost of sales as a percentage of total sales was 93% for the nine months ended September 30, 2009. Our average cost paid for corn per bushel was $3.80 for this period. Our two largest costs of production are corn and natural gas. Both of these costs are affected by factors largely out of our control.
We do not have any views as to the projected cost of natural gas.
Please see the analysis below under Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Future Cost of Goods Sold.
General and Administrative Expenses
Our general and administrative expenses as a percentage of total sales was 3.0% for the nine months ended September 30, 2009. We expect that general and administrative expenses will remain relatively constant for the rest of the fiscal year.
Interest Expense
Interest expense as a percentage of total sales was 2.7% for the nine months ended September 30, 2009. On October 7, 2008 our construction loan, which we refer to below as the Term Loan, was converted to a variable rate loan based on the prime rate. Subsequent to December 31, 2008, the interest rate was changed to LIBOR + 3.5%. The current rate applied to outstanding balances is 3.8%.
Additional Operational Data
For the three and nine months ended on September 30, 2009, our operating statistics are as follows:
|
Ended September 30, 2009 |
|
Ended September 30, 2008 | |
|
Three months |
Nine months |
|
Three months |
Ethanol sold (gallons) |
12,940,537 |
38,712,510 |
|
12,371,725 |
Dried distillers grains sold (tons) |
36,675 |
102,746 |
|
30,486 |
Modified distillers grains sold (tons) |
3,959 |
16,011 |
|
5,362 |
Ethanol average price per gallon |
$1.59 |
$1.55 |
|
$2.42 |
Dried distillers grain average price per ton |
$95.42 |
$113.14 |
|
$149.61 |
Modified distillers grain average price per ton |
$44.89 |
$57.15 |
|
$61.79 |
Bushels of corn purchased |
4,824,310 |
13,610,553 |
|
4,214,171 |
Average corn cost per bushel |
$3.34 |
$3.80 |
|
$6.21 |
Trends and Uncertainties Impacting the Ethanol Industry and Our Future Operations
We continue to be subject to industry-wide factors, as well as factors affecting the economy at large, that affect our operating and financial performance. The industry-wide factors include, but are not limited to, the available supply and cost of corn from which our ethanol and distillers grains are processed; the cost of natural gas, which we will use in the production process; dependence on our ethanol marketer and distillers grains marketer to market and distribute our products; the cost of gasoline and petroleum; the intensely competitive nature of the ethanol industry, including ethanol imported from Caribbean basin countries and Brazil; possible legislation at the federal, state and/or local level; changes in federal ethanol tax incentives and the cost of complying with extensive environmental laws that regulate our industry.
We expect ethanol sales to constitute the bulk of our future revenues. We expect to benefit from federal ethanol supports and federal tax incentives. Changes to these supports or incentives could significantly impact demand for ethanol.
19
Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Future Cost of Goods Sold
Our cost of goods sold consists primarily of costs relating to the corn and natural gas supplies and depreciation necessary to produce ethanol and distillers grains for sale. Variables such as planting dates, rainfall, and temperatures will likely cause market uncertainty and create corn price volatility throughout the year.
In March 2006, the Company entered into a grain supply agreement with Ray-Carroll. Under the agreement, the Company agrees to purchase all corn needed to operate a 50-65 million gallon per year ethanol facility, up to twenty-two million bushels per year. The Company agreed to pay $0.116 per bushel over Ray-Carrolls posted bid at its Carrollton facility, with the rate increasing annually by 3.0%. At September 30, 2009 and 2008, the rate was $0.1268 and $0.1231, respectively. The term of this agreement is twenty years from the first delivery of the product by the supplier to the Company. Corn purchases related to the agreement for the three and nine months ended September 30, 2009 were approximately $16,097,000 and $51,681,000, respectively. Corn purchases related to the agreement for the three and nine months ended September 30, 2008 were approximately $26,170,000 and $35,181,000, respectively. As of September 30, 2008, the Company had entered into forward purchase contracts under this agreement with Ray-Carroll totaling 5.8 million bushels for delivery through May, 2009 at prices ranging from $5.13 to $7.20 per bushel. These contracts were written down to the lower of cost or market previous to the quarter ended September 30, 2009, which resulted in recording unrealized losses on future contracts totaling approximately $10,728,000 for the three and nine months then ended. As a result of continued declines in corn prices, the accrued loss on forward contracts grew to $14,135,849 as of December 31, 2008. Additional losses totaling $1,364,152 were recorded in the nine month period ended September 30, 2009 on these same contracts. There were no losses on forward contracts for the three months ended September 30, 2009. The Company entered into a Conversion Agreement, dated as of March 31, 2009 with Ray-Carroll to settle the outstanding forward corn purchase contracts at $15.5 million.
