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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017

or

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: 000-52421

 

ADVANCED BIOENERGY, LLC

(Exact name of Registrant as Specified in its Charter)

 

Delaware

 

20-2281511

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

8000 Norman Center Drive, Suite 610

Bloomington, Minnesota 55437

(763) 226-2701

(Address, including zip code, and telephone number,

including area code, of Registrant’s Principal Executive Offices)

 

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. Yes        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       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,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No

As of February 1, 2018, the number of outstanding units was 25,410,851.

 

 


ADVANCED BIOENERGY, LLC

FORM 10-Q

Index

 

 

Page

Part I. Financial Information

 

Item 1. Financial Statements

3

Consolidated Balance Sheets

3

Consolidated Statements of Operations

4

Consolidated Statement of Changes in Members’ Equity

5

Consolidated Statements of Cash Flows

6

Notes to Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

27

Item 4. Controls and Procedures

28

Part II. Other Information

 

Item 1. Legal Proceedings

29

Item 1A. Risk Factors

29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3. Defaults Upon Senior Securities

29

Item 4. Mine Safety Disclosure

29

Item 5. Other Information

29

Item 6. Exhibits

29

Exhibit Index

30

Signatures

31

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands)

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,436

 

 

$

18,804

 

Accounts receivable:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

3,193

 

 

 

4,039

 

Other receivables

 

 

998

 

 

 

805

 

Inventories

 

 

5,153

 

 

 

4,334

 

Prepaid expenses

 

 

1,074

 

 

 

665

 

Restricted cash

 

 

1,000

 

 

 

1,000

 

Total current assets

 

 

29,854

 

 

 

29,647

 

Property and equipment, net

 

 

30,615

 

 

 

31,226

 

Other assets

 

 

730

 

 

 

756

 

Total assets

 

$

61,199

 

 

$

61,629

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,590

 

 

$

3,531

 

Accrued expenses

 

 

2,221

 

 

 

2,221

 

Current portion of long-term debt (stated principal amount of $4,465

   and $4,677 at December 31, 2017 and September 30, 2017, respectively)

 

 

4,369

 

 

 

4,581

 

Total current liabilities

 

 

12,180

 

 

 

10,333

 

Other liabilities

 

 

29

 

 

 

31

 

Long-term debt (stated principal amount of $19,000 and $20,000 at

   December 31, 2017 and September 30, 2017, respectively)

 

 

18,809

 

 

 

19,785

 

Total liabilities

 

 

31,018

 

 

 

30,149

 

Members' equity:

 

 

 

 

 

 

 

 

Members' capital, no par value, 25,410,851 units issued and outstanding

 

 

44,826

 

 

 

44,826

 

Accumulated deficit

 

 

(14,645

)

 

 

(13,346

)

Total members' equity

 

 

30,181

 

 

 

31,480

 

Total liabilities and members' equity

 

$

61,199

 

 

$

61,629

 

 

See notes to consolidated financial statements.

3


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Operations

(Dollars in thousands, except per unit data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2017

 

 

2016

 

 

Net sales

 

 

 

 

 

 

 

 

 

Ethanol and related products

 

$

30,498

 

 

$

38,508

 

 

Total net sales

 

 

30,498

 

 

 

38,508

 

 

Cost of goods sold

 

 

30,908

 

 

 

31,151

 

 

Gross profit (loss)

 

 

(410

)

 

 

7,357

 

 

Selling, general and administrative expenses

 

 

690

 

 

 

1,125

 

 

Operating income (loss)

 

 

(1,100

)

 

 

6,232

 

 

Other income

 

 

2

 

 

 

29

 

 

Interest income

 

 

1

 

 

 

4

 

 

Interest expense

 

 

(202

)

 

 

(228

)

 

Net income (loss)

 

$

(1,299

)

 

$

6,037

 

 

Weighted average units outstanding - basic and diluted

 

 

25,411

 

 

 

25,411

 

 

Income (loss) per unit - basic and diluted

 

$

(0.05

)

 

$

0.24

 

 

 

See notes to consolidated financial statements.

4


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statement of Changes in Members’ Equity

For the Three Months Ended December 31, 2017

(Dollars in thousands)

(Unaudited)

 

 

 

Member

 

 

Members'

 

 

Accumulated

 

 

 

 

 

 

 

Units

 

 

Capital

 

 

Deficit

 

 

Total

 

MEMBERS' EQUITY - September 30, 2017

 

 

25,410,851

 

 

$

44,826

 

 

$

(13,346

)

 

$

31,480

 

Net loss

 

 

-

 

 

 

-

 

 

 

(1,299

)

 

 

(1,299

)

MEMBERS' EQUITY - December 31, 2017

 

 

25,410,851

 

 

$

44,826

 

 

$

(14,645

)

 

$

30,181

 

 

See notes to consolidated financial statements

5


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,299

)

 

$

6,037

 

Adjustments to reconcile net income (loss) to operating activities cash flows:

 

 

 

 

 

 

 

 

Depreciation

 

 

964

 

 

 

926

 

Amortization of deferred financing costs

 

