Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Iowa Renewable Energy, LLC | c12456exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Iowa Renewable Energy, LLC | c12456exv31w2.htm |
EX-10.1 - EXHIBIT 10.1 - Iowa Renewable Energy, LLC | c12456exv10w1.htm |
EX-32.1 - EXHIBIT 32.1 - Iowa Renewable Energy, LLC | c12456exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Iowa Renewable Energy, LLC | c12456exv32w2.htm |
EX-10.2 - EXHIBIT 10.2 - Iowa Renewable Energy, LLC | c12456exv10w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarter ended December 31, 2010
OR
o | Transition report under Section 13 or 15(d) of the Exchange Act. |
For the transition period from to
Commission file number 000-52428
IOWA RENEWABLE ENERGY, LLC
(Exact name of small business issuer as specified in its charter)
Iowa | 20-3386000 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
1701 East 7th Street, P.O. Box 2, Washington, Iowa 52353
(Address of principal executive offices)
(Address of principal executive offices)
(319) 653-2890
(Issuers telephone number)
(Issuers telephone number)
Indicate by check mark whether the registrant: (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 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 Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the Registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
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
State the number of shares outstanding for each of the issuers classes of common equity as of the
latest practicable date:
As of February 14, 2011 there were 26,331 units outstanding.
INDEX
Page No. | ||||||||
3 | ||||||||
3 | ||||||||
13 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
25 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Unaudited Financial Statements |
Iowa Renewable Energy, LLC
Unaudited Balance Sheets
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 305,964 | $ | 479,309 | ||||
Due from broker |
310,390 | 310,390 | ||||||
Inventory |
269,644 | 372,547 | ||||||
Prepaids and other assets |
51,930 | 71,641 | ||||||
937,928 | 1,233,887 | |||||||
Property and Equipment: |
||||||||
Land |
420,000 | 420,000 | ||||||
Plant and processing equipment |
40,742,442 | 40,742,442 | ||||||
Office building, furniture and fixtures |
588,965 | 588,965 | ||||||
Equipment and vehicles |
240,241 | 240,241 | ||||||
41,991,648 | 41,991,648 | |||||||
Accumulated depreciation |
(9,273,612 | ) | (8,615,336 | ) | ||||
32,718,036 | 33,376,312 | |||||||
Other Assets: |
||||||||
Cash, restricted by loan agreement |
371,055 | 730,288 | ||||||
Financing costs, net |
216,220 | 338,174 | ||||||
587,275 | 1,068,462 | |||||||
$ | 34,243,239 | $ | 35,678,661 | |||||
Liabilities and Members Equity |
||||||||
Current Liabilities: |
||||||||
Current maturities of long-term debt |
$ | 27,434,667 | $ | 27,457,729 | ||||
Accounts payable and accrued expenses |
410,238 | 311,607 | ||||||
Total current liabilities |
27,844,905 | 27,769,336 | ||||||
Long-Term Debt |
| | ||||||
Commitments |
||||||||
Members Equity: |
||||||||
Member contributions, net of issuance costs, units
outstanding December 31, 2010 and September 30, 2010 26,331 |
23,165,422 | 23,165,422 | ||||||
Accumulated (deficit) |
(16,767,088 | ) | (15,256,097 | ) | ||||
6,398,334 | 7,909,325 | |||||||
$ | 34,243,239 | $ | 35,678,661 | |||||
See Notes to Unaudited Financial Statements.
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Iowa Renewable Energy, LLC
Unaudited Statements of Operations
Three Months Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
Sales |
$ | 70,426 | $ | 8,455,587 | ||||
Federal incentives |
| 187,632 | ||||||
70,426 | 8,643,219 | |||||||
Cost of sales |
1,022,490 | 8,765,323 | ||||||
Gross (loss) |
(952,064 | ) | (122,104 | ) | ||||
Operating expenses: |
||||||||
General and administrative |
95,863 | 350,817 | ||||||
Depreciation |
9,500 | 9,500 | ||||||
105,363 | 360,317 | |||||||
(Loss) before other income (expense) |
(1,057,427 | ) | (482,421 | ) | ||||
Other income (expense): |
||||||||
Interest and other income |
96,152 | 391,182 | ||||||
Interest expense |
(549,716 | ) | (303,565 | ) | ||||
Net (loss) |
$ | (1,510,991 | ) | $ | (394,804 | ) | ||
Weighted average units outstanding |
26,331 | 26,331 | ||||||
Net (loss) per unit basic and diluted |
$ | (57.38 | ) | $ | (14.99 | ) | ||
See Notes to Unaudited Financial Statements.
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Iowa Renewable Energy, LLC
Unaudited Statements of Cash Flows
Three Months Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net (loss) |
$ | (1,510,991 | ) | $ | (394,804 | ) | ||
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities: |
||||||||
Depreciation |
658,276 | 662,502 | ||||||
Amortization |
121,954 | 25,430 | ||||||
Unrealized (gain) loss on derivative financial instruments |
| (42,604 | ) | |||||
Change in working capital components: |
||||||||
Decrease in due from broker |
| 137,661 | ||||||
(Increase) in accounts receivable |
| (162,363 | ) | |||||
Decrease in inventory |
102,903 | 2,461,266 | ||||||
Decrease in prepaids and other assets |
19,711 | 69,408 | ||||||
Increase (decrease) in accounts payable and accrued expenses |
98,631 | (305,605 | ) | |||||
Net cash provided by (used in) operating activities |
(509,516 | ) | 2,450,891 | |||||
Cash Flows from Investing Activity,
(increase) decrease in cash restricted |
359,233 | (24,778 | ) | |||||
Cash Flows from Financing Activity,
payment on long-term borrowings |
(23,062 | ) | (1,044,525 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
(173,345 | ) | 1,381,588 | |||||
Cash and cash equivalents: |
||||||||
Beginning |
479,309 | 649,297 | ||||||
Ending |
$ | 305,964 | $ | 2,030,885 | ||||
Supplemental
Disclosure of Cash Flow Information, cash payments for interest |
$ | 383,753 | $ | 303,518 |
See Notes to Unaudited Financial Statements.
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Table of Contents
Iowa Renewable Energy, LLC
Notes to Unaudited Financial Statements
Note. 1 Nature of Business and Significant Accounting Policies
Nature of business:
Iowa Renewable Energy, LLC (the Company), located in Washington, Iowa, was formed in April 2005 to
pool investors to build a biodiesel manufacturing plant with an annual capacity of 30 million
gallons. The Company was in the development stage until July 2007, when it commenced operations.
See Note 6 for discussion of managements plans for current operations.
Basis of presentation:
The accompanying unaudited condensed interim financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. These financial statements and related notes
should be read in conjunction with the financial statements and notes thereto included in the
Companys audited financial statements for the year ended September 30, 2010 included in the
Companys Annual Report on Form 10-K. In the opinion of management, the condensed interim financial
statements reflect all adjustments (consisting of normal recurring accruals) that we consider
necessary to present fairly the Companys results of operations, financial position and cash flows.
The results reported in these condensed interim financial statements should not be regarded as
necessarily indicative of results that may be expected for the entire year.
Significant accounting policies:
Use of 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 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.
Concentrations of credit risk: The Companys cash balances are maintained in bank deposit
accounts which at times may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
Cash and cash equivalents: The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
Restricted cash: Includes deposits to custodial accounts held by our lender. Debt service
reserve: The Company is required under the terms of its debt agreement to make monthly deposits to
a debt service reserve until such time as the balance equals $1,319,265. Monthly deposits shall
consist of not less than one-third of all available monthly projected EBITDA. Capital improvements
reserve: The Company is required under the terms of its debt agreement to make deposits into an
account held by the Lender. The fund will be used to fund capital improvements. During the term of
the loan, the capital improvements reserve must be maintained at $125,000. As part of the Line of
credit agreement, discussed in Note 4 below, the Lenders will defer principal payments and pull
interest payments from the debt service reserve. The lenders began taking interest payments from
the debt service reserve in June of 2010. The balance in the debt service reserve at December 31,
2010 is $1,709 while the Capital Improvements reserve stands at $369,345.
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. The Company had
no outstanding accounts receivable as of December 31, 2010 or September 30, 2010.
