Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - Western Dubuque Biodiesel, LLC | c08457exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Western Dubuque Biodiesel, LLC | c08457exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Western Dubuque Biodiesel, LLC | c08457exv31w1.htm |
EX-10.1 - EXHIBIT 10.1 - Western Dubuque Biodiesel, LLC | c08457exv10w1.htm |
EX-31.2 - EXHIBIT 31.2 - Western Dubuque Biodiesel, LLC | c08457exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended September 30, 2010
OR
OR
o | Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to
Commission file number 000-52617
Commission file number 000-52617
WESTERN DUBUQUE BIODIESEL, LLC
(Exact name of registrant as specified in its charter)
Iowa (State or other jurisdiction of organization) |
20-3857933 (I.R.S. Employer Identification No.) |
904 Jamesmeier Rd.
P.O. Box 82
Farley, IA 52046
(Address of principal executive offices)
P.O. Box 82
Farley, IA 52046
(Address of principal executive offices)
(563) 744-3554
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). 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 the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: As of November 15, 2010, there were 29,779 membership units
outstanding.
INDEX
Page No. | ||||||||
1 | ||||||||
1 | ||||||||
14 | ||||||||
21 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
ii
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTERN DUBUQUE BIODIESEL, LLC
BALANCE SHEETS
BALANCE SHEETS
(UNAUDITED) | ||||||||
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 1,621,604 | $ | 3,379,382 | ||||
Margin deposits |
70,416 | 13,890 | ||||||
Accounts receivable: |
||||||||
Trade |
| 55,090 | ||||||
Related party |
| 143,059 | ||||||
Other receivables |
94,823 | 12,000 | ||||||
Incentive receivables |
| 3,494,322 | ||||||
Inventory |
7,414,041 | 313,929 | ||||||
Utility deposits |
87,099 | | ||||||
Prepaid feedstocks and expenses |
134,351 | 93,829 | ||||||
Total current assets |
9,422,334 | 7,505,501 | ||||||
PROPERTY, PLANT AND EQUIPMENT |
||||||||
Land and land improvements |
3,091,093 | 3,091,093 | ||||||
Office building and equipment |
417,392 | 407,203 | ||||||
Plant and process equipment |
37,848,001 | 37,799,987 | ||||||
Vehicles |
42,537 | 42,537 | ||||||
Total, at cost |
41,399,023 | 41,340,820 | ||||||
Less accumulated depreciation |
6,937,219 | 5,294,490 | ||||||
Total property, plant and equipment |
34,461,804 | 36,046,330 | ||||||
OTHER ASSETS |
||||||||
Restricted cash |
406,929 | 406,929 | ||||||
Loan origination fees, net of amortization |
214,108 | 285,477 | ||||||
Total other assets |
621,037 | 692,406 | ||||||
TOTAL ASSETS |
$ | 44,505,175 | $ | 44,244,237 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable: |
||||||||
Trade |
$ | 33,246 | $ | 390,791 | ||||
Related party |
| 1,047,081 | ||||||
Short-term borrowings related party |
5,672,128 | | ||||||
Current portion of long-term debt |
24,694,040 | 25,435,486 | ||||||
Derivative instruments |
41,561 | 5,737 | ||||||
Accrued liabilities |
72,849 | 63,138 | ||||||
Deferred rent |
15,450 | 17,400 | ||||||
Total current liabilities |
30,529,274 | 26,959,633 | ||||||
MEMBERS EQUITY |
||||||||
Contributed capital |
26,230,096 | 26,230,096 | ||||||
Accumulated deficit |
(12,254,195 | ) | (8,945,492 | ) | ||||
Total members equity |
13,975,901 | 17,284,604 | ||||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 44,505,175 | $ | 44,244,237 | ||||
See accompanying notes to financial statements.
1
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
STATEMENTS OF OPERATIONS (UNAUDITED)
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
REVENUES |
||||||||||||||||
Biodiesel and by product sales related parties |
$ | 10,099 | $ | 4,666,250 | $ | 225,012 | $ | 7,076,150 | ||||||||
Tolling services related party |
| | | 1,030,385 | ||||||||||||
Incentive funds |
67,146 | 351,407 | 67,146 | 777,659 | ||||||||||||
Total revenues |
77,245 | 5,017,657 | 292,158 | 8,884,194 | ||||||||||||
COST OF SALES |
||||||||||||||||
Materials, labor and overhead |
915,747 | 5,921,850 | 2,435,597 | 9,611,424 | ||||||||||||
Net losses (gains) on derivative instruments |
189,989 | (177,812 | ) | (165,703 | ) | 242,691 | ||||||||||
Total cost of sales |
1,105,736 | 5,744,038 | 2,269,894 | 9,854,115 | ||||||||||||
Gross profit (loss) |
(1,028,491 | ) | (726,381 | ) | (1,977,736 | ) | (969,921 | ) | ||||||||
OPERATING EXPENSES |
||||||||||||||||
Consulting and professional fees |
41,054 | 63,228 | 160,577 | 207,409 | ||||||||||||
Office and administrative expenses |
89,049 | 62,534 | 233,008 | 213,730 | ||||||||||||
Total operating expenses |
130,103 | 125,762 | 393,585 | 421,139 | ||||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||||||
Other income |
1,463 | 650 | 2,763 | 1,950 | ||||||||||||
Interest income |
4,797 | 6,684 | 22,311 | 49,268 | ||||||||||||
Interest expense |
(346,748 | ) | (256,087 | ) | (962,456 | ) | (780,321 | ) | ||||||||
Total other expense |
(340,488 | ) | (248,753 | ) | (937,382 | ) | (729,103 | ) | ||||||||
NET INCOME LOSS |
$ | (1,499,082 | ) | $ | (1,100,896 | ) | $ | (3,308,703 | ) | $ | (2,120,163 | ) | ||||
BASIC AND DILUTED LOSS PER UNIT |
$ | (50.34 | ) | $ | (36.97 | ) | $ | (111.11 | ) | $ | (71.20 | ) | ||||
WEIGHTED AVERAGE UNITS OUTSTANDING,
BASIC AND DILUTED |
$ | 29,779 | 29,779 | 29,779 | 29,779 | |||||||||||
See accompanying notes to financial statements.
2
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
STATEMENTS OF CASH FLOWS (UNAUDITED)
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2010 | September 30, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (3,308,703 | ) | $ | (2,120,163 | ) | ||
Adjustments to reconcile net loss to net cash
used in operating activities |
||||||||
Depreciation |
1,642,729 | 1,642,081 | ||||||
Amortization |
71,369 | 71,370 | ||||||
Effects of changes in operating assets and liabilities |
||||||||
Margin deposits |
(56,526 | ) | (221,150 | ) | ||||
Accounts receivable |
198,149 | 1,073,119 | ||||||
Other receivables |
(82,823 | ) | (47,444 | ) | ||||
Incentive receivables |
3,494,322 | (222,948 | ) | |||||
Inventory |
(7,100,112 | ) | (1,268,605 | ) | ||||
Utility deposits |
(87,099 | ) | | |||||
Prepaid feedstocks and expenses |
(40,522 | ) | (31,194 | ) | ||||
Derivative instruments |
35,824 | (85,159 | ) | |||||
Accounts payable |
(1,404,626 | ) | (520,165 | ) | ||||
Accrued liabilities |
9,711 | (88,450 | ) | |||||
Deferred rent |
(1,950 | ) | 8,050 | |||||
Net cash used in operating activities |
(6,630,257 | ) | (1,810,658 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Payments for property, plant and equipment,
including construction in progress |
(58,203 | ) | (41,387 | ) | ||||
Increase in restricted cash |
| (69,592 | ) | |||||
Net cash used in investing activities |
(58,203 | ) | (110,979 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net borrowings under short-term financing with related party |
5,672,128 | | ||||||
Payments on long-term debt |
(741,446 | ) | (2,421,140 | ) | ||||
Net cash provided by (used in) financing activities |
4,930,682 | (2,421,140 | ) | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(1,757,778 | ) | (4,342,777 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
3,379,382 | 7,553,554 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 1,621,604 | $ | 3,210,777 | ||||
See accompanying notes to financial statements.