 

25

 

 

 

25

 

Amortization of deferred rent

 

 

(2

)

 

 

(3

)

Gain on disposal of assets

 

 

-

 

 

 

(28

)

Change in working capital components:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

846

 

 

 

(3,010

)

Other receivables

 

 

(193

)

 

 

(6

)

Inventories

 

 

(819

)

 

 

(812

)

Prepaid expenses

 

 

(409

)

 

 

(349

)

Accounts payable

 

 

2,084

 

 

 

1,620

 

Accrued expenses

 

 

-

 

 

 

(209

)

Net cash provided by operating activities

 

 

1,197

 

 

 

4,191

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(378

)

 

 

(1,065

)

Change in other assets

 

 

26

 

 

 

-

 

Net cash used in investing activities

 

 

(352

)

 

 

(1,065

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments on debt

 

 

(1,213

)

 

 

(1,000

)

Proceeds from debt

 

 

-

 

 

 

1,102

 

Net cash provided by (used in) financing activities

 

 

(1,213

)

 

 

102

 

Net increase (decrease) in cash and cash equivalents

 

 

(368

)

 

 

3,228

 

Beginning cash and cash equivalents

 

 

18,804

 

 

 

15,416

 

Ending cash and cash equivalents

 

$

18,436

 

 

$

18,644

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

188

 

 

$

213

 

Supplemental disclosure of non-cash financing and investing activities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses related to fixed assets

 

$

-

 

 

$

256

 

 

See notes to consolidated financial statements.

6


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Significant Accounting Policies

The consolidated financial statements include the accounts of Advanced BioEnergy, LLC (“ABE” or the “Company”) and its wholly owned subsidiaries, ABE Fairmont, LLC (“ABE Fairmont”) and ABE South Dakota, LLC (“ABE South Dakota”). Substantially all of the assets of ABE Fairmont were sold in December 2012 and the subsidiary is now inactive.  All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  The interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2017. The financial information as of December 31, 2017 and the results of operations for the three months ended December 31, 2017 are not necessarily indicative of the results for the fiscal year ending September 30, 2018. In the opinion of management, the interim financial statements reflect all normal recurring adjustments necessary for fair presentation.

Certain expenses recognized in previous quarters were reclassified for year-end presentation in the prior year to be consistent with the classifications that management had adopted. As such, certain amounts have been reclassified for the prior year quarter periods presented, with no effect on members’ equity or net income.

The Company currently operates two ethanol production facilities in Aberdeen and Huron, South Dakota with a combined production capacity of 80 million gallons per year.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash balances are maintained in bank depositories and periodically exceed federally insured limits. The Company has not experienced losses in these accounts.  Restricted cash at September 30, 2017 and December 31, 2017 included a deposit for a rail car sublease.

Fair Value of Financial Instruments

Financial instruments include cash, cash equivalents and restricted cash, accounts receivable, accounts payable, accrued expenses, and long-term debt. The fair value of the long-term debt is estimated based on level 3 inputs based on current anticipated interest rate that management believes would currently be available to the Company for similar debt, taking into account the current credit risk of the Company and other market factors.  Based on these factors, the fair value of the long-term debt is currently estimated at carrying value. Excluding cash and cash equivalents, the fair value of the other financial instruments are estimated to approximate carrying value due to the short-term nature of these instruments, and are considered to be Level 3 inputs.

Receivables

Credit sales are made to a relatively small numbers of customers with no collateral required. Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual receivables and considering a customer’s financial condition, credit history and current economic conditions. Receivables are written off if deemed uncollectible. Recoveries of receivables previously written off are recorded when received.  There was no allowance for doubtful accounts recorded at December 31, 2017 or September 30, 2017.

Inventories

Ethanol inventory, raw materials, work-in-process and parts inventory are valued using methods that approximate the lower of cost (first-in, first-out) or net realizable value (NRV). Distillers grains and related products are stated at NRV. In the valuation of inventories and purchase and sale commitments, the Company determines NRV by estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

7


Property and Equipment

Property and equipment is carried at cost less accumulated depreciation computed using the straight-line method over the estimated useful lives:

 

Office equipment

 

3-7 Years

Other equipment

 

1-5 Years

Process equipment

 

15 Years

Buildings

 

40 Years

 

Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the estimated fair value on that date.

Commodity Sales and Purchase Contracts, Derivative Instruments

The Company enters into forward sales contracts for ethanol, distillers and corn oil, and purchase contracts for corn and natural gas. The Company classifies these sales and purchase contracts as normal sales and purchase contracts and accordingly these contracts are not marked to market. These contracts provide for the sale or purchase of an item other than a financial instrument or derivative instrument that will be delivered in quantities expected to be sold or used over a reasonable period in the normal course of business.

In addition, certain derivative financial instruments that meet the criteria for derivative accounting treatment also qualify for a scope exception to derivative accounting, as they are considered normal purchases and sales.  The availability of this exception is based on the assumption that the Company has the ability and it is probable that it will deliver or take delivery of the underlying item.  Derivatives that are considered to be normal purchases and sales are exempt from derivative accounting treatment, and are accounted for under accrual accounting.