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Iowa Renewable Energy, LLC
Notes to Unaudited Financial Statements
The Companys policy is to charge simple interest on trade receivables past due balances; accrual
of interest is discontinued when management believes collection is doubtful. Receivables are
considered past due based upon payment terms set forth at the date of the related sale. The Company
had no receivables accruing interest at December 31, 2010 or September 30, 2010.
Inventory: Inventory is valued at the lower of cost or market using the first-in, first
out (FIFO) method. Inventory consists of the following as of December 31, 2010 and September 30,
2010:
December 31, 2010 | September 30, 2010 | |||||||
Raw material |
$ | 126,520 | $ | 111,951 | ||||
Finished goods |
143,124 | 261,596 | ||||||
$ | 269,644 | $ | 372,547 | |||||
Organizational costs and startup costs: The Company expenses all organizational and
startup costs as incurred.
Property and equipment: Property and equipment is stated at cost. Depreciation of such
amounts commenced when the plant began operations. Depreciation is computed using the straight-line
method over the following estimated useful lives:
Years | ||||
Plant and process equipment |
10-20 | |||
Office building |
10-20 | |||
Office equipment |
3-7 | |||
Other equipment |
3-7 |
Maintenance and repairs are expensed as incurred; major improvements and betterments are
capitalized.
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 undiscounted cash flows are less than the carrying amount of the asset. The amount of
the loss is determined by comparing the fair market values of the asset to the carrying amount of
the asset. No loss has been recorded during the three months ended December 31, 2010 or 2009.
Financing costs: Deferred financing costs associated with the construction and revolving
loans and the $34,715,000 construction loan (Note 4) include expenditures directly related to
securing debt financing. These costs are being amortized using the effective interest method over
the remaining term of the related debt agreement. Deferred financings costs associated with the
Companys line of credit are being amortized using the effective interest method over the 6 month
term of the related agreement. Accumulated amortization as of December 31, 2010 and September 30,
2010 was $540,541 and $418,586, respectively.
Derivative instruments: The Company has entered into derivative contracts to hedge its
exposure to price risk related to forecasted soybean oil purchases and forecasted biodiesel sales.
These derivative contracts are to be accounted for under Accounting Standards Codification (ASC)
Topic No. 815, Derivatives and Hedging. ASC 815 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction.
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Table of Contents
Iowa Renewable Energy, LLC
Notes to Unaudited Financial Statements
Although the Company believes its derivative positions are economic hedges, none have been
designated as a hedge for accounting purposes and derivative positions are recorded on the balance
sheet at their fair market value, with changes in fair value recognized in current period earnings.
The following amounts have been included in cost of goods sold for the three months ended December
31, 2010 and 2009:
Three Months Ended | ||||||||
December 31, 2010 | December 31, 2009 | |||||||
Realized (gain) loss |
$ | | $ | 62,466 | ||||
Changed in unrealized (gain) loss |
| (42,604 | ) | |||||
Net (gain) loss |
$ | | $ | 24,862 | ||||
There were no derivative contracts outstanding during the three months ended and as of December 31,
2010.
Revenue recognition: Revenue from the production of biodiesel and related products is
recorded upon transfer of the risks and rewards of ownership and delivery to customers. Interest
income is recognized as earned.
Federal incentive payments and receivables: 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 Federal Blenders credit expired on
December 31, 2009 and only in December 2010 was it extended for 2011 and made retroactive for 2010.
No sales in the first quarter included Federal Blenders Incentive.
Cost of sales: The primary components of cost of sales from the production of biodiesel
products are raw materials (soybean oil, animal fats, hydrochloric acid, methanol, sodium
methylate, and chemicals), energy (natural gas and electricity), and labor. Cost of sales detail
for the three months ended December 31, 2010 and 2009 is as follows:
Three Months Ended December 31 | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Cost of Revenue/Sales | Dollars | Percentage | Dollars | Percentage | ||||||||||||
Input costs (soy oil, chemicals, etc.) |
$ | 109,308 | 10.69 | % | $ | 7,488,096 | 85.43 | % | ||||||||
Plant wages and salaries |
81,505 | 7.97 | 116,395 | 1.33 | ||||||||||||
Utilities and waste disposal |
61,633 | 6.03 | 244,628 | 2.79 | ||||||||||||
Fees-procurement |
| | 34,250 | 0.39 | ||||||||||||
Loss on derivative financial instruments |
| | 24,862 | 0.28 | ||||||||||||
Depreciation |
648,775 | 63.45 | 653,002 | 7.45 | ||||||||||||
Maint., supplies and other expenses |
121,269 | 11.86 | 204,090 | 2.33 | ||||||||||||
Total cost of revenue/sales |
$ | 1,022,490 | 100.00 | % | $ | 8,765,323 | 100.00 | % | ||||||||
Shipping and handling costs: Shipping and handling costs are expensed as incurred and are
included in the cost of sales.
Income taxes: The Company is organized as a limited liability company which is accounted
for like a partnership for federal and state income tax purposes and generally does not incur
income taxes. Instead, the Companys earnings and losses are included in the income tax returns of
its members. Therefore, no provision or liability for federal or state income taxes has been
included in these financial statements.
(Loss) per unit: Loss per unit has been computed on the basis of the weighted average
number of units outstanding during each period presented.
8
Table of Contents
Iowa Renewable Energy, LLC
Notes to Unaudited Financial Statements
Note 2. Major Customer and Related Party
Iowa Renewable Energy, LLC entered into a marketing agreement with Renewable Energy Group (REG),
where REG made efforts to market and sell all of the biodiesel produced. Sales to REG for the three
month periods ended December 31, 2010 and 2009 were none and approximately $8.5 million,
respectively. There were no related accounts receivable from REG as of December 31, 2010 and
September 30, 2010.
Iowa Renewable Energy, LLC also entered into procurement and management agreements with REG to
supply the Company with feedstocks and chemical inputs necessary for production and to manage
operations.
Fees under this agreement are based on the number of biodiesel gallons produced and in addition the
agreement provides for payment of a yearly bonus based on the Companys net income. Total fees
expensed under the agreement for the three month periods ended December 31, 2010 and 2009 were none
and $131,152, respectively.
On April 3, 2009 the Company received a written notice of termination from REG due to changes in
the biodiesel market since the original agreements were signed. Therefore the current agreements
expired on June 30, 2010.
On January 29, 2010, the Company and WMG Services LLC (WMG) entered into a Management Services
Agreement (Agreement). The Agreement provides that WMG will provide certain facility administration
services; accounting services; and marketing, sales, feedstock sourcing and logistic services for
the Company in exchange for a monthly asset utilization fee and a monthly performance fee. These
fees are determined on a sliding fee scale tied to production. The Agreement commenced July 1, 2010
(Effective Date). The Agreement shall continue for a term of twenty-four (24) months from the
Effective Date. Thereafter, the Agreement shall automatically renew for additional successive terms
of twelve (12) months, unless either party gives ninety (90) days notice of its desire not to
renew. The Agreement may also be terminated for a failure to cure a material breach of the
Agreement thirty (30) days after receipt of notice of the breach, or for a change of control.
Through December 31, 2010 the Company did not incur any expenses under this agreement.
Note 3. Members Equity
The Company was formed on April 14, 2005 to have a perpetual life. The Company has one class of
membership unit with each unit representing a pro rata ownership interest in the Companys capital,
profits, losses and distributions. Income and losses are allocated to all members in proportion to
units held.
The Company was initially capitalized by 12 members of the original board of directors,
contributing an aggregate of $240,000 for 480 units. The Company was further capitalized by 78
members contributing an aggregate of $2,440,000 in exchange for 4,880 units. These units were
issued pursuant to a private placement memorandum, limited to Iowa residents in which the Company
offered a maximum of 6,000 units at a cost of $500 per unit for a maximum offering of $3,000,000,
with all funds collected being considered at-risk capital. Each investor was required to purchase a
minimum of 50 units for $25,000, with the option to purchase additional units in increments of one
unit for $500 thereafter up to a maximum purchase by a single investor of 100 units for $50,000.
Additionally, a total of 500 units were issued to the members of an entity related to the Company
through common ownership in exchange for project development services provided pursuant to a
consulting agreement. The private placement memorandum for the seed round offering was closed on
November 30, 2005.
In April 2006, the Company issued an Iowa registered offering of membership units. The intrastate
offering was set for a minimum of 17,595 membership units up to a maximum of 25,095 units for sale
at $1,000 per unit, for a minimum offering amount of $17,595,000 and a maximum offering amount of
$25,095,000. The minimum purchase requirements were 25 units for a minimum investment of $25,000.