3
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2010
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Western Dubuque Biodiesel, LLC located in Farley, Iowa was organized on November 14, 2005 to own
and operate a 30 million gallon annual production biodiesel plant for the production of fuel grade
biodiesel. The Companys fiscal year ends on December 31. Significant accounting policies followed
by the Company are presented below:
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Basis of Accounting
The Company uses the accrual basis of accounting in accordance with accounting principles generally
accepted in the United States of America. This method recognizes revenues as earned and expenses as
incurred.
In the opinion of management, all adjustments have been made that are necessary to fairly present
the financial position, results of operations, and cash flows of the Company. Management has deemed
all adjustments of a normal or recurring nature.
These financial statements should be read in conjunction with the financial statements and notes
included in the Companys financial statements for the year ended December 31, 2009.
Revenue Recognition
Revenue from the production of biodiesel and related products is recognized upon delivery to
customers or under the terms of a tolling service agreement. Revenue is recorded upon the transfer
of the risks and rewards of ownership and delivery to customers. Interest income is recognized as
earned.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be cash equivalents.
The Company maintains its accounts primarily at one financial institution. At times during the
year, the Companys cash and cash equivalents balances exceed amounts insured by the Federal
Deposit Insurance Corporation.
Restricted Cash
The Company is required to maintain cash balances to be held at a bank as a part of their financing
agreement as described in Note 4.
Accounts Receivable
Accounts receivable are presented at face value, net of the allowance for doubtful accounts. The
allowance for doubtful accounts is established through provisions charged against income and is
maintained at a level believed adequate by management to absorb estimated bad debts based on
historical experience and current economic conditions. Management believes all receivables will be
collected and therefore the allowance has been established to be $-0- at September 30, 2010 and
December 31, 2009.
Account balances with invoices past stated terms are considered delinquent. No interest is charged
on trade receivables with past due balances. Payments of accounts receivable are applied to the
specific invoices identified on the customers remittance advice or, if unspecified, to the
customers total balances.
4
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Derivative Instruments and Hedging Activities
Topic 815 of the Accounting Standards Codification (ASC), Derivatives and Hedging, requires a
company to evaluate its contracts to determine whether the contracts are derivatives. Certain
contracts that literally meet the definition of a derivative may be exempted from ASC 815 as normal
purchases or normal sales. Normal purchases and normal sales are contracts that provide for the
purchase or sale of something other than a financial instrument or derivative instrument that will
be delivered in quantities expected to be used or sold over a reasonable period in the normal
course of business. Contracts that meet the requirements of normal sales are documented as such,
and exempted from the accounting and reporting requirements of ASC 815. The Company has entered
into agreements to purchase feedstocks for anticipated production needs. These contracts are
considered normal purchase contracts and exempted from ASC 815.
Inventories
Inventory is stated at the lower of cost, determined on a first in, first out basis, or market
value.
Property and Equipment
Property and equipment are stated at cost. Significant additions are capitalized, while
expenditures for maintenance, repairs and minor renewals are charged to operations when incurred.
Depreciation and amortization are computed using the straight-line method over the estimated useful
lives of the assets determined as follows:
Years | ||||
Land improvements |
2040 | |||
Office equipment |
5 10 | |||
Office building |
30 | |||
Plant and process equipment |
1040 | |||
Vehicles |
57 |
The Company reviews its property and equipment for impairment whenever events indicate that the
carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum of
the future cash flows is less than the carrying amount of the asset. The amount of the loss is
determined by comparing the fair market value of the asset to the carrying amount of the asset.
Loan Origination Fees
Loan origination fees are stated at cost and will be amortized on the straight-line method over the
life of the loan agreements. Amortization commenced as the Company borrowed funds on the loans.
Amortization for the nine months ended September 30, 2010 and 2009 was $71,369 and $71,370,
respectively.
Income Taxes
The Company is organized as a limited liability company under state law and is treated as a
partnership for income tax purposes. Under this type of organization, the Companys earnings pass
through to the partners and are taxed at the partner level. Accordingly, no income tax provision
has been calculated. Differences between financial statement basis of assets and tax basis of
assets is related to capitalization and amortization of organization and start-up costs for tax
purposes, whereas these costs are expensed for financial statement purposes. Differences also exist
in the treatment of expenses capitalized for inventory for tax purposes, prepaid expenses and
differences between depreciable lives and methods used for book and tax purposes.
5
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Loss Per Unit
Losses per unit are calculated based on the period of time units have been issued and outstanding.
For purposes of calculating diluted earnings per capital unit, units subscribed for but not issued
are included in the computation of outstanding capital units based on the treasury stock method. As
of September 30, 2010 and 2009, there was not a difference between basic and diluted earnings per
unit as there were no units subscribed.
Cost of Sales
The primary components of cost of sales from the production of biodiesel products are raw
materials, labor and depreciation on process equipment.
Fixed costs during the periods when the plant is idle are classified in cost of sales. Cost of
sales during these periods primarily consists of labor, depreciation on process equipment, and
other indirect costs.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in the cost of sales.
Environmental Liabilities
The Companys operations are subject to federal, state and local environmental laws and
regulations. These laws require the Company to investigate and remediate the effects of the release
or disposal of materials at its location. Accordingly, the Company has adopted policies, practices
and procedures in the areas of pollution control, occupational health, and the production,
handling, storage and use of hazardous materials to prevent material, environmental or other damage
and to limit the financial liability which could result from such events. Environmental liabilities
are recorded when the liability is probable and the costs can be reasonably estimated.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument held by the Company:
Current assets and current liabilities The carrying value approximates fair value due to the
short maturity of these items.
Long-term debt The carrying amount of long-term obligations approximated fair value based on
estimated interest rates for comparable debt.
New Accounting Standards
In February 2010, FASB issued Accounting Standards Update (ASU) 2010-09, Subsequent Events (Topic
855), Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date in both issued and revised financial statements.
Revised financial statements include financial statements revised as a result of either correction
of an error or retrospective application of GAAP. All of the amendments in ASU 2010-09 are
effective upon issuance of the final ASU, except for the use of the issued date for conduit debt
obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The
Company adopted ASU 2010-09 and it did not have a material impact on the Companys interim
financial statements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820),
Improving Disclosures about Fair Value Measurements, amending ASC 820. ASU 2010-06 requires
entities to provide new disclosures and clarify existing disclosures relating to fair value
measurements. The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in Level 3 fair
value measurements, which are effective for fiscal years beginning after December 15, 2010 and for
interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material
impact on the Companys financial position or results of operations.
6
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. ASU 2010-20 amends FASB ASC 310 to require
additional disclosures about the credit quality of financing receivables and the allowance for
credit losses. ASU 2010-20 defines two levels of disaggregation portfolio segment and class of
financing receivables and amends existing disclosure requirements to include information about
the credit quality of financing receivables and allowance for credit losses at a greater level of
disaggregation. It also requires disclosures on credit quality indicators, past due information,
and modifications of financing receivables by class of financing receivables and significant
purchases and sales by portfolio segment. The new disclosures as of the end of a reporting period
are effective for interim and annual reporting periods ending on or after December 15, 2010, or
December 31, 2010 for the Company. The new disclosures about activity that occurs during a
reporting period are effective for interim and annual reporting periods beginning on or after
December 15, 2010, or three months ending March 31, 2011 for the Company. ASU 2010-20 is not
expected to have a material effect on the Companys financial position and results of operations.