Natural gas is also an important input commodity to our manufacturing process. We estimate that our natural gas usage will be approximately 10% to 15% of our annual total production cost. We look for continued volatility in the natural gas market. Any ongoing increases in the price of natural gas will increase our cost of production and may negatively impact our future profit margins.
Liquidity and Capital Resources
The Companys cash flow analysis varies greatly from the first nine months of 2008 to the first nine months of 2009 because the ethanol plant was still being built in early 2008 and began production of distillers grains and ethanol only in May of 2008. Cash provided by operations for the nine months ended September 30, 2009 was $6,029,000, compared to cash used in operations of $3,635,000 for the same period of 2008. The Company used cash for purchase of property, plant and equipment of $573,000 in the first nine months of 2009, and $29,929,000 during the first nine months of 2008. Cash used in financing activities for the nine months ended September 30, 2009 was $1,241,000, compared to cash provided by financing activities of $34,108,000 in the same period of 2008. During 2008, issuance of debt and a revolving line of credit provided $34,142,000. In 2009, voluntary capital contributions of $3,863,000 were offset by principal debt payments of $5,078,000.
As of September 30, 2009, we had total assets of $82,709,400 consisting primarily of cash, receivables, inventories and property, plant and equipment. We had current liabilities of $9,154,400, which was the current portion of long-term debt and accounts payable and accrued expenses. Total members equity as of September 30, 2009, was $19,679,400.
The financial statements have been prepared assuming the Company will continue as a going concern, realizing assets and liquidating liabilities in the ordinary course of business.
On March 31, 2009 the Company completed a fundraising totaling $3,862,968 in cash and $2,000,000 in settlement of corn forward contract liability as part of a voluntary capital fundraising from current members. As part of the fundraising, participating members capital accounts were credited by the amount of each members capital contribution, resulting in such contributing members owning a greater percentage of the business in the form of voting rights and distributions than before the fundraising, however no additional membership units were issued.
Any requirement to realize assets in other than the ordinary course of business in order to provide liquidity could result in losses not reflected in these financial statements.
20
Term Loan
On March 1, 2007, the Company entered into a $48,000,000 construction loan (the Term Loan) pursuant to a Construction and Term Loan Agreement (the Term Loan Agreement) with FCS Financial, PCA serving as the administrative agent for the transaction. The Term Loan was converted to permanent financing on October 7, 2008, and is being repaid over 10 years until it matures on October 7, 2018. The Term Loan is secured by a first priority security interest in our real and personal property, including our interest in the ethanol project. Under the terms of the Term Loan Agreement, 50% of our Excess Cash Flow, as defined in the Term Loan Agreement, is to be applied on an annual basis to prepay the Term Loan. On March 31, 2009, the Companys term and revolving credit agreements were amended. The amendments permit the Company to defer up to four term loan principal payments, delay the excess cash flow sweep until January 1, 2011, require the Company to comply with new cash flow reporting and hedging policy obligations, require the Company to hire a plant manager and a risk manager, and require the Company to make a commercially reasonable inquiry into amending its existing air permit. The amendments also deleted the Minimum Equity and the Minimum Net Worth covenants after March 31, 2009 until the maturity date of the loans. The Third Term Amendment also resets the financial requirements of the Minimum Working Capital and the Minimum Fixed Charge Coverage covenants. Pursuant to the term loan amendment, the Company deferred its February 1, 2009 term loan payment.
Under the amended agreement, the Company is required to maintain working capital (defined as current assets less current liabilities excluding the current portion of long term debt and subordinated debt) of $3,000,000 through 2009. At September 30, working capital calculated under this formula was $9,623,000. The fixed charge coverage covenant is an annual calculation, and as such, is not calculated until December 31. At September 30, 2009, The Company was in compliance with all loan covenants.