The Company began the intrastate offering on April 17, 2006 which was completed on May 1, 2006. A
total of 19,371 membership units were issued to 508 members amounting to $19,371,000 of gross
proceeds.
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Iowa Renewable Energy, LLC
Notes to Unaudited Financial Statements
In November 2006 the directors exercised 1,100 units at $500 per unit. 100 units were unexercised
and expired. In accordance with the Loan agreement, referenced in Note 4 below, the options funds
were used for construction contract obligations prior to the initial draw on the loan in December
2006.
Note 4. Long-Term Debt
Long-term debt consists of the following as of December 31, 2010:
Note payable to MLIC Asset Holdings, LLC for construction loan (A) |
$ | 27,142,668 | ||
Note payable to the Iowa Department of Economic Development (B) |
55,000 | |||
Note payable to the Iowa Department of Transportation (C) |
236,998 | |||
$ | 27,434,667 | |||
(A) | On October 26, 2006, the Company entered into a $34,715,000 construction-term loan agreement
which was used to complete the biodiesel project. The loan consisted of two phases: a
construction phase where the Company made periodic requests for fund advances to meet
construction obligations and at the completion of construction, the loan converted to a
senior debt instrument. Previously, the note bore interest at prime plus .25% and was due in
monthly principal and interest payments of $373,000. The loan is secured by substantially all
assets of the Company. The Company violated the debt covenants and on April 2, 2009 received a
written notice of default from the lender. In conjunction with the line of credit discussed
below, the Lender has agreed until February 1, 2011 to allow the Company to defer principal
payments on the term debt, interest payments related to the term loan will be charged against
the debt service reserve fund, and the Company has been granted a forbearance on the covenant
requirements of the term loan, specifically, section 5.02 (m)-(q). In place of the covenants,
the Company has additional reporting requirements which accelerate their monthly reporting and
provide additional cash flow information to the lender. While this does represent additional
external reporting the information provided is data that is currently captured and reported
internally. The forbearance also accelerates the maturity date for the entire loan to
September 5, 2011 and increases the interest rate to 6.0% plus the one month LIBOR rate in
effect two New York Banking Days prior to the beginning of each calendar month (6.26% as of
December 31, 2010). New York Banking Days is defined as any day other than Saturday or Sunday
that a commercial bank is open for business in New York, New York. The LIBOR margin will be
adjusted every six months based on a schedule set in the agreement based on the Companys
leverage ratio at that time. Effective February 1, 2011, the Company entered into an
additional Amendment and Note Modification with MLIC to extend the maturity date and
forbearance of the note through January 2, 2012. |
|
In addition to the debt service reserve and capital improvements reserve discussed in Note
1, the Company is required to deposit in a sinking fund one-third of all monthly projected
EBITDA shall be applied to reduce loan principal. At the point the outstanding principal
loan balance is reduced to $20,182,750 no additional sinking fund deposits will be required. |
||
(B) | The Company has a $300,000 loan agreement and a $100,000 forgivable loan agreement with the
Iowa Department of Economic Development. The $300,000 loan is noninterest-bearing and due in
monthly payments of $5,000 beginning December 2006 for a term of 60 months with a balance as
of December 31, 2010 and September 30, 2010 of $55,000 and $65,000, respectively. Borrowings
under this agreement are collateralized by substantially all of the Companys assets and will
be subordinate to the $34,715,000 of financial institution debt. The $100,000 loan was
forgiven during the quarter ended December 31, 2009 as the Company met the employment and
production criteria defined in the agreement. The forgiveness was included in other income on
the statement of operations. On November 18, 2010 the Company requested from the IDED a
deferral of payments for the period January 1, 2011 through June 30, 2011. On December 16,
2010 the IDED board approved the deferral request with the requirement of a 6.0% interest
accrual on the loan for that period. The Companys Board approved the interest related to the
deferral at the December 21, 2010 Board meeting. |
|
(C) | The Company has a $132,000 loan agreement and a $168,000 forgivable grant agreement with the
Iowa Department of Transportation. The $132,000 loan bears interest at 3.67% beginning June
2008 and is due
in semi-annual payments of $14,569 beginning December 2008 for a term of 60 months. The
balance at December 31, 2010 and September 30, 2010 was $68,978 and $82,061,
respectively. Borrowings under this agreement are collateralized by substantially all of the
Companys assets and is not subordinate to the $34,715,000 of financial instrument debt. The
$168,000 grant is forgivable upon completion of the loan agreement. |
10
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Iowa Renewable Energy, LLC
Notes to Unaudited Financial Statements
On September 2, 2010 the Company entered into a short-term line of credit where MLIC Asset
Holdings, LLC, Federation Bank, and Washington State Bank will provide up to a $6.0 million
revolving line of credit to be used for the purchase of raw materials. The line of credit term is
for a six month period with formal maturity at May 31, 2011. At the maturity date any unpaid
principal and accrued interest of the line of credit must be paid. The interest rate to be charged
on the line of credit will be an annual rate equal 12.0% plus the one month Libor rate in effect
two New York Banking Days prior to the beginning of each calendar month. New York Banking Days is
defined as any day other than Saturday or Sunday that a commercial bank is open for business in New
York, New York. Any draws on this line of credit for purchases of raw
materials are secured by inventory, receivables and other related
assets.
Note 5. Lease Commitment and Other Contingencies
The Company leases a copier under a long-term operating lease that will expire in February 2011.
The lease requires payments of $275 per month plus applicable taxes, therefore minimum lease
payments under this operating lease for future years is $275 during the three months ended December
31, 2010. On January 3, 2011 the Company entered into a new operating lease that will expire
January 2016 which requires lease payments of $237 per month plus applicable tax.
The European Union is currently leveling tariffs on biofuels exported from the United States due to
subsidies paid on biofuels. These tariffs went into effect March 13, 2009. In July 2009, the
European Commission decided to extend these tariffs beyond their initial July 2009 expiration date
until 2014. The Company will likely face increased competition for sales of its biodiesel and
international demand for its product will likely decrease as a result of these tariffs. If any
governmental supports are modified or permanently removed and decreased demand for the Companys
biodiesel results, its profitability will be reduced. Because biodiesel has historically been more
expensive to produce than diesel fuel, the biodiesel industry has depended on governmental
incentives that have effectively brought the price of biodiesel more in line with the price of
diesel fuel to the end user. These incentives have supported a market for biodiesel that might not
exist without the incentives. The most significant of these incentives for biodiesel is the
blenders tax credit which provides a $1.00 tax credit per gallon of pure biodiesel, or B100, to
the first blender of biodiesel with petroleum based diesel fuel. The blenders tax credit expired
on December 31, 2009 and only in December 2010 was it extended for 2011 and made retroactive for
2010.
Note 6. Going Concern and Managements Plans
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. Through December 31, 2010, the Company has generated accumulated losses of
$16,767,088, has experienced significant volatility in its input costs and undertaken significant
borrowings to finance the construction of the biodiesel plant. The loan agreements with the
Companys lender currently contain covenants that require a minimum ratio of current assets to
current liabilities (working capital ratio), minimum debt coverage, fixed charge coverage ratios
and a minimum level of equity. The Company is not in compliance with certain of these covenants at
December 31, 2010 and the Company may fail to comply with one or more of the loan covenants
throughout fiscal 2011. Failure to comply with these loan covenants constitutes 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. Furthermore, the loan agreements have been amended such that all
principal and interest is due and payable no later than January 2, 2012 and there is no assurance
that the Company will be able to secure financing at that time. In addition, our determination of
any impairment of our long-lived assets is based on projected cash flows. If those projected cash
flows change, requiring the assets to be adjusted to the estimated fair value the amount of any
impairment could be significant and could have a material adverse effect on our reported financial
results for the period in which the charge is taken. These issues raise doubt about whether the
Company will continue as a going concern.