NOTE 2 INCENTIVE PAYMENTS AND RECEIVABLE
Revenue from federal incentive programs is recorded when the Company has sold blended biodiesel and
satisfied the reporting requirements under the applicable program. When it is uncertain that the
Company will receive full allocation and payment due under the federal incentive program, it
derives an estimate of the incentive revenue for the relevant period based on various factors
including the most recently used payment factor applied to the program. The estimate is subject to
change as management becomes aware of increases or decreases in the amount of funding available
under the incentive programs or other factors that affect funding or allocation of funds under such
programs.
The Company receives federal incentive revenues from the Volumetric Ethanol Excise Tax Credit
(VEETC) and Commodity Credit Corporation (CCC) Bioenergy Programs. The VEETC expired on December
31, 2009. The amount of incentives receivable was $-0- and $3,494,322 as of September 30, 2010 and
December 31, 2009.
NOTE 3 INVENTORY
Inventory consists of:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(UNAUDITED) | ||||||||
Raw material |
$ | 763,882 | $ | 161,471 | ||||
Work in progress |
364,599 | 72,996 | ||||||
Finished goods |
6,285,560 | 79,462 | ||||||
Total |
$ | 7,414,041 | $ | 313,929 | ||||
7
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTE 4 LONG-TERM DEBT AND FINANCING
Long-term obligations of the Company are summarized as follows:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(UNAUDITED) | ||||||||
Note payable to Beal Bank see details below |
$ | 24,499,040 | $ | 25,188,855 | ||||
Note payable to the Iowa Department of Economic
Development see details below |
195,000 | 240,000 | ||||||
Note payable to Hodge Material Handling see
details below |
| 6,631 | ||||||
Total |
24,694,040 | 25,435,486 | ||||||
Less current portion |
24,694,040 | 25,435,486 | ||||||
Long-term portion |
$ | | $ | | ||||
Due to going concern issues addressed in Note 11, the debt has been classified as current.
On July 5, 2006, the Company entered into a $35,500,000 loan agreement with Marshall BankFirst, and
in July 2009, the loan agreement was acquired by Beal Bank. The loan commitment was the lesser of
$35,500,000 or sixty one percent of total project costs. The loan term is seventy-four months which
consists of the construction phase and a term phase. The construction phase ended March 1, 2008 and
the term phase commenced thereafter. Monthly interest payments were required during the
construction phase with monthly interest and principal required during the term phase to be based
on a ten year principal amortization. Monthly payments of $339,484 including interest at a variable
rate commenced March 1, 2008 under the term phase with the remaining principal and interest due at
maturity, January 1, 2013. The agreement was amended and monthly payments were reduced to $150,000
beginning in November 2009 and continuing until November 2010. The loan commitment also includes a
provision for additional payments during the term phase, based on one-third of all monthly
earnings before interest, taxes, depreciation and amortization (EBITDA) remaining after the
regularly scheduled principal and interest payments have been paid in full. The agreement also
includes provisions for reserve funds for capital improvements, working capital, and debt service.
As of September 30, 2010, balances of $354,708 and $52,221 remain in the debt service reserve and
capital reserve funds as restricted cash. During the term phase, the Company has the option of
selecting an interest rate at 25 basis points over the prime rate as published in the Wall Street
Journal or 300 basis points over the five-year LIBOR/Swap Curve rate. On March 1, 2008, upon
commencement of the term phase the Company selected the variable rate option of 25 basis points
over the prime rate (3.50% at September 30, 2010 and December 31, 2009). The notes are secured by
essentially all of the Companys assets. Under the terms of the agreements, the Company is to
adhere to certain financial covenants. The Company is to adhere to minimum debt service coverage,
fixed charge coverage, and current ratio requirements, as well as a maximum debt as a percentage of
earnings before interest, taxes, depreciation and amortization (EBITDA) ratio. The Company was not
in compliance with certain covenants as of September 30, 2010 and December 31, 2009.
The Company has been awarded $400,000 from the Iowa Department of Economic Development consisting
of a $300,000 zero interest deferred loan and a $100,000 forgivable loan. The zero interest
deferred loan requires sixty monthly installments of $5,000 beginning December 2006. In January
2007, the zero interest deferred loan was amended, and deferred monthly installments until August
2007, with remaining principal due at maturity, May 2012. The Company must satisfy the terms of the
agreement, which include producing 30,000,000 gallons of biodiesel and wage and job totals, to
receive a permanent waiver of the forgivable loan. The loan is secured by a security agreement
including essentially all of the Companys assets.
8
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
The Company had an installment sales contract with Hodge Material Handling dated October 16, 2007.
The Company purchased a fork truck for $23,625, and was required to make 36 monthly installments of
$770, beginning 30 days after taking possession of the fork truck. Interest was implied at a rate
of 10.69% per annum. The contract was paid off in 2010.
The Company had issued a $116,132 letter of credit through American Trust Bank in favor of Black
Hills Energy (previously Aquila, Inc.). The letter of credit was effective for the period February
6, 2007 through February 6, 2010. The letter of credit expired in February 2010 and the Company
placed funds on deposit with Black Hills Energy. The deposit is to be adjusted annually based on
volume used.
During 2010 the Company entered into a financing agreement with a related party to produce a
specified number of biodiesel gallons and finance the feedstock purchases (See Note 7). The
agreement calls for specified fees based on gallons produced and interest on feedstock purchased.
Interest is payable monthly at the prime rate plus 4.0% (7.25% at September 30, 2010). Outstanding
borrowings and fees under this agreement are payable upon sale of the biodiesel. The balance
outstanding under this agreement as of September 30, 2010 was $5,672,128. The agreement is secured
by feedstock and biodiesel inventory. Upon the sale of biodiesel credit may be extended when a new
agreement is entered. As part of the agreement the Company is required to hedge 85% of the
biodiesel gallons produced. At September 30, 2010 the Company was not in compliance with these
terms due to a pending sale with REG which was finalized in October (See also Note 12). The Company
obtained a waiver for this violation.
NOTE 5 MEMBERS EQUITY
The Companys operating agreement provides that the net profits or losses of the Company will be
allocated to the members in proportion to the membership units held. Members will not have any
right to take part in the management or control of the Company. Each membership unit entitles the
member to one vote on any matter which the member is entitled to vote. Transfers of membership
units are prohibited except as provided for under the operating agreement and require approval of
the board of directors.
NOTE 6 CASH FLOW DISCLOSURES
Supplemental disclosure for interest paid:
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2010 | September 30, 2009 | |||||||
Cash paid for interest |
$ | 891,087 | $ | 725,298 | ||||
NOTE 7 RELATED PARTY TRANSACTIONS
The Companys general contractor (Renewable Energy Group, LLC) entered into an agreement to
construct the plant. On July 31, 2006, the general contractor formed a new related entity called
Renewable Energy Group, Inc. (REG, Inc.). The new entity, REG, Inc. is contracted to provide the
management and operational services for the Company. On August 9, 2006, REG, LLC assigned its
construction agreement to the newly formed entity REG, Inc., which became the general contractor.
The Company previously entered into an agreement with REG, Inc. to provide certain management and
operational services. The agreement provided for REG, Inc. to place a general manager and
operations manager, acquire substantially all feed stocks and basic chemicals necessary for
production, and perform substantially all the sales and marketing functions for the Company. The
agreement with REG, Inc. requires a per gallon fee, paid monthly, based on the number of gallons of
biodiesel produced or sold. In addition, REG will be paid an annual bonus based on a percentage of
the plants profitability with such bonus not to exceed $1,000,000 per year.
Payments were due the tenth of the month following the month for which such fees are computed or
payable. The agreement shall remain in force for three years after the end of the first month in
which product is produced for sale. The agreement shall continue until one party gives written
notice of termination to the other of a proposed termination date at least twelve months in advance
of a proposed termination date.
9
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
On June 5, 2009, the Company received from REG, Inc. a notice of termination of its management and
operational services agreement. The notification from REG, Inc. states that it shall constitute
such twelve month advance termination notice required by the terms of the agreement. The Company
and REG, Inc. operated under an amended management and operational services agreement dated
November 25, 2009. The management and operational services agreement expired on August 1, 2010.