Revolving Loan
On November 6, 2007, the Company as borrower entered into a revolving credit agreement with FCS Financial, PCA (FCS) as lender for a total borrowing up to $5,000,000 (the Revolving Credit Agreement). The purpose of the Revolving Credit Agreement is to (i) fund proper corporate business purposes of the Company, (ii) fund the Companys maintenance capital expenditures and (iii) to finance letters of credit. Borrowings under the Revolving Credit Agreement are subject to availability under a borrowing base calculation based on accounts receivable, inventory and accounts payable. Each borrowing, at the option of the Company, can be either a revolving base rate loan or a revolving LIBOR rate loan plus 3.5% at December 31, 2008, and 2.5% at September 30, 2009 (in either case, a Revolving Loan). The Company may select interest periods of one, two, three or six months for LIBOR loans. The Revolving Loan is secured by all of the Companys real property and personal property now owned or hereafter acquired by the Company, secured equally and ratably with the Term Loan on the same lien priority basis. The Revolving Loan was amended on March 31, 2009 by the Company and FCS to reestablish a maximum borrowing amount of $5,000,000 (subject to borrowing base availability) and modify the maturity date of the revolving loan to be due in full on June 2, 2010. As of September 30, 2009 and December 31, 2008, the amount borrowed under the revolving credit agreement was $-0- and $2,652,245, respectively.
Under the terms of the Revolving Credit Agreement, the Company may request that FCS issue one or more letters of credit, subject to borrowing availability. The Company agrees to pay FCS a fee of 2.5%, payable quarterly, on the face amount of each letter of credit issued. As of September 30, 2009, a $120,000 undrawn letter of credit was issued by FCS on behalf of the Company to cover bonding provisions. The letter of credit expires January 2010. If the letter of credit is drawn against, then the amount of the letter of credit would become a borrowing under the revolving credit agreement. At December 31, 2008 there were no letters of credit outstanding.
The 2010 Notes
On June 5, 2008, the Company issued $3,590,000 of 9% subordinated secured notes (the Subordinated Notes) to accredited investors and related entities totaling $2,540,000 and unrelated creditors totaling $1,050,000, respectively. The Subordinated Notes bear interest at 9% per annum computed on the basis of a 360-day year for the actual number of days elapsed and will mature on June 4, 2010 (the Maturity Date). Interest will be payable annually, with the first installment paid on June 5, 2009, and thereafter on the Maturity Date, at which time the entire outstanding principal balance, together with all accrued and unpaid interest, will be immediately due and payable in full. The Subordinated Notes are secured pursuant to a loan and security agreement among the Company as debtor, the State Bank of Slater as agent and the holders from time to time as a party thereto as lenders dated June 5, 2008, whereby the Company granted a second lien security interest over substantially all of Companys personal property in support of the obligation to repay the Subordinated Notes. The Subordinated Notes are also secured by a leasehold deed of trust, assignment of rents and security agreement, among the Company as grantor, Thomas Kreamer as trustee and the Bank of Slater as grantee dated June 5, 2008, whereby the Company granted a second lien security interest over substantially all of Companys personal property in support of the obligation to repay the Subordinated Notes. The Company also agreed that debt created by the issuance of the Subordinated Notes is subordinate to loans provided primarily by FCS. On March 31, 2009, the Company entered into a Conversion Agreement that established certain financial conditions whereby a previously issued $1 million Subordinated Note issued by the Company to Ray-Carroll on June 5, 2008 may mature on June 5, 2011 instead of June 5, 2010 . In return for the potential delayed maturity of the $1 million Note, the Company may not make financial distributions to its members until such $1 million note is repaid. The Company made interest payments on the Subordinated Notes on June 5, 2009 in the amount of $327,587.
21
Chapter 100 Bonds
In September 2006, the Company entered into an Economic Development Agreement with the County of Carroll, Missouri to implement a tax abatement plan under Missouri law. The plan provides for 100% abatement of real property taxes for approximately twenty years. On April 29, 2008, the County issued bonds under Chapter 100 of the Missouri Revised Statutes in a maximum amount of $88,500,000. Legal title of our real and personal property was transferred to the County and the County then leased the property back to us. The bonds were issued to the Company so no cash was exchanged. The lease payments are equal to the amount of the debt service payments on these bonds. The banks, and agents under the Term Loan Agreement received an assignment of the Chapter 100 Bonds and retained their first priority position against the real property over the Chapter 100 Bonds. We have an option to purchase the real property by paying off these bonds, paying the trustee fees, plus $1,000. In return for the abatement of property taxes by the County, we have agreed to pay the County $10,000 on each anniversary date of the Chapter 100 Bonds issuance until the bonds are no longer outstanding. In addition and commencing in 2009, we have agreed to make annual grant payments in lieu of property taxes in the amount of $90,000 for the period during which the bonds are outstanding.