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Iowa Renewable Energy, LLC
Notes to Unaudited Financial Statements
Beginning January 1, 2010, following the expiration of the Federal Blenders Credit, the Company
went into a warm shut down status. In this status, the Company maintained a minimal crew and has
used the period to perform maintenance on the plant while selling remaining inventory on the spot
market. The warm shut down has allowed the Company to reduce expenses and preserve cash; however
the low sales level has not covered the reduced cost. The Company is hopeful that the reinstatement
of the biodiesel tax credit and the demand created by RFS2 will create sufficient product demand
for the Company to resume biodiesel production. Meanwhile, the Company has been in communication
with its lender as to the steps it needs to take to resolve this situation. The Companys ability
to continue as a going concern is dependent on the Companys ability to comply with the loan
covenants, the lenders willingness to waive any noncompliance with such covenants and the
Companys ability to refinance the debt at its maturity date of January 2, 2012. As discussed in
Note 4 above, the Company has secured an operating line of credit for $6.0 million. The line of
credit is restricted to the purchase of raw materials to be used in the production of biodiesel
with a small set aside that can be used for hedging activities. In addition to the line of credit,
the Company has secured from its lender forbearance through January 2, 2012 from exercising their
remedies under the term loan document with regard to the existing defaults.
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Item 2. | Managements Discussion and Analysis of Financial Conditions and Results of Operations |
Iowa Renewable Energy, LLC (referred to in this report as the Company, we, us, or IRE)
prepared the following discussion and analysis to help you better understand our financial
condition, changes in our financial condition, and results of operations for the three month period
ended December 31, 2010. This discussion should be read in conjunction with the financial
statements and notes and the information contained in our annual report on Form 10-K for the fiscal
year ended September 30, 2010.
Forward Looking Statements
This report contains forward-looking statements that involve known and unknown risks and
relate to future events, our future financial performance, or our expected future operations and
actions. In some cases, you can identify forward-looking statements by terminology such as may,
will, should, expect, plan, anticipate, believe, estimate, future, intend,
could, hope, predict, target, potential, or continue or the negative of these terms or
other similar expressions. These forward-looking statements are only our predictions based upon
current information and involve numerous assumptions, risks and uncertainties. Our actual results
or actions may differ materially from these forward-looking statements for many reasons, including
the reasons described in this report. While it is impossible to identify all such factors, factors
that could cause actual results to differ materially from those estimated by us include:
Failure to comply with loan covenants contained in our financing agreements;
Our ability to continue to export our biodiesel;
The continued imposition of tariffs or other duties on biodiesel imported into Europe;
Continuing decrease in the demand for biodiesel;
WMG Services, LLCs (WMG) ability to market our product and procure feedstock;
Actual biodiesel and glycerin production varying from expectations;
Economic consequences of the domestic and global economic downturn and the on-going financial crisis;
Availability and cost of products and raw materials, particularly soybean oil, animal fats, natural gas and
methanol;
Changes in the price and market for biodiesel and its co-products, such as glycerin;
Our ability to market and our reliance on third parties to market our products;
Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices such as:
| national, state or local energy policy; |
||
| federal and state biodiesel tax incentives; |
||
| the RFS or other legislation mandating the use of biodiesel or other lubricity additives; or |
||
| environmental laws and regulations that apply to our plant operations and their enforcement; |
Total U.S. consumption of diesel fuel;
Fluctuations in petroleum and diesel prices;
Changes in plant production capacity or technical difficulties in operating the plant;
Changes in our business strategy, capital improvements or development plans;
Results of our hedging strategies;
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Competition with other manufacturers in the biodiesel industry;
Our ability to generate free cash flow to invest in our business and service our debt (and the flexibility of our
lender in regards to our debt);
Our liability resulting from litigation;
Our ability to retain key employees and maintain labor relations;
Changes and advances in biodiesel production technology;
Competition from alternative fuels and alternative fuel additives;
Our ability to generate profits; and
Other factors described elsewhere in this report.
We undertake no duty to update these forward-looking statements, even though our situation may
change in the future. Furthermore, we cannot guarantee future results, events, levels of activity,
performance or achievements. We caution you not to put undue reliance on any forward-looking
statements, which speak only as of the date of this report. You should read this report completely
and with the understanding that our actual future results may be materially different from what we
currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
We began producing biodiesel on July 10, 2007. The plant was operating at full capacity until
the end of September 2007; with only minor temporary shut downs for maintenance and a
weather-related power outage. Since the beginning of October 2007, we have only been operating to
produce biodiesel to satisfy existing contracts for the sale of our biodiesel and have not been
producing biodiesel for speculation. This has allowed us to avoid excess inventory, but also
resulted in several plant shutdowns. During the first quarter of fiscal year 2011, we did not
operate our plant.
From October 1, 2010 through December 31, 2010 we did not produce new biodiesel and the sales
we had of approximately $70,000 were related to sales of existing inventories at our plant. We
anticipate we may have operating interruptions throughout our 2011 fiscal year due to the
instability the biodiesel industry has experienced from government supports, such as the biodiesel
tax credit, and general lack of demand. This biodiesel tax credit amounted to $1.00/gallon of
biodiesel blended and allowed biodiesel to stay competitive with petroleum diesel. This tax credit
expired on December 31, 2009, and was only recently reinstated in December 2010. This
reinstatement was made retroactive to January 1, 2010 and will again expire on December 31, 2011.
We do not anticipate benefiting from the retroactive application of the biodiesel tax credit in
2010, because of our limited number of sales during our 2010 fiscal year. In addition, favorable
RFS2 regulations were released in February 2010; however, application of the RFS2 has remained
unclear. On December 21, 2010, a lawsuit challenging the RFS2 regulations was dismissed in full,
which we anticipate may provide more certainty for the program. We anticipate the increase in
value of Renewable Identification Number System (RINS) as a result of the RFS2 will make biodiesel
prices more competitive, and in some cases when combined with the
biodiesel tax credit, less
expensive, than petroleum diesel. For more information on the RFS2 regulations, please see
Revenues below. To the extent RFS2 and the biodiesel tax credit are not swiftly and effectively
implemented, or if either of these supports are allowed to expire, we will likely continue (or
begin again) to experience lack of demand and instability in our business.
We do not anticipate speculatively producing biodiesel for the remainder of the 2011 fiscal
year. Our Loan Agreement, as defined below, requires that we have a contract to fill before we can
access our line of credit and this line of credit is the only means through which we have the
necessary capital to produce. We have been experiencing liquidity difficulties since beginning our
operations and if these conditions do not improve, or get worse, during the
remainder of our fiscal year 2011, we will likely have to continue to suspend production of our
plant for extended periods of time.
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Through December 31, 2010, we have generated accumulated losses of approximately $16,800,000,
have experienced significant increases in input costs and have experienced significant decreases in
biodiesel demand. Furthermore, we have undertaken significant borrowings to finance our operation
of the biodiesel plant and production of biodiesel. The loan agreements and related documents,
including the mortgage, security agreement and promissory notes (collectively, the Loan
Agreement), which is currently held by MLIC Asset Holdings LLC (MLIC), contain covenants that
require a minimum ratio for current assets to current liabilities (working capital ratio), minimum
debt coverage and fixed charge coverage ratios. As of December 31, 2010 we were in compliance with
these requirements. On September 2, 2010, we executed a Third Amendment and Note Modification with
MLIC (the Amendment Documents). The purpose of the Amendment Documents was to modify our term
loan, including the payments and interest terms thereof (see Short and Long Term Debt Sources
below for details on the amendments to our loan agreement). However, our revised loan agreement
requires that we maintain an equity level described in the revised agreement which is set at $7
million. With our current lack of sales and our high fixed costs structure we have fallen below the
$7 million threshold in our first quarter of fiscal year 2011. Effective February 1, 2011, we
entered into an agreement with MLIC to reduce the equity level threshold to $5 million.
Our liquidity issues raise doubt about whether we will continue as a going concern. We are
uncertain how often we will be able to operate the plant, or if we will be able to operate at all,
during the next quarter. Because the biodiesel tax credit was only recently reinstated and
extended, we are still not certain if this measure will be enough to re-stimulate the biodiesel
market. Our operations will depend largely on whether the reinstatement of the biodiesel tax
credit is sufficient to stimulate demand, if WMG is able to obtain contracts for our biodiesel and
continued forbearances by our lender.
Results of Operations for the Three Months Ended December 31, 2010 and 2009
The following table shows the results of our operations and the percentage of revenues, costs
of goods sold, operating expenses and other items to total revenues in our statements of operations
for the three months ended December 31, 2010 and 2009.