The Company incurred management and operational service fees, feed stock procurement fees, and
sales fees with REG, Inc. For the nine months ended September 30, 2010 and 2009, the Company
incurred fees of $15,311 and $253,493, respectively. The amount payable to REG, Inc. as of
September 30, 2010 and December 31, 2009 was $-0- and $29,756, respectively.
The Company purchased feedstocks under a financing agreement from a company related to a member of
the board of directors during 2010. The agreement calls for specified fees based on gallons
produced and interest on feedstock purchases. For the nine months ended September 30, 2010, the
Company purchased feedstock and incurred fees plus interest of $6,394,446. The amount payable to
this related company as of September 30, 2010 was $5,672,128 and included in short-term borrowings
(see Note 4). The Company also purchased feedstocks from this related party during 2009 under
standard trade terms. The amount payable at December 31, 2009 was $1,017,325.
In August 2008, the Company entered into a tolling service agreement with REG, Inc. to process a
specified number of gallons of biodiesel from September to February 2009. Under the terms of the
agreement, REG, Inc. was to provide the raw material feedstock and pay a specified price per gallon
for processing. This agreement was completed in February 2009.
A member of the board of directors is also a member of the board of directors of the Companys
depository bank.
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Company has received refunds from an industrial new jobs training program. The Company funds
the program through diverting their state payroll tax withholdings. In the event these withholdings
arent enough to cover the bond payments, the Company will need to advance the funds to cover the
program costs. As of September 30, 2010, there was a total of $364,902 committed under the program
of which $239,444 remained to be covered by future state payroll tax withholdings.
In June 2007, the Company entered into a water use agreement with the City of Farley. The agreement
requires a minimum usage of 50,000 gallons per day over the life of the agreement, which expires in
2026. At September 30, 2010 and December 31, 2009, the remaining estimated minimum cost under the
agreement was $609,896 and $730,954, respectively.
NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the guidance set forth in ASC Topic 820 for assets and liabilities recognized
at fair value on a recurring basis. This guidance provides a comprehensive framework for measuring
fair value and expands disclosures which are required about fair value measurements. Specifically,
the guidance sets forth a definition of fair value and establishes a hierarchy prioritizing the
inputs to valuation techniques, giving the highest priority to quoted prices in active markets for
identical assets and liabilities and the lowest priority to unobservable value inputs. The adoption
of this guidance had an immaterial impact on the Companys financial statements. The guidance
defines levels within the hierarchy as follows:
| Level 1 Unadjusted quoted prices for identical assets and liabilities in active
markets; |
||
| Level 2 Quoted prices for similar assets and liabilities in active markets (other
than those included in Level 1) which are observable for the asset or liability, either
directly or indirectly; and |
||
| Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. |
10
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
The following tables set forth financial assets and liabilities measured at fair value in the
statement of financial position and the respective levels to which the fair value measurements are
classified within the fair value hierarchy as of September 30, 2010 and December 31, 2009:
September 30, 2010 (UNAUDITED) | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Carrying Amount | Active Markets for | Observable | Unobservable | |||||||||||||
on | Identical Assets | Inputs | Inputs | |||||||||||||
Balance Sheet | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial liabilities: |
||||||||||||||||
Commodity derivatives |
$ | (41,561 | ) | $ | (41,561 | ) | $ | | $ | | ||||||
December 31, 2009 | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Carrying Amount | Active Markets for | Observable | Unobservable | |||||||||||||
on | Identical Assets | Inputs | Inputs | |||||||||||||
Balance Sheet | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial liabilities: |
||||||||||||||||
Commodity derivatives |
$ | (5,737 | ) | $ | (5,737 | ) | $ | | $ | | ||||||
The Company enters into various commodity derivative instruments, including forward contracts,
futures, options and swaps. The fair value of the Companys derivatives are determined using
unadjusted quoted prices for identical instruments on the applicable exchange in which the Company
transacts. When quoted prices for identical instruments are not available, the Company uses forward
price curves derived from market price quotations. Market price quotations are obtained from
independent brokers, exchanges, direct communication with market participants and actual
transactions executed by the Company.
NOTE 10 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted ASC Topic 815, Derivatives and Hedging, on January 1, 2009. This guidance was
intended to improve financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their effects on an
entitys financial position, financial performance, and cash flows.
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the Company enters into contractual arrangements (derivatives)
as a means of managing exposure to changes in biodiesel prices and feedstock costs under
established procedures and controls. The Company has established a variety of approved derivative
instruments to be utilized in each risk management program, as well as varying levels of exposure
coverage and time horizons based on an assessment of risk factors related to each hedging program.
As part of its trading activity, the Company uses option and swap contracts offered through
regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market value of
biodiesel inventories and input costs.
Commodity Risk Management
Commodity price risk management programs serve to reduce exposure to price fluctuations on
purchases of feedstocks and biodiesel prices. The Company enters into over-the-counter and
exchange-traded derivative commodity instruments to hedge the commodity price risk associated with
feedstocks and commodity exposures. These agreements expire throughout 2010.
11
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Accounting for Derivative Instruments and Hedging Activities
All derivatives are designated as non-hedge derivatives. Although the contracts may be effective
economic hedges of specified risks, they do not meet the hedge accounting criteria of ASC 815. At
September 30, 2010 and December 31, 2009, the Company had net derivative liabilities of $(41,561)
and $(5,737) related to these instruments, respectively, with the related mark-to-market effects
included in Cost of sales in the statements operations.
The following tables set forth the fair value of derivatives not designated as hedging instruments
as of September 30, 2010 and December 31, 2009, respectively:
Liability Derivatives | Liability Derivatives | |||||||||||||||
September 30, 2010 (UNAUDITED) | December 31, 2009 | |||||||||||||||
Balance Sheet | Balance Sheet | |||||||||||||||
Location | Fair Value | Location | Fair Value | |||||||||||||
Commodity contracts Heat oil swaps |
Current liabilities | $ | (41,561 | ) | Current liabilities | $ | (5,737 | ) | ||||||||
During the three and nine months ended September 30, 2010 and 2009, net realized and unrealized
losses on derivative transactions were recognized in the statement of operations as follows:
Derivative (Gain) Loss | Derivative (Gain) Loss | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
Statement of | Statement of | |||||||||||||||
Operations Location | (Gain) Loss | Operations Location | (Gain) Loss | |||||||||||||
Commodity contracts Heat oil swaps |
Cost of sales | $ | 189,989 | Cost of sales | $ | (177,812 | ) | |||||||||
Derivative (Gain) Loss | Derivative (Gain) Loss | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
Statement of | Statement of | |||||||||||||||
Operations Location | (Gain) Loss | Operations Location | (Gain) Loss | |||||||||||||
Commodity contracts Heat oil swaps |
Cost of sales | $ | (165,703 | ) | Cost of sales | $ | 242,691 | |||||||||
NOTE 11 UNCERTAINTY
The accompanying financial statements have been prepared assuming that the Company will continue
as a going concern. For the nine months ended September 30, 2010, the Company generated
significant net losses of $3,308,703 and experienced significant fluctuations in input costs and
lack of demand for its products. The Federal blenders credit expired on December 31, 2009. If
legislative action is not taken in 2010, it may materially impair the Companys ability to
profitably produce and sell biodiesel. The Companys management and operational services agreement
with REG, Inc. expired on August 1, 2010 (See Note 7). In an effort to increase profit margins and
reduce losses, the Company anticipates producing biodiesel from refined animal fats, canola oil
and soybean oil to lower input costs. The Company also plans to seek to produce biodiesel on a
toll basis where biodiesel would be produced using raw materials provided by someone else.
Finally, the Company plans to scale back on its production or temporarily shut down the biodiesel
plant depending on the Companys cash situation and its ability to purchase raw materials to
operate the plant.