Off-Balance Sheet Arrangements
At September 30, 2009, the Company had fixed priced ethanol forward sales contracts totaling 144,000 gallons at prices ranging from $1.55 to $1.73 per gallon and variable priced ethanol forward sales contracts totaling 6,008,000 gallons for delivery through December, 2009. The Company uses these contracts to manage the exposure to price risk with ethanol sales and to ensure uninterrupted production by guaranteeing a limited amount of ethanol distribution. As of September 30, 2009, the current market price of ethanol equaled $1.65 per gallon. The Company subjected these contracts to lower of cost or market analysis and determined no lower of cost or market adjustment was required
Item 3. Quantitative and qualitative disclosures about market risk
The Company is not required to provide information under this item as it is a small reporting company, pursuant to the exclusion provided in S-K Item 305(e).
Item 4. Controls and Procedures
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SECs rules and forms and that the information is gathered and communicated to our management, including our General Manager (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
As required by Rule 15d-15(b), the individual serving as our Principal Executive Officer/Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 15d-14 as of the end of the period covered by this report. Based on the foregoing evaluation, our Principal Executive Officer/Chief Financial Officer has concluded that our disclosure controls and procedures are not effective in timely alerting him to material information required to be included in our periodic SEC filings and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Principal Executive Officer/Chief Financial Officer, to allow timely decisions regarding required disclosure as a result of the deficiency in our internal control over financial reporting discussed below.
22
Management of the Company, with the assistance of the Companys audit committee and its external auditors, BKD, LLP, has identified several material weaknesses and significant deficiencies in the internal controls over financial reporting that have led to the conclusion that the Companys disclosure controls and procedures are not effective. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness.
The Company has identified material weaknesses relating to (1) segregation of management duties and (2) financial statement preparation.
Segregation of Management Duties -With the resignation of the General Manager/Chief Restructuring Officer on July 21, 2009, several control functions assigned to this position are not currently being performed; however, other controls have been implemented in order to partially compensate. The Board of Managers of the Company is considering whether to hire an additional employee to serve as Chief Financial Officer in Mr. Hansons place.
Financial Statement Preparation - Financial statements prepared by management required certain inventory recalculations and other reclassifications and disclosure modification after presentation to the external auditors but before presentation in this report in order to be properly stated. The financial statements in this report have been properly classified. Management intends to better use outside consultants, including the services of Williams-Keepers LLC to properly classify the information in the financial statements.
Changes In Internal Control Over Financial Reporting
The above noted weaknesses were noted on the Form 10-Q for the period ended June 30, 2009, in addition to material weaknesses relating to (1) inventory and (2) accounts payable and accrued expenses cut-off. The weaknesses related to Inventory and Accounts Payable and Accrued Expenses Cut-off were remedied during the quarter ended September 30, 2009. The quarterly report on Form 10-Q for the period ended June 30, 2009 also identified a significant deficiency relating to corn forward purchase contracts, which was remedied during the quarter ended September 30, 2009.
Inventory The Company has changed its procedures to now delete all old production cost data from its calculation tables prior to inputting any new information. Additionally, effective November 2009, the Company has engaged Williams-Keepers LLP, as an outside consultant, as an additional step to prevent such errors in the future.
Accounts Payable and Accrued Expenses Cut-off - Certain legal fees and a settlement payment related to plant construction costs were not initially recorded in the period in which the services were rendered. The Company has changed its procedures to record expenses when an initial invoice is received, even if management intends to dispute the amount. Additionally, the Company has implemented steps to promote better communication and coordination between management and the accounting staff to record all transactions in the proper accounting period.
Corn Forward Purchase Contracts Following the close of the second quarter of 2009, the accounting department was not initially aware of an outstanding fixed price corn forward purchase contract with undelivered corn totaling 725,979 bushels. The contract was properly included in the Companys second quarter financial statements. During the third quarter of 2009, the Company has revised its financial statement preparation procedures to include any existing forward contract obligations in its financial statements for future periods.
23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk factors
Smaller reporting companies are not required to provide the information required under this item.
Item 2. Unregistered Sales of Equity Securities & Use of Proceeds
None.
Item 3. Defaults on Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
24
Item 6. Exhibits
The following exhibits are filed with or incorporated as part of this report as required by Item 601 of Regulation S-K:
Exhibit No. |
|
Description |
|
Reference |
|
|
|
|
|
31.1 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
|
|
|
|
|
|
|
31.2 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
|
|
|
|
|
|
|
32 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|
|
* Filed herewith.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SHOW ME ETHANOL, LLC
Date: December 4, 2009
By: |
/s/ Richard A. Hanson |
|
Name: |
Richard A. Hanson |
|
Title: |
Chief Financial Officer |
|
26
EXHIBIT INDEX
Exhibit No. |
|
Description |
|
Reference |
|
|
|
|
|
31.1 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
|
|
|
|
|
|
|
31.2 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
|
|
|
|
|
|
|
32 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|
|
* Filed herewith.
27