Three Months Ended | Three Months Ended | |||||||||||||||
December 31, 2010 (Unaudited) | December 31, 2009 (Unaudited) | |||||||||||||||
Income Statement Data | Amount | Percent | Amount | Percent | ||||||||||||
Revenues |
$ | 70,426 | 100.0 | % | $ | 8,643,219 | 100.0 | % | ||||||||
Cost of Goods Sold |
1,022,490 | 1,451.9 | % | 8,765,323 | 101.4 | % | ||||||||||
Gross (Loss) |
(952,064 | ) | (1,351.9 | %) | (122,104 | ) | (1.4 | %) | ||||||||
Operating Expenses |
105,363 | 149.6 | % | 360,317 | 4.2 | % | ||||||||||
Operating (Loss) |
(1,057,427 | ) | (1,501.5 | %) | (482,421 | ) | (5.6 | %) | ||||||||
Other Income |
96,152 | 136.5 | % | 391,182 | 4.5 | % | ||||||||||
Interest Expense |
(549,716 | ) | (780.6 | %) | (303,565 | ) | (3.5 | %) | ||||||||
Net (Loss) |
(1,510,991 | ) | (2,145.5 | %) | (394,804 | ) | (4.6 | %) |
Our operating results generally reflect the relationship between the price of biodiesel and
the costs of feedstock used to produce our biodiesel. Because biodiesel is used as an additive or
alternative to diesel fuel, biodiesel prices are strongly correlated to petroleum-based diesel fuel
prices. Our results of operations will benefit when the margin between biodiesel prices and
feedstock costs widens and will be harmed when this margin narrows. Biodiesel prices and feedstock
costs have decreased from the record highs reached in the summer of 2008; however, we expect that
biodiesel prices and feedstock costs will remain volatile in the long-term.
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Revenues
Our revenues from operations primarily come from biodiesel sales, glycerin sales and fatty
acid and soapstock sales. The following table shows the sources of our revenues for the three
months ended December 31, 2010 and 2009:
Three Months Ended | Three Months Ended | |||||||||||||||
December 31, 2010 | December 31, 2009 | |||||||||||||||
Revenue Source | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
Biodiesel Sales |
$ | 58,214 | 82.7 | % | $ | 8,469,443 | 97.9 | % | ||||||||
Glycerin Sales |
12,212 | 17.3 | % | 116,999 | 1.4 | % | ||||||||||
Fatty Acid and Soapstock Sales |
| | 56,777 | 0.7 | % | |||||||||||
Total Sales Revenue |
$ | 70,426 | 100.0 | % | $ | 8,643,219 | 100.0 | % | ||||||||
Revenues from sales for the three months ended December 31, 2010 totaled $70,426 compared with
$8,643,219 for the three months ended December 31, 2009. We received no funds from federal
government incentive programs during the three months ended December 31, 2010, whereas we received
$187,632 in incentives from the federal government based on our sale of biodiesel during the three
months ended December 31, 2009.
Total revenues were lower for the three months ended December 31, 2010, compared to the same
period in 2009, due to a significant decrease in biodiesel demand, our lack of biodiesel production
and the lack of federal incentives received as a result of our lowered biodiesel production. The
decrease in biodiesel demand has affected the biodiesel industry throughout the past several
quarters, which is likely attributable to the United States current economic downturn and credit
crisis, the unfavorable economic conditions prevailing across the globe generally, and the lack
of the biodiesel tax credit during most of 2010. Our biodiesel sale prices during the quarter
ended December 31, 2010 were higher than the biodiesel prices we experienced in the same period in
2009. The average biodiesel sale price we received for the quarter ended December 31, 2010 was
approximately 16% higher than our average biodiesel sale price for the comparable period in 2009.
We also sold 93% less glycerin for the three months ended December 31, 2010 as compared to the same
period ended December 31, 2009. We sold 100% less fatty acids and soapstock during the period
ended December 31, 2010 than we did in the comparable period in 2009. We sold our glycerin during
the period ended December 31, 2010 at prices that averaged approximately 89% higher than we sold
our glycerin and fatty acids during the same period in 2009.
Diesel fuel prices per gallon
have historically remained at levels below or equal to the price of biodiesel. For example, the
price for B99.9 soy biodiesel in Iowa was approximately $3.82 per gallon for the day of February 9,
2011, according to the Iowa Department of Transportations Average Fuel Prices Report. However,
according to the same report, Iowa diesel fuel prices as of February 9, 2011 averaged approximately
$2.82 per gallon, which is significantly lower than the price per gallon for B99.9 biodiesel. The
premium of biodiesel sales prices over diesel sales prices have caused a reduction in the demand
for biodiesel. However, 2011 RINS have been trading at approximately $1 per RIN, as RIN generators
attempt to meet their RFS requirements. This $1 RIN value equates to approximately $1.50 per
gallon of biodiesel and when this is used in conjunction with the $1 per gallon biodiesel tax
credit, can result in biodiesel pricing coming below diesel fuel prices. So long as RINS continue
to trade at these values, management anticipates increased demand for biodiesel. Management
expects that any further drop in biodiesel prices, without a corresponding decrease in the cost of
feedstock and other inputs, will cause the profit margin on each gallon of biodiesel produced to
shrink further, or all together, which could result in significant losses. Due to the volatility
of the global economic conditions and commodities markets, it is uncertain whether biodiesel prices
and input costs will rebound to the higher prices
experienced in the summer of 2008.
We also believe that the U.S. and global economic downturn and the financial crisis that led
to a collapse of a variety of major U.S. financial institutions and the federal governments
passage of bailout plans may also place downward pressure on the demand for fuel, including
biodiesel. These factors have caused significant upheaval in the financial markets and economy of
the United States, as well as abroad. Credit markets have tightened and
lending requirements are no less stringent than during the height of the recession. Commodity
markets remain volatile. While the U.S. economy slowly climbs out of the recession, as evidenced
by improvements in unemployment rates and retail sales this last quarter, we expect the above
negative conditions may cause continued stagnation in biodiesel demand. It is uncertain for how
long and to what extent these financial troubles may negatively affect biodiesel demand in the
future.
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Through our marketer, WMG, we expect that a portion of our biodiesel may be sold abroad to
international markets, particularly Canada. In some instances, we believe that international
biodiesel sales may return greater profits than domestic biodiesel sales. However, demand for
international sales have been greatly reduced as a result of anti-dumping and anti-subsidy tariffs
imposed by the European Commission on all biodiesel produced in the United States. The tariffs went
into effect March 13, 2009 and the European Commission determined in July 2009, that the tariffs
would be extended through 2014. According to the May 2009 issue of The Biodiesel Magazine, the
tariffs could result in an additional charge of $30 to $265 per metric ton of biodiesel. Because of
these tariffs, we do not anticipate sales to Europe.
Excess production capacity in the biodiesel industry could make it difficult for us to market
our products at profitable prices. The Biodiesel Magazine website estimates that current total
biodiesel production capacity of existing plants as of January 27, 2011 was about 2.83 billion
gallons per year, which is up from approximately 1.92 billion gallons per year as of September
2007. The Biodiesel Magazine website also estimates that plants under construction and expansion as
of January 27, 2011 could add another 386 million gallons to U.S. biodiesel production capacity,
for a total annual production capacity of 3.22 billion gallons. Despite these significant
increases in production capacity, the National Biodiesel Board estimates that only 545 million
gallons of biodiesel were produced in 2009. According to Reuters, 2010 production decreased by 20%,
posting only fifty percent (50%) of the 2008 biodiesel output. Many biodiesel plants do not
operate at full capacity due in part to the fact that total production capacity significantly
exceeds demand. If the demand for biodiesel does not grow at the same pace as increases in supply,
we expect the price for biodiesel to decline in the long-term.
We expect our results of operations to benefit from federal and state biodiesel supports and
tax incentives. Biodiesel has generally been more expensive to produce than petroleum-based diesel
and, as a result, the biodiesel industry depends on such incentives to be competitive. Changes to
these supports or incentives could significantly impact demand for biodiesel. The most significant
of these are the Volumetric Ethanol Excise Tax Credit (VEETC), and the RFS, as amended by the
Energy Independence and Security Act of 2007 (the EISA).