12
Table of Contents
WESTERN DUBUQUE BIODIESEL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
The Company has also undertaken significant borrowings to finance the construction of its
biodiesel plant. The loan agreements with the Companys lender contain restrictive covenants,
which require the Company to maintain minimum levels of working capital, and minimum financial
ratios including debt service coverage, fixed charge coverage and debt as a percentage of earnings
before interest, taxes, depreciation, and amortization (EBITDA). The Company was not in compliance
with certain restrictive covenants at September 30, 2010 and December 31, 2009, and it is
projected the Company will fail to comply with one or more loan covenants, including the working
capital covenant throughout the Companys 2010 fiscal year. This raises doubt about whether the
Company will continue as a going concern. These loan covenant violations constitute an event of
default under the Companys loan agreements which, at the election of the lender, could result in
the acceleration of the unpaid principal loan balance and accrued interest under the loan
agreements or the loss of the assets securing the loan in the event the lender elected to
foreclose its lien or security interest in such assets. The Companys ability to continue as a
going concern is dependent on the Companys ability to comply with the loan covenants and the
lenders willingness to waive any non-compliance with such covenants.
Management anticipates that if additional capital is necessary to comply with its loan covenants
or to otherwise fund operations, the Company may issue additional membership units through one or
more private placements. However, there is no assurance that the Company would be able to raise
the desired capital.
NOTE 12 SUBSEQUENT EVENTS
Management evaluated subsequent events through the date the financial statements were issued.
On October 7, 2010, the Company entered into an agreement to sell 2,000,000 gallons of biodiesel to
REG at a specified price. On October 29, 2010, the Company entered into another agreement with REG
to sell an additional 150,000 gallons.
13
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
We prepared the following discussion and analysis to help you better understand our financial
condition, changes in our financial condition, and results of operations for the three and nine
month periods ended September 30, 2010. You should read this discussion together with the financial
statements and notes and the information contained in our annual report on Form 10-K for the fiscal
year ended December 31, 2009, as amended.
Cautionary Statements Regarding Forward-Looking Statements
This report contains forward-looking statements that involve known and unknown risks and
relate to future events, our future financial performance and our expected future operations and
actions. In some cases, you can identify forward-looking statements by terminology such as may,
will, should, expect, plan, anticipate, believe, estimate, future, intend,
could, hope, predict, target, potential, or continue or the negative of these terms or
other similar expressions. These forward-looking statements are only our predictions based upon
current information and involve numerous assumptions, risks and uncertainties. Our actual results
or actions may differ materially from these forward-looking statements for many reasons, including
those described in this report. While it is impossible to identify all such factors, factors that
could cause actual results to differ materially from those estimated by us include, without
limitation:
| The federal governments failure to reinstate the $1.00 per gallon biodiesel blenders
credit (which expired December 31, 2009) or extend the small agri-biodiesel producers
credit (set to expire December 31, 2010); |
| Our ability to secure and retain service providers to replace Renewable Energy Group,
Inc. (REG) after our Management and Operational Services Agreement (MOSA) terminated on
August 1, 2010; |
| The availability and terms of credit or equity financing needed to continue operations
if our income from operations is insufficient for us to continue producing biodiesel; |
| Our ability to generate free cash flow to invest in our business and service our debt; |
| Our ability to comply with our loan covenants and our lenders response to our
noncompliance with such covenants; |
| Our ability to market our products and our reliance on others to market our products; |
| Fuel prices, diesel and biodiesel consumption and consumer attitudes regarding biodiesel
use; |
| Prices of vegetable oils (particularly soybean oil), animal fats and other feedstock; |
| Our ability to enter into toll manufacturing agreements or other arrangements that shift
responsibility for feedstock procurement and costs to other parties; |
| The continued imposition of tariffs or other duties on biodiesel exported to Europe; |
| Overcapacity within the biodiesel industry resulting in increased competition and costs
for feedstock and/or decreased prices for our biodiesel and glycerin; |
| Changes in soy-based biodiesels qualification under the Renewable Fuel Standard (RFS)
and similar legislation; |
| Decreased availability of soybean oil, animal fat or other feedstock; |
| Our ability to locate alternative feedstock to respond to market conditions,
particularly since we lack the capability to pre-treat and process raw animal fats and
other crude vegetable oils at our plant; |
| Laws, tariffs, trade or other controls or enforcement practices such as: national, state
and local energy policy; federal biodiesel tax incentives; and environmental laws and
regulations; |
| The biodiesel industrys ability to successfully lobby for legislation beneficial to the
biodiesel industry; |
14
Table of Contents
| Changes in plant production capacity or technical difficulties in operating the plant,
including changes due
to events beyond our control or due to intentional reductions or shutdowns; |
| Changes and advances in biodiesel production technology, including our competitors
ability to process raw animal fats or other feedstock which we cannot process; |
| Competition from alternative fuels; and |
| Other factors described in this report. |
We undertake no duty to update these forward-looking statements, even though our situation may
change in the future. We cannot guarantee future results, events, activity levels, performance, or
achievements. You should not put undue reliance on any forward-looking statements, which speak only
as of the date of this report. You should read this report completely and with the understanding
that our actual future results may differ materially from what we currently expect. We qualify our
forward-looking statements by these cautionary statements.
Overview
Western Dubuque Biodiesel, LLC (we or us) was formed on November 14, 2005 as an Iowa
limited liability company. We own and operate a 30 million gallon per year biodiesel production
plant in Farley, Dubuque County, Iowa and produce and sell biodiesel and its primary co-product,
glycerin.
On December 31, 2009, the biodiesel mixture tax credits, including the excise tax credit and
the income tax credit (collectively, the biodiesel blenders credit) expired. The biodiesel
blenders credit provided a $1.00 per gallon excise tax credit and a $1.00 per gallon income tax
credit for biodiesel mixtures. The two credits are coordinated so that a taxpayer cannot claim both
credits for the same biodiesel. The biodiesel industry depends on the biodiesel blenders credit to
make biodiesel cost-competitive with petroleum-based diesel. While management anticipates that the
biodiesel blenders credit will be reinstated within the next several months, this important
federal tax incentive may never be reinstated.
For the three months covered by this report, we did not produce biodiesel and generated net
losses of $1,499,082. As of the date of this report, we are not producing biodiesel. We are
currently out of compliance with our loan covenants with our lender, and we anticipate that we will
be out of compliance with our loan covenants during the remainder of 2010. Our net losses, combined
with the loss of the biodiesel blenders credit, termination of the MOSA with REG on August 1,
2010, and our failure to satisfy our loan covenants, have raised doubts as to our ability to
continue as a going concern.
Results of Operations for the Three Months Ended September 30, 2010
The following table shows the results of our operations and the percentage of revenues, cost
of sales, operating expenses and other items in relation to total revenues for the quarters ended
September 30, 2010 and 2009:
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Income Statement Data | Amount | Percent | Amount | Percent | ||||||||||||
Revenues |
$ | 77,245 | 100.00 | % | $ | 5,017,657 | 100.00 | % | ||||||||
Cost of Sales |
1,105,736 | 1,431.37 | % | 5,744,038 | 114.48 | % | ||||||||||
Gross Profit (loss) |
(1,028,491 | ) | (1,331.47 | )% | (726,381 | ) | (14.48 | )% | ||||||||
Operating Expenses |
130,103 | 168.43 | % | 125,762 | 2.50 | % | ||||||||||
Other Income (Expense) |
(340,488 | ) | (440.79 | )% | (248,753 | ) | (4.96 | )% | ||||||||
Net Income (Loss) |
$ | (1,499,082 | ) | (1,940.68 | )% | $ | (1,100,896 | ) | (2.19 | )% | ||||||
15
Table of Contents
Revenues
Revenues from operations for the quarter ended September 30, 2010 were $77,245, of which
$67,146 was incentive funds. Our revenues are significantly lower than in the same period in 2009
because we sold significantly less biodiesel during the quarter ended September 30, 2010 due to the
expiration of the blenders credit and unfavorable market conditions. Moreover, we received less in
incentive funds compared to incentive funds of $351,407 for the same period in 2009. For the three
months ended September 30, 2010, we incurred fees from REG of $15,311 under the MOSA and no amounts
were payable as of September 30, 2010, as these fees were reflected in the sales price for our
biodiesel.