The American Jobs Creation Act of 2004 originally created the biodiesel blenders excise tax
credit under the Volumetric Ethanol Excise Tax Credit (VEETC). Known as the biodiesel tax credit,
it provided a tax credit of $1.00 per gallon for biodiesel. The biodiesel credit may be claimed in
both taxable and nontaxable markets, including exempt fleet fuel programs and off-road diesel
markets. The desired effect of the biodiesel tax credit was to streamline the use of biodiesel and
encourage petroleum blenders to blend biodiesel as far upstream as possible, which will allow more
biodiesel to be used in the marketplace. According to the American Soybean Association, the credit
makes biodiesel more competitive with petroleum diesel; without it, biodiesel becomes more
expensive than regular diesel. The biodiesel tax credit also streamlined the tax refund
system for below-the-rack blenders to allow a tax refund of the biodiesel tax credit on each gallon
of biodiesel blended with diesel (dyed or undyed) to be paid within 20 days of blending.
Below-the-rack blenders are those blenders that market fuel that is for ground transportation
engines and is not in the bulk transfer system. The biodiesel credit expired on December 31, 2009.
Only in December 2010 was the biodiesel tax credit reinstated retroactively for 2010 and extended
through December 31, 2011. Due to the recent nature of this change, it remains uncertain whether a
one-year extension of the biodiesel tax credit will be sufficient to stimulate biodiesel demand.
Moreover, we do not anticipate benefitting much from the retroactive application of the biodiesel
tax credit in 2010, because of our limited number of sales during our 2010 fiscal year.
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The Energy Policy Act of 2005 created the Renewable Fuel Standard (RFS) which required
refiners to use 7.5 billion gallons of renewable fuels by 2012. The Energy Independence and
Security Act of 2007 (EISA) expanded the existing RFS to require the use of 9 billion gallons of
renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022 (RFS2). The
RFS2 requires that 600 million gallons of renewable fuel used in 2009 must come from advanced
biofuels other than corn-based ethanol, such as ethanol derived from cellulose, sugar or crop
residue and biomass-based diesel (which includes biodiesel and renewable diesel), increasing to 21
billion gallons in 2022. The RFS2 further includes a requirement that 500 million gallons of
biodiesel and biomass-based diesel fuel be blended into the national diesel pool in 2009, gradually
increasing to one billion gallons by 2012. However, in November 2008, the EPA announced that the
RFS2 program in 2009 would continue to be applicable to producers and importers of gasoline only.
This meant that the 500 million gallons of biomass-based diesel required by the RFS2 did not have
to be blended into U.S. fuel supplies in 2009. This is due to the fact that the regulatory
structure of the original RFS program did not provide a mechanism for implementing the EISA
requirement for the use of 500 million gallons of biomass-based diesel. On February 3, 2010 the
EPA issued final rules under RFS2. The final rules addressed this issue by combining the 2010
biomass-based diesel requirement of 0.65 billion gallons with the 2009 biomass-based diesel
requirement of 0.5 billion gallons to require that obligated parties meet a combined 2009/2010
requirement of 1.15 billion gallons by the end of the 2010 compliance year. In November 2010, the
EPA released 2011 volume requirements. The 2011 requirements are 1.20 billion gallons and the use
of 800 million gallons of biomass-biodiesel during the 2011 compliance year. We anticipate that
there will again be a roll-over of some of the 2010 requirement into 2011 and also that some of the
cellulosic requirements that cannot be achieved due to lack of technology may be allowed to be
filled by biodiesel. Thus, we anticipate that biodiesel requirements under the 2011 RFS2 may
exceed the standard 800 million gallon requirement. According to The Biodiesel Magazine website,
cellulosic biofuel and biomass-based diesel consumed beyond the 2011 minimum thresholds will be
credited towards the advanced biofuel and total renewable fuel volume requirements.
The RFS2 program recently gained additional certainty when on December 21, 2010 a lawsuit
challenging the RFS2 regulations was dismissed. We anticipate that the RFS2 may increase demand
for biodiesel in the long-term, as it sets a minimum usage requirement for biodiesel and other
types of biomass-based diesel. However, there can be no assurance demand for biodiesel will be
increased by the RFS2. As of January 27, 2011, The Biodiesel Magazine website estimated that
national biodiesel production capacity was approximately 2.83 billion gallons per year, which
already exceeds the 2012 biodiesel and biomass-based diesel use mandate. Accordingly, there is no
guarantee that additional production of biodiesel and biomass-based diesel will not continually
outstrip any additional demand for biodiesel that might be created by this new law. We also
anticipate that the expanded RFS2 will be primarily satisfied by ethanol, including both corn-based
and other types of ethanol. The amount of corn-based ethanol that may be used to satisfy the RFS2
requirements is capped at 15 million gallons starting in 2015 and, accordingly, other types of
ethanol, including cellulose-based ethanol, will likely be used to satisfy any requirements over
and above the 15 million gallon corn-based ethanol cap. Furthermore, we have not yet significantly
benefited from RFS2 because the biodiesel tax credit was expired when the final RFS2 regulations
were released. Because the biodiesel tax credit was only recently reinstated and extended, we are
still not certain if this measure will be enough to re-stimulate the biodiesel market.
One advantage biodiesel has in the petroleum diesel market is the marketability and value of
RINS. The RFS2 system is enforced through a system of registration, recordkeeping and reporting
requirements for obligated parties and renewable producers (RIN generators), as well as any party
that procures or trades renewable identification numbers, either as part of their renewable
purchases or separately. Any person who violates any prohibition or requirement of the RFS2 program
may be subject to civil penalties for each day of each violation. For example, a failure to acquire
sufficient RINS to meet a partys renewable fuels obligation would constitute a separate day of
violation for each day the violation occurred during the annual averaging period. The enforcement
provisions are necessary to ensure the RFS2 program goals are not compromised by illegal conduct in
the creation and transfer of RINS. The EPA has assigned equivalence values to each type of
renewable energy fuel in order to determine compliance with the RFS2. The equivalence values used
ethanol as the base-line measurement (such that one gallon of ethanol is equivalent to one credit
towards RFS2 compliance) and assigned biodiesel an equivalence value of 1.5, such that each gallon
of biodiesel used by an obligated party will be equal to one and one-half gallons credit towards
its RFS2 compliance. A market has established in the petroleum diesel industry for trading these
RINS. Thus, the value of the RIN can sometimes offset higher biodiesel pricing, which can make
biodiesel more competitive on the market with petroleum diesel. Currently RINS are trading for
approximately $1 per RIN, which equates to $1.50 per gallon of biodiesel and when considered in
conjunction with the $1 per gallon biodiesel tax credit, can result in the price of biodiesel
coming below the price of diesel.
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Cost of Goods Sold
The primary components of cost of goods sold from the production of biodiesel are raw
materials (soybean oil, animal fats, corn oil, methanol and other chemicals), energy (natural gas
and electricity), labor and depreciation
on process equipment. Our business is sensitive to feedstock costs. The cost of feedstock is
the largest single component of the cost of biodiesel production, typically accounting for 70-90%
of the overall cost of producing biodiesel. Any fluctuation in the price of feedstock will alter
the return on investment that our members receive. Changes in the price or supply of feedstock are
subject to and determined by market forces and other factors over which we have no control, such as
crop production, carryout, exports, government policies and programs, and weather. Because
biodiesel prices are strongly correlated to diesel fuel prices, the biodiesel industry is unlike
many other industries where finished product prices are more strongly correlated to changes in
production costs. This characteristic of the biodiesel industry makes it difficult for biodiesel
producers to pass along increased feedstock costs and, therefore, increases in feedstock costs can
significantly affect our ability to generate profits.
Cost of goods sold for our products for the quarter ended December 31, 2010 was $1,022,490,
which is down from $8,765,323 for the three months ended December 31, 2009. This decrease is
largely due to our decreased operations. As a percentage of revenues, our cost of goods sold
increased to 1,451.9% for the period ended December 31, 2010 from 101.4% for the same period in
2009, due largely to the low sales level in 2010. The level of sales are not sufficient to cover
the existing fixed costs, which make up the majority of the overall change between periods.
We have attempted, and will continue to attempt, to utilize less costly feedstock alternatives
to soybean oil to the greatest extent possible in order to return the greatest profit margins
possible on our biodiesel sales. During the three months ended December 31, 2010 none of our
biodiesel was produced from animal fat, compared to 14% during the same period in 2009. The sales
during our first quarter were from existing inventories, so we do not have comparable feedstock
prices.
Soybean oil prices have been extremely volatile, reaching a peak in the summer of 2008. The
USDA National Weekly Ag Energy Round-Up Report indicates that as of February 4, 2011, crude soybean
oil prices in Iowa are up to approximately 54.58 to 56.28 cents per pound from the price of 31.90
to 35.25 cents per pound for the same week a year ago. The prices for animal fats tend to move in
relation to the price of other feedstocks such as soybean oil. Accordingly, as soybean oil prices
increase, animal fat prices will also likely increase. According to the USDAs February 10, 2011
Oil Crop Outlook report, preliminary lard and edible tallow prices for January 2011 were 48.50
cents and 50.10 cents per pound, respectively, which is only slightly lower than the July 2008
average prices of 52.82 cents and 48.61 cents per pound, respectively. Based on these trends,
management anticipates that the cost of animal fat feedstock may decrease for the second quarter of
fiscal year 2011, thereby decreasing our cost of goods sold on a per gallon of animal fat-based
biodiesel sold. However, management expects that prices may remain volatile throughout fiscal year
2011, as domestic and global economic conditions and commodities markets may affect input prices,
including animal fats.
We experienced no gains or losses during the three months ended December 31, 2010 related to
our derivative instruments. For the three months ended December 31, 2009 we had a net loss of
$24,862 related to our derivative instruments. This decrease in activity related to derivative
instruments is a result of a lack of production of biodiesel and need for hedging activities. We
enter into option contracts to reduce the risk caused by market fluctuations of soybean oil and
home heating oil. The contracts are used to fix the purchase price of our anticipated requirements
of soybean oil in production activities and to manage exposure to changes in biodiesel prices. We
enter into home heating oil hedges that are specifically related to our biodiesel contracts that
have the price set based on the Chicago spot market price for home heating oil. These home heating
oil hedges may result in us having to pay margin calls until we are paid under the related
biodiesel contract, but will ultimately allow us to lock in our profit margin and be offset by
higher-priced biodiesel sales. Because of the way we report our derivatives for accounting
purposes, the fair value of the derivatives is continually subject to change due to the changing
market conditions. As the value of soybean oil and home heating oil fluctuates, the value of our
derivative instruments are impacted, which affects our financial performance. For more information
on how we record our derivative instruments, see Critical Accounting Estimates Derivative
Instruments and Hedging Activities below. We anticipate continued volatility in our cost of goods
sold due to the timing and changes in value of derivative instruments relative to the cost of the
commodity being hedged.
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Operating Expenses
Operating expenses have reduced to $105,363 for the three months ended December 31, 2010
compared to $360,317 for the same period in 2009. In an attempt to reduce costs, we have cut back
on operating expenses where possible. The decrease in operating expenses as a percentage of
revenues is primarily due to our reduced operations. We expect that our operating expenses for
fiscal 2011 will remain fairly consistent if the plant remains idle.
Other Income (Expenses)
Our other income and expenses for the three months ended December 31, 2010 was
interest expense of $549,716 and other income of $96,152, compared to $303,565 interest expense and
$391,182 other income respectively for the three months ended December 31, 2009. The decrease in
other income was a result of our 2010 recognition of $100,000 of debt forgiveness income on our
forgivable loan, our receipt of approximately $280,000 in Advanced BioFuels Producer Credit funds
and a $72,471 grant from Kirkwood Community College and our decreased production levels in our 2010
fiscal year and the first quarter of our 2011 fiscal year. The interest expense represents interest
and amortization costs. The increase in interest expense was primarily the result of an increase
in our outstanding borrowings and our average interest rates. Our interest rate increased as a
part of our forbearance agreement under our Loan Agreement.
Changes in Financial Condition for the Three Months Ended December 31, 2010
The following table highlights the changes in our financial condition:
December 31, 2010 | September 30, 2010 | |||||||
Current Assets |
$ | 937,928 | $ | 1,233,887 | ||||
Total Assets |
$ | 34,243,239 | $ | 35,678,661 | ||||
Current Liabilities |
$ | 27,844,905 | $ | 27,769,336 | ||||
Members Equity |
$ | 6,398,334 | $ | 7,909,325 |
Current Assets
Current assets totaled $937,928 at December 31, 2010 down from $1,233,887 at September 30,
2010. The decrease during this period is in part due to lower inventory levels from the reduction
in production caused by the decrease in demand for biodiesel and due
to lower cash due to losses.
Current Liabilities
Total current liabilities totaled $27,844,905 at December 31, 2010, up slightly from
$27,769,336 at September 30, 2010. The increase of $75,569 during this period resulted from
increased accounts payables and accrued expenses with accrued interest expense on the term debt.
Members Equity
Total members equity as of December 31, 2010 was $6,398,334, down from $7,909,325 as of
September 30, 2010. The decrease in total members equity is a result of the loss recognized
during the period. The loss is the result of the low level of sales experienced in fiscal year 2011
and the lower sales price received for the Company product sold. The low level has resulted in an
inability to cover the fixed costs and interest expense incurred annually by us.
Liquidity and Capital Resources
Cash Flow from Operating Activities
Net cash flow used in operating activities for the three months ended December 31, 2010
totaled $509,519, compared to cash flow provided in operating activities of $2,450,891 for the
three months ended December 31, 2009. This was due to the increased loss incurred in fiscal year
2011 compared to prior fiscal year, the overall decline in working capital components and the
decline in sales.
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Cash Flow used in Investing Activities
Net cash flow provided by investing activities for the three months ended December 31, 2010
totaled $359,233, which was related primarily to decreases in restricted cash.
Cash Flow provided by (used in) Financing Activities
Net cash used in financing activities for the three months ended December 31, 2010 totaled
$23,062 which was all a result of payments on our long-term debt.
Short-Term and Long-Term Debt Sources
In
October 2006, we closed on our $34,715,000 debt financing with
Marshall Bankfirst (Bankfirst). The financing
with Bankfirst provided for a $29,715,000 term loan, with an interest rate during construction (the
first 14 months following loan closing) of 0.75% over the Prime Rate as of the effective date
reported in the Money Rates column of The Wall Street Journal. Our construction loan converted to a
term loan in February 2008. MLIC has
succeeded as lender under the term loan.
The term loan imposes various covenants upon us which may restrict our operating flexibility.
We are subject to several ratios in the term loan which may limit how we allocate our sources of
funds. The term loan imposes a negative covenant on distributions which may restrict our ability to
distribute earnings to our members. The term loan also requires us to obtain permission from our
lender prior to making any significant changes in our material contracts with third-party service
providers.
We executed a mortgage in favor of MLIC creating a first lien on substantially all of our
assets, including our real estate, plant, all personal property located on our property and all
revenues and income arising from the land, plant or personal property for the loan and credit
agreements discussed above.
On September 2, 2010, we executed a Third Amendment and Note Modification with MLIC (the
Amendment Documents). Under the Amendment Documents MLIC has agreed to forbear exercising its
remedies under the tem loan and to waive our compliance with certain covenants and rations through
February 1, 2011. We have agreed to pay MLIC all accrued interest monthly through February 1,
2011. During each month between October 1, 2010 and February 1, 2011 we have agreed to pay MLIC
all accrued interest. Effective February 1, 2011, we entered into an additional Amendment and Note
Modification with MLIC to extend this forbearance through January 2, 2012.
Beginning on March 1, 2011, regular monthly principal and interest (which increased to 6% over
LIBOR for the first six months, subject to adjustment every six months thereafter based on our
leverage ratio) payments based upon the remaining term of the original amortization period of ten
years shall resume in accordance with the original terms of the term loan. Beginning on March 1,
2011, we shall also pay the accrued interest on the principal payments that have been deferred
until such deferred payments have been paid in full. On September 5, 2011, the principal payments
that were otherwise due on August 1, 2010 through December 1, 2010 shall be due and payable. In
addition, on September 5, 2011, the remaining unpaid principal balance of the term loan, together
with all accrued but unpaid interest, shall be due and payable in full. Effective February 1,
2011, we entered into an additional Amendment and Note Modification with MLIC to extend the
maturity date of the note through January 2, 2012.