Industry-wide factors affect our operating and financial performance. Our operating results
are largely driven by the prices at which we sell our biodiesel and glycerin, feedstock costs and
other operating costs. In addition, our revenues are impacted by such factors as our dependence on
one or a few major customers to market and distribute our products; the intensely competitive
nature of our industry; the extensive environmental laws that regulate our industry; legislation at
the federal, state and/or local level; and changes in biodiesel supports and incentives.
Average B100 biodiesel prices for the Upper Midwest, as reported by the Jacobsen Publishing
Company, for the months of July, August and September were $3.15, $3.28, and $3.31, respectively,
slightly up from the respective average prices of $2.94, $3.14 and $3.09 for the same periods in
2009. However, diesel fuel prices per gallon are lower than biodiesel prices, and current economic
conditions have resulted in decreased demand for biodiesel and other fuels. Moreover, the loss of
the biodiesel blenders credit has further decreased the ability of biodiesel fuel prices to
compete with petroleum-based diesel. We typically expect even lower demand in the winter months
because blenders decrease their blend percentages due to cold flow concerns. Additionally, there is
lower demand for biodiesel in European markets due to tariffs imposed on biodiesel imported from
the U.S. We expect these trends to continue for the remainder of 2010. Management anticipates that
there may be increased demand for biodiesel under the EPAs final RFS2 regulations discussed in our
annual report on Form 10-K. There can be no assurance, however, that the RFS2 will increase demand
for biodiesel, and any increase may be offset by the loss of the biodiesel blenders credit. If we
cannot sell our biodiesel at acceptable prices for sustained periods, we expect continued temporary
shutdowns, and we may have to permanently shut down the plant.
Cost of Sales
The primary components of cost of sales from biodiesel production are raw materials
(feedstock; hydrochloric acid; methanol; and sodium methylate), energy (natural gas and
electricity), labor and depreciation on process equipment. Biodiesel sales for the three-month
period ending September 30, 2010 were significantly less than sales for the same period in 2009.
Our costs of sales in 2010 were also less, due primarily to a lack of sales and lower labor costs
due to a reduced workforce.
Our plant can process soybean oil, canola oil and refined animal fats. Soybean oil prices
remain high in comparison to prices at which we can sell our biodiesel. Jacobsen Publishing Company
reported that the central Illinois average July, August and September 2010 soybean oil prices were
$0.3525, $0.3767 and $0.3918 per pound respectively, as compared to $0.3180, $0.3373 and $0.3105
per pound for the same months in 2009. Our ability to use feedstock other than soybean oil and
refined animal fats depends on whether we can gain access to a consistent feedstock supply at
competitive prices and obtain feedstock that has been pretreated for use at our plant if necessary.
If we cannot obtain adequate feedstock at affordable costs for sustained periods, we expect
temporary shutdowns to continue, and we may have to permanently shut down the plant.
Operating Expenses
Operating expenses were $130,103 for the three months ended September 30, 2010 and $125,762
for the same period in 2009. Our operating expenses are primarily consulting and professional fees
and office and administrative expenses. We expect that going forward our operating expenses will
remain consistent.
16
Table of Contents
Other Income (Expenses)
Our other income and expenses for the three months ended September 30, 2010 was primarily
interest expense of $346,748. We expect our other income (expenses) to remain consistent for each
quarter.
Results of Operations for the Nine Months Ended September 30, 2010
The following table shows the results of our operations and the percentage of revenues, costs
of goods sold, operating expenses and other items in relation to total revenues for the nine months
ended September 30, 2010 and September 30, 2009:
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Income Statement Data | Amount | Percent | Amount | Percent | ||||||||||||
Revenues |
$ | 292,158 | 100.00 | % | $ | 8,884,194 | 100.00 | % | ||||||||
Cost of Sales |
2,269,894 | 776.94 | % | 9,854,115 | 110.92 | % | ||||||||||
Gross Profit (Loss) |
(1,977,736 | ) | (676.94 | )% | (969,921 | ) | (10.92 | )% | ||||||||
Operating Expenses |
393,585 | 134.72 | % | 421,139 | 4.74 | % | ||||||||||
Other Income (Expense) |
(937,382 | ) | (320.85 | )% | (729,103 | ) | (8.21 | )% | ||||||||
Net Income (Loss) |
$ | (3,308,703 | ) | (1132.50 | )% | $ | (2,120,163 | ) | (23.87 | )% | ||||||
Revenues
Our revenues are significantly lower for the nine months ended September 30, 2010 than the
same period in 2009, primarily due to producing and selling less biodiesel and receiving less
incentive funds in 2010.
Cost of Sales
Our costs of sales for the first nine months of 2010 are substantially less than our costs of
sales for the same period in 2009, due primarily to decreased sales, gains on derivative
instruments in 2010 and lower labor costs due to a reduced workforce.
Operating Expenses
Our operating expenses were $393,585 and $421,139 for the nine months ended September 30, 2010
and 2009, respectively. Our operating expenses are primarily due to expenses for consulting and
professional fees and office and administrative expenses. We expect that going forward our
operating expenses will remain consistent.
Other Income (Expenses)
Our other expenses of $937,382 for the nine months ended September 30, 2010 resulted primarily
from interest expense of $962,456, partially offset by our other income and interest income. We
expect that going forward our other income (expenses) will remain consistent.
17
Table of Contents
Changes in Financial Condition for the Nine Months Ended September 30, 2010
The following table sets forth our sources of liquidity at September 30, 2010 and December 31,
2009:
September 30, 2010 | December 31, 2009 | |||||||
Current Assets |
$ | 9,422,334 | $ | 7,505,501 | ||||
Current Liabilities |
$ | 30,529,274 | $ | 26,959,633 | ||||
Total Members Equity |
$ | 13,975,901 | $ | 17,284,604 |
Current Assets
The increase in current assets is primarily due to an increase in inventory, partially offset
by a decrease in incentive receivables and cash.
Current Liabilities
Our long-term debt is classified as a current liability due to our failure to meet the
financial covenants under our term loan. These loan covenant violations constitute an event of
default under our loan agreement which, at our lenders election, could result in the acceleration
of the unpaid principal loan balance and accrued interest or a loss of the assets securing the loan
if the lender elects to foreclose the loan.
The increase in our current liabilities is primarily due to amounts we owe to Innovative Ag
Services (IAS), as described in Liquidity and Capital Resources-Debt Financing.
Members Equity
The change in members equity is due to an increase in the accumulated deficit from $8,945,492
to $12,254,195 due to our net loss.
Plan of Operations for the Next 12 Months
Plant Operations
We did not produce biodiesel during the quarter covered by this report. As of the date of this
report, we are not producing biodiesel. We have to contracts for biodiesel sales that we entered
into following the period covered by this report, as discussed in PART II Item 5: Other
Information. Our MOSA with REG terminated effective August 1, 2010. We are evaluating alternative
biodiesel and glycerin marketing arrangements. Our failure to contract with a biodiesel or glycerin
marketer on acceptable terms could significantly and negatively impact our revenues and our ability
to operate the biodiesel plant.
We reduced our employment levels in comparison with the same period in 2009 because the
biodiesel plant is experiencing reduced production and shutdowns. During the quarter covered by
this report, we placed three additional employees on layoff status. As of September 30, 2010, we
have 12 full-time employees, including our general manager, Tom Brooks. We now directly employ our
general manager, who was previously employed by REG and provided services for our plant under the
MOSA. Mr. Brooks will receive an annual salary of $110,000 and will be eligible for insurance and
disability benefits. Additionally, subject to board approval, he will be eligible to participate in
the company incentive bonus program. We currently do not have an operations manager.