Also on September 1, 2010, we entered into a loan agreement and related documents for a
$6,000,000 revolving line of credit with MLIC as the lead lender (the Line of Credit). The funds
from the Line of Credit will be used for the production of biodiesel at our plant and up to
$400,000 of the funds may be used by us for risk management to hedge biodiesel. Any funds
disbursed to us under the Line of Credit shall be repaid to MLIC, along
with interest, by May 31, 2011. Interest under the loan shall be variable, based on 12% above the
current thirty (30) day LIBOR rate. As of December 31, 2010 the Company has borrowed no money
against the Line of Credit. Effective February 1, 2011, we entered into an additional Amendment to
the Line of Credit with MLIC to extend the due date of the Line of Credit through January 2, 2012.
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In addition, we are required to maintain certain financial ratios and covenants, including,
but not limited to: net tangible worth of $7 million; and we agreed not to purchase or redeem our
units, declare or pay any dividends, except dividends payable solely in units, make any
distributions to members or set aside any funds for any such purpose, without the prior written
approval of the MLIC. With our current sales experience and our high fixed costs structure we have
fallen below the $7 million threshold in our first quarter of fiscal year 2011. Effective February
1, 2011, we entered into an agreement with MLIC to reduce the equity level threshold to $5 million.
Grants and Government Programs
We entered into a loan with the Iowa Department of Economic Development for
$400,000. This loan is part of the Iowa Department of Economic Developments Value Added Program.
One hundred thousand dollars of the loan is forgivable (and has since been forgiven) and the
remaining $300,000 of principal amount does not bear interest. We recently requested and were
granted a six-month waiver on payments. This waiver will begin in January 2011 and as a result of
this waiver, interest will be at 6.0% when we again begin making payments. The balance at December
31, 2010 was $55,000.
In addition, on May 14, 2007, we entered into a Railroad Revolving Loan and Grant Program
Agreement with the Iowa Department of Transportation for an amount of up to $168,000 (or 13.3% of
the cost for the railroad project, whichever is less) and a loan amount of up to $132,000 (or 10.5%
of the cost for the railroad project, whichever is less). Interest on the loan amount is at 3.67%
per year for five (5) years and we made our first payment under this loan in December 2008. The
balance at December 31, 2010 was $68,978.
Distribution to Unit Holders
As of December 31, 2010, the board of directors of the Company had not paid any distributions.
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.
Revenue Recognition
Revenue from the production of biodiesel and glycerin is recorded when title transfers to
customers. Biodiesel and glycerin are generally shipped FOB from the plant.
Derivative Instruments and Hedging Activities
Accounting Standards Codification (ASC) Topic No. 815, Derivatives and Hedging Activities, or
ASC 815, requires a company to evaluate its contracts to determine whether the contracts are
derivatives. Certain derivative contracts may be exempt under ASC 815 as normal purchases or normal
sales, which 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. At this time, our forward
contracts related to the purchase of soy oil are considered normal purchases and, therefore, are
exempted from the accounting and reporting requirements of ASC 815.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment, are evaluated for impairment on
the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impaired asset is written down to our
estimated fair market value based on the best information available. Considerable management
judgment is necessary to estimate discounted future cash flows and may differ from actual cash
flows.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The Company is not required to include this information due to its status as a smaller
reporting company.
Item 4. | Controls And Procedures |
Our management, including our Chief Executive Officer (the principal executive officer),
Michael Bohannan, along with our Chief Financial Officer (the principal financial officer), J.
William Pim, have reviewed and evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2010. Based on a review and evaluation, these officers believe that
our disclosure controls and procedures are effective in ensuring that material information related
to us is recorded, processed, summarized and reported within the time periods required by the forms
and rules of the Securities and Exchange Commission.
Our management, consisting our Chief Executive Officer and our Chief Financial Officer, have
reviewed and evaluated any changes in our internal control over financial reporting that occurred
as of December 31, 2010 and there has been no change that has materially affected or is reasonably
likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
In February 2009, we gave notice to REG that it had breached the management and operational
services agreement (MOSA) in a variety of manners and requested the annual review of the MOSA, as
provided for in the MOSA. After not receiving requested information and being unable to resolve any
disputes, in June 2009, we gave notice to REG that we intended to proceed with arbitration to
resolve disputes arising under the MOSA. On or about October 30, 2009, we delivered our Statement
of Claims to REG and the selected arbitrator alleging the following: (1) breach of the MOSA for
failure to utilize best efforts; (2) breach of the covenant of good faith and fair dealing; (3)
breach of fiduciary duties; (4) fraudulent non-disclosure; and (5) negligent misrepresentation. On
or about December 7, 2009, REG responded to these claims and also asserted counterclaims for breach
of written contract, breach of the covenant of good faith and fair dealing, breach of oral contract
and promissory estoppel, all of which arise out of one customer issue. On or about December 16,
2009, we responded to the counterclaims. The parties have selected Wayne Mark as the arbiter and a
scheduling order has been entered. The parties have exchanged and provided initial responses to
written discovery and other discovery matters continue. The arbitration is set for August 22,
2011 through September 2, 2011 in Des Moines, Iowa.
Item 1A. | Risk Factors. |
The Company is not required to include this information due to its status as a smaller
reporting company.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
We did not sell any membership units during the three months ended December 31,
2010. None of our membership units were purchased by or on behalf of the Company or any affiliated
purchaser (as defined in Rule 10b-18(a)(3) of the Exchange Act) of the Company during the three
months ended December 31, 2010.
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Item 3. | Defaults Upon Senior Securities. |
As of December 31, 2010, we were not in compliance with our Loan Agreement. We were required
under our Loan Agreement to maintain certain financial ratios and covenants, including, but not
limited to: net tangible worth of $7 million; and we agreed not to purchase or redeem our units,
declare or pay any dividends, except dividends payable solely in units, make any distributions to
members or set aside any funds for any such purpose, without the prior written approval of the
MLIC. With our current sales experience and our high fixed costs structure we have fallen below
the $7 million threshold in our first quarter of fiscal year 2011. However, effective February 1,
2011, we entered into an agreement with MLIC to reduce the equity level threshold to $5 million.
Without this modification, we would have been in default under our Loan Agreement.
Item 4. | Removed and Reserved. |
Item 5. | Other Information. |
The Companys 2011 annual meeting of members will be held on Saturday, May 7, 2011 at the
Knights of Columbus Hall, 606 W. 3rd Street, Washington, Iowa. Registration
for the meeting will begin at 12:00 p.m. The 2011 Annual Meeting will commence at approximately
1:00 p.m. The purposes of the meeting are to: (1) Elect two (2) Group I Directors to our Board of
Directors; (2) Member approval to the appointment of Larry Rippey to complete a Group II director
term until the 2012 Annual Meeting; (3) Member approval to the appointment of Steven Powell to
complete a Group III director term until the 2013 Annual Meeting; and (4) Transact such other
business as may properly come before the 2011 Annual Meeting or any adjournments thereof.
Because the 2011 annual meeting date has changed by more than thirty (30) days from the date
disclosed in our 2010 annual meeting proxy statement, the deadline for submitting shareholder
proposals is March 8, 2011, with any shareholder proposals received after such date considered
untimely. The deadline for director nominations is also March 8, 2011.
Item 6. | Exhibits |
The following exhibits are filed as part of, or are incorporated by reference into, this
report:
Exhibit No. | Description | Method of Filing | ||
10.1
|
First Addendum to Loan Agreement between MLIC Asset Holdings LLC, Federation Bank and Washington State Bank and Iowa Renewable Energy, LLC dated February 1, 2011. | * | ||
10.2
|
Second Addendum to Third Amendment to Construction-Term Loan Agreement between MLIC Asset Holdings LLC, successor-in-interest to Outsource Services Management, LLC, successor-in-interest to the Federal Deposit Insurance Corporation as receiver of BankFirst and Iowa Renewable Energy, LLC dated February 1, 2011. | * | ||
31.1
|
Certificate pursuant to 17 CFR 240 13a-14(a) | * | ||
31.2
|
Certificate pursuant to 17 CFR 240 13a-14(a) | * | ||
32.1
|
Certificate pursuant to 18 U.S.C. Section 1350 | * | ||
32.2
|
Certificate pursuant to 18 U.S.C. Section 1350 | * |
(*) | Filed herewith. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
IOWA RENEWABLE ENERGY, LLC |
||||
Date: February 14, 2011 | /s/ Michael Bohannan | |||
Michael Bohannan | ||||
Chairman and President |
Date: February 14, 2011 | /s/ J. William Pim | |||
J. William Pim | ||||
Chief Financial Officer |
25