Operating Budget and Financing of Plant Operations
We have exhausted the funds available under our debt facilities and do not have further
commitments for funds from any lender. We do not believe that market conditions will be favorable
for us to secure additional debt or equity financing during 2010. However, management continues to
consider opportunities to increase our liquidity, including through additional debt or equity
financing.
18
Table of Contents
Our ability to finance our operations during the next 12 months depends in large part on
whether we are producing biodiesel and whether we can sell the biodiesel we produce. Although
Management anticipates the market would improve if the blenders credit is reinstated, it is
unclear whether the credit will be reinstated. When our plant is not operating, our operating costs
are less since they generally consist of maintaining the plant, including employing a smaller group
of employees to maintain plant equipment, as well as our office staff necessary to continue to
operate the company. However, if we cannot produce and sell the biodiesel at prices that support
our operations, we anticipate that we will not have sufficient cash to continue operations for a
sustained period.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance
with generally accepted accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. These policies are described in the notes to the financial
statements.
Liquidity and Capital Resources
Cash Flows
Cash Flow from Operating Activities. We used net cash of $6,630,257 in operating activities
for the nine months ended September 30, 2010, compared to $1,810,658 for the nine months ended
September 30, 2009. This was due to increases in inventory partially offset by decreases in
accounts payable and incentives receivable.
Cash Flow from Investing Activities. We used net cash of $58,203 in investing activities for
the nine months ended September 30, 2010 and $110,979 for the nine months ended September 30, 2009.
Cash Flow from Financing Activities. Net cash provided by financing activities was $4,930,682
for the nine months ended September 30, 2010, as compared to net cash used in financing activities
of $2,421,140 for the nine months ended September 30, 2009. Cash provided by financing activities
increased due to the advances from IAS, and cash used decreased because our loan payments were
temporarily reduced.
Sources of Funds
Equity Financing. We used all of the proceeds from our equity offerings to fund the plant
construction and operations. We do not believe that market conditions will be favorable for us to
secure additional equity financing for at least the remainder of the 2010 fiscal year. However,
management continues to consider all opportunities to increase our liquidity, including through
additional equity financing.
Debt Financing. In October 2006, we closed on our term loan with Marshall Bankfirst. In July
2009, state banking regulators shut down Marshall Bankfirst and Beal Bank Nevada became our new
lead lender. The loan documents we executed with our lender describe the requirements of our term
loan in more detail. The loan term is seventy-four months, which consists of a construction phase
and a term phase. The term phase commenced on March 1, 2008. We selected the variable rate option
for the loan of 0.25% over the prime rate (3.50% at September 30, 2010). Monthly payments are
$339,484 including interest at a variable rate. Payments are calculated in an amount necessary to
amortize the principal amount of this note plus interest thereon over a 10-year period. The
remaining unpaid principal balance, together with all accrued but unpaid interest, is due in full
on January 1, 2013. As of September 30, 2010, the outstanding balance on our term loan was
$24,499,040. We have exhausted the funds available under our debt facilities and do not have
further commitments for funds from any lender.
Our lender allowed us to make reduced payments on our term loan of $150,000 per month for nine
months beginning in November 2009. Effective July 1, 2010, we amended our loan agreement to reduce
our monthly loan payments to $150,000 beginning July 1, 2010 and continuing through and including
November 1, 2010. Under the amendment, our monthly payment will increase to $339,484 beginning
December 1, 2010 and payments will otherwise be payable and applied according to the original terms
of the loan agreement. We are currently discussing the possibility of further reduced payments
with our lender, but we have not entered into any alternative agreements with regard to our
December 1 payment or any future payments.
19
Table of Contents
We executed a mortgage in favor of our lender creating a first lien on substantially all of
our assets, including our real estate, plant, all personal property located on our property and our
revenues and income. Due to our lenders security interest in our assets, we cannot sell our assets
without its permission, which could limit our operating flexibility. Additionally, our term loan
agreement imposes various covenants upon us which may restrict our operating flexibility. The term
loan requires us to: maintain up to $125,000 in a capital improvements reserve fund that we must
replenish as we use these funds for capital improvement expenditures; maintain certain financial
ratios; and obtain our lenders permission before making any significant changes in our material
contracts with third-party service providers. The term loan requires us to certify to our lender at
intervals designated in the term loan that we are meeting the financial ratios required by the loan
agreement.
We are not in compliance with these restrictive covenants as of September 30, 2010, and
management projects that we will fail to comply with one or more loan covenants through at least
the remainder of our 2010 fiscal year. Failure to comply with such covenants constitutes a default
under our loan agreement. While we are in default, our lender may elect to take several actions,
including, without limitation, acceleration of the unpaid principal balance and accrued interest or
foreclosure on its mortgage and security interest. Such actions could result in the loss of our
assets and a permanent shutdown of our plant.
Although our lender has not elected to exercise its remedies as of the date of this report, it
may do so in the future. Our lender has not provided us a waiver of our failure to satisfy the
covenants or otherwise agreed not to take action. Our default has caused doubts about our ability
to continue as a going concern.
During the fourth quarter of 2009, we entered into an agreement with ADM to purchase canola
oil for feedstock to produce biodiesel. We also agreed to sell the biodiesel that was produced to
ADM. We engaged Innovative Ag Services (IAS) to provide financing for us to purchase the feedstock
from ADM. Jack Friedman, one of our directors and a member of our audit committee, is the Chief
Executive Officer of IAS. We agreed to pay IAS interest on the financing provided, as well as a fee
per gallon of biodiesel produced with the feedstock. The biodiesel that ADM agreed to purchase from
us under this agreement was delivered before the end of 2009. In March 2010, we entered into a
subsequent agreement with IAS to purchase approximately 1,975,000 gallons of soybean oil. In
exchange for this trade financing, we granted IAS a security interest in our biodiesel and
feedstock inventory. As of September 30, 2010, we owed IAS $5,672,128 under these arrangements.
Government Programs and Grants. We have entered into a loan agreement with the Iowa Department
of Economic Development (IDED) for $400,000. This loan is part of the IDEDs Value Added Program
and $100,000 of the loan is forgivable. As of September 30, 2010, we owe $195,000. The loan
requires us to maintain production rates at our nameplate capacity and certain employment levels.
Effective September 17, 2009, IDED agreed to amend the loan requirements to extend the project
completion date and the project maintenance date. This means that beginning on May 31, 2011, we
must have 30 full time employees and maintain those positions through May 31, 2013. Any failure to
satisfy these requirements constitutes a default, and may result in acceleration of the loan, as
well as partial or full repayment of the forgivable portion if IDED exercises the remedies
available to it.
On July 1, 2009, the USDA preliminarily approved our application for financial assistance. If
finalized as proposed, the arrangement would allow us to use a $10 million guarantee by the USDA to
secure a new $20 million loan from a third-party lender, which we expect we would use to replace
our existing debt financing. However, final approval and receipt of the funds is contingent upon
several conditions, some of which are outside of our control. For example, we do not have an
agreement with any third-party lender to lend us the funds. As a result, we may be unable to obtain
third-party funding or satisfy the requirements for receipt of funds under the USDA guarantee.
Distribution to Unit Holders
As of September 30, 2010, our board of directors had not declared any distributions.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
20
Table of Contents
Item 3. Quantitative and Qualitative Disclosures about Market Risks
We are exposed to the impact of market fluctuations of interest rates and commodity prices as
discussed below. We have no exposure to foreign currency risk as we conduct all of our business in
U.S. Dollars.
Interest Rate Risk
We are exposed to market risk from interest rate changes, resulting primarily from holding
loans that bear variable interest rates. We have prepared the following sensitivity analysis
showing the anticipated effect on our income from a 10% adverse change in interest rates for a
one-year period.
Outstanding Variable Rate Debt | Interest Rate at | Adverse 10% Change | Annual Adverse | |||||||||||||
at September 30, 2010 | September 30, 2010 | in Interest Rates | Change to Income | |||||||||||||
$ | 24,499,040 | 3.50 | % | 3.850 | % | $ | (82,643 | ) | ||||||||
$ | 5,672,128 | 7.25 | % | 7.975 | % | $ | (4,301 | ) |
Commodity Price Risk
We use derivative financial instruments as part of an overall strategy to manage market risk.
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as
soybean oil, and finished products, such as biodiesel, by using derivative instruments. In
practice, as markets move, we actively manage our risk and adjust hedging strategies as
appropriate. Although we believe our hedge positions accomplish an economic hedge against our
future purchases, they do not qualify for hedge accounting, which would match the gain or loss on
our hedge positions to the specific commodity purchase being hedged. We treat our hedge positions
as non-hedge derivatives, which means as the current market price of our hedge positions changes,
the gains and losses are immediately recognized in our cost of goods sold. The immediate
recognition of hedging gains and losses under our treatment of our hedge positions can cause net
income to be volatile from quarter to quarter due to the timing of the change in value of the
derivative instruments relative to the cost and use of the commodity being hedged. We do not enter
into these derivative financial instruments for trading or speculative purposes, nor do we
designate these contracts as hedges for accounting purposes pursuant to the requirements of ASC
815, Derivatives and Hedging.
At September 30, 2010 and December 31, 2009, we had net derivative liabilities of $41,561 and
$5,737, respectively, related to home heating oil swaps commodity contracts, with the related
mark-to-market effects included in Cost of Sales in the statements of operations. For the nine
months ended September 30, 2010, we recorded a gain of $165,703 to cost of sales related to
derivative contracts.
Several variables could affect the extent to which price fluctuations of soybean oil, natural
gas or biodiesel impact our derivative instruments. However, it is likely that commodity cash
prices will have the greatest impact on the derivative instruments with delivery dates nearest the
current cash price. As we move forward, additional protection may be necessary. As the prices of
these hedged commodities move in reaction to market trends and information, our statement of
operations will be affected depending on the impact such market movements have on the value of our
derivative instruments. Depending on market movements, these price protection positions may cause
immediate adverse effects, but are intended to produce long-term growth for us.
A sensitivity analysis has been prepared to estimate our exposure to soybean oil and biodiesel
price risk. The table presents the net fair value of our derivative instruments as of September 30,
2010 and December 31, 2009, and the potential loss in fair value resulting from a hypothetical 10%
adverse change in such prices. The fair value of the positions is a summation of the fair values
calculated by valuing each net position at quoted market prices as of the applicable date. The
results of this analysis, which may differ from actual results, are as follows:
Effect of | ||||||||
Fair Value | Adverse Change | |||||||
September 30, 2010 |
$ | (41,561 | ) | $ | (47,930 | ) | ||
December 31, 2009 |
$ | (5,737 | ) | $ | (23,098 | ) |
21
Table of Contents
Item 4. Controls and Procedures
Our management, including our Chief Executive Officer (the principal executive officer), along
with our Chief Financial Officer (the principal financial officer), have reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended) as of September 30, 2010. Based upon this review and
evaluation, these officers have concluded that our disclosure controls and procedures are not
effective due to the material weakness described below.
Our management and our audit committee have concluded that during the period covered by this
report, there were deficiencies that existed in the design or operation of our internal control
over financial reporting that adversely affected our disclosure controls and that may be considered
to be a material weakness. Specifically, there were several adjustments related to the September
30, 2010 financial statements that were proposed and recorded, as well as revisions that were made,
that could be considered to be a material weakness. In light of the foregoing, our audit committee
will increase its review of our disclosure controls and procedures. The material weakness will not
be considered remediated until the applicable remedial controls operate for a sufficient period of
time and management has concluded, through testing, that these controls are operating effectively.
Our management, including our principal executive officer and principal financial officer,
have reviewed and evaluated any changes in our internal control over financial reporting that
occurred as of September 30, 2010 and, except as set forth above, there has been no change that has
materially affected or is reasonably likely to materially affect our internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Risk factors are discussed in our annual report on Form 10-K, as amended. The risks described
in our annual report are not the only risks facing us. The following Risk Factors supplement and
update the Risk Factors disclosed in our annual report and should be read with the section above
entitled Managements Discussion and Analysis of Financial Condition and Results of Operations
and the risk factors in our annual report, as amended.
There are doubts about our ability to continue as a going concern and if we cannot continue
our business, our units may have little or no value. As discussed in Note 11 to the accompanying
financial statements, several unfavorable conditions have created uncertainty regarding our ability
to continue to operate as a going concern, including our net losses. Additionally, we are currently
in violation of the financial covenants contained in our term loan agreement, which, at our
lenders election, could result in the acceleration of the unpaid principal balance and accrued
interest under the loan agreement. This would require us to immediately repay all amounts that we
owe to our lender. We do not anticipate having the funds to immediately repay the loan if our
lender accelerates our loan. Moreover, our MOSA with REG terminated effective August 1, 2010, and
we do not have alternative service providers. In addition, because of the expiration of the
biodiesel blenders credit, we do not have any contracts for the sale of our product and are not
operating our plant as of the date of this report. If we cannot continue to operate as a going
concern, we may be forced to file for bankruptcy or otherwise liquidate our assets. This could
result in the loss of some or all of the value of our units.
Loss of or ineligibility for favorable tax benefits for biodiesel production could result in
the permanent shutdown of our plant. The biodiesel industry and our business are assisted by
various federal biodiesel incentives
such as the subsidy for small agri-biodiesel producers and the biodiesel blenders credit. The
biodiesel blenders credit expired on December 31, 2009 and the subsidy for small producers is set
to expire December 31, 2010. When the biodiesel blenders credit expired, it resulted in
substantially all biodiesel producers in the United States ceasing operations. If the biodiesel
blenders credit is not reinstated or is reinstated at a lower level, it may result in our failure
which could result in the loss of some or all of the value of our units.
22
Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
As described in Part II, Item 2 Liquidity and Capital Resources, we are in default of the
covenants contained in our term loan agreement with our lender. Our failure to comply with these
covenants is an event of default, entitling our lender to exercise its remedies under the loan
documents and applicable law, including, but not limited to, acceleration of the unpaid principal
balance and accrued interest and foreclosure of its mortgage and security interest. As of the date
of this report, our lender has also chosen not to exercise its remedies. However, if we continue to
be in default, our lender may not continue to forebear from exercising such additional remedies.
Item 4. (Removed and Reserved)
Item 5. Other Information
Subsequent to the period covered by this report, we entered into two agreements with REG for
sales of biodiesel. On October 7, we sold 2,000,000 gallons of biodiesel to REG and on October 29,
we sold 150,000 gallons to REG. These sales constitute substantially all of our biodiesel
inventory as of September 30.
Item 6. Exhibits
The following exhibits are filed as part of, or are incorporated by reference into, this
report:
Exhibit | Method of | |||||
No. | Description | Filing | ||||
10.1 | Fourth Amendment to Loan Agreement
|
* | ||||
31.1 | Certificate pursuant to 17 CFR 240 13a-14(a)
|
* | ||||
31.2 | Certificate pursuant to 17 CFR 240 13a-14(a)
|
* | ||||
32.1 | Certificate pursuant to 18 U.S.C. Section 1350
|
* | ||||
32.2 | Certificate pursuant to 18 U.S.C. Section 1350
|
* |
(*) | Filed herewith. |
23
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WESTERN DUBUQUE BIODIESEL, LLC |
||||
Date: November 15, 2010 | /s/ Bruce Klostermann | |||
Bruce Klostermann | ||||
Vice Chairman and Director (Principal Executive Officer) |
||||
Date: November 15, 2010 | /s/ George Davis | |||
George Davis | ||||
Treasurer and Director (Principal Financial and Accounting Officer) |
24