Revenue Recognition

Ethanol revenue is recognized when product title and all risk of ownership is transferred to the customer as specified in the contractual agreements with the marketers. Under the terms of the marketing agreements, revenue is recognized when product is loaded into rail cars or trucks for shipment. Revenue from the sale of co-products is recorded when title and all risk of ownership transfers to customers. Co-products are normally shipped free on board (“FOB”) shipping point. In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, commissions due to the marketers are deducted from the gross sale price at the time of payment.  Interest income is recognized as earned.

Income (loss) per Unit

Basic and diluted income (loss) per unit is computed using the weighted-average number of vested units outstanding during the period. Unit warrants are considered unit equivalents and are considered in the diluted income-per-unit computation.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles, or GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.

Income Taxes

The Company has elected to be treated as a partnership for tax purposes and generally does not incur income taxes. Instead, the Company’s earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements. The Company files income tax returns in the U.S. federal and various state jurisdictions.

Recent Accounting Pronouncements

Effective October 1, 2018, the Company will adopt the amended guidance in ASC 606, Revenue from Contracts with Customers, which requires revenue recognition to reflect the transfer of promised goods or services to customers in an amount that

8


reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated standard permits either the retrospective or cumulative effect transition method.  The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

Effective October 1, 2018, the Company will adopt the amended guidance in ASC 230, Statement of Cash Flows, which amends existing guidance to require that the Statement of Cash Flows now include restricted cash and restricted cash equivalents along with cash and cash equivalents when reconciling beginning and end-of-period amounts.  Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the Statement of Cash Flows.  The amended standard is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted.  Because our restricted cash as of December 31, 2017 was $1.0 million, we do not expect this standard to have a significant effect on the presentation of our Statement of Cash Flows.

In February 2016, the ASC was amended and a new accounting standard, ASC Topic 842, “Leases,” was issued to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In order to meet that objective, the new standard requires recognition of the assets and liabilities that arise from leases. Accordingly, a lessee will recognize a right-of-use (ROU) asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The lease liability will initially be measured at the present value of the future minimum lease payments over the lease term. The ROU asset will initially be measured as the sum of the initial lease liability, initial costs directly attributable to negotiating and arranging the lease, and payments made by a lessee to the lessor at or before the lease commencement date less any lease incentives received. Lessees can make an accounting policy election by class of underlying asset not to recognize a ROU asset and corresponding lease liability for leases with a term of 12 months or less. Accounting by lessors will remain largely unchanged from current U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases, leveraged leases, and amounts previously recognized in accordance with the business combinations guidance for leases. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We have not completed the evaluation of the effect this standard will have on our financial statements, but we believe that adopting this standard may have a material impact on our balance sheet.

 

 

2. Inventories

A summary of inventories is as follows (in thousands):

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

Chemicals

 

$

923

 

 

$

939

 

Work in process

 

 

683

 

 

 

646

 

Ethanol

 

 

1,529

 

 

 

788

 

Distillers grain

 

 

234

 

 

 

157

 

Supplies and parts

 

 

1,784

 

 

 

1,804

 

Total

 

$

5,153

 

 

$

4,334

 

 

9


3. Property and Equipment

A summary of property and equipment is as follows (in thousands):

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

Land

 

$

1,811

 

 

$

1,811

 

Buildings

 

 

8,146

 

 

 

8,128

 

Process equipment

 

 

109,643

 

 

 

109,006

 

Other equipment

 

 

196

 

 

 

147

 

Office equipment

 

 

1,770

 

 

 

1,770

 

Construction in process

 

 

228

 

 

 

580

 

 

 

 

121,794

 

 

 

121,442

 

Accumulated depreciation

 

 

(91,179

)

 

 

(90,216

)

Property and equipment, net

 

$

30,615

 

 

$

31,226

 

 

4. Long-term Debt

A summary of long-term debt is as follows (in thousands, except percentages):

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

December 31,

 

 

September 30,

 

 

 

Interest Rate

 

 

2017

 

 

2017

 

ABE South Dakota:

 

 

 

 

 

 

 

 

 

 

 

 

Senior debt principal - variable

 

4.74%

 

 

$

23,465

 

 

$

24,677

 

Deferred financing costs

 

N/A

 

 

 

(287

)

 

 

(311

)

Total outstanding (stated principal)

 

 

 

 

 

$

23,178

 

 

$

24,366

 

 

The estimated maturities of debt are as follows (in thousands):

 

 

 

Senior Debt

 

 

Deferred

 

 

 

 

 

Due By December 31:

 

Principal

 

 

Financing Costs

 

 

Total

 

2018

 

$

4,465

 

 

$

(96

)

 

$

4,369

 

2019

 

 

4,000

 

 

 

(96

)

 

 

3,904

 

2020

 

 

4,000

 

 

 

(95

)

 

 

3,905

 

2021

 

 

11,000

 

 

 

-

 

 

 

11,000

 

Total debt

 

$

23,465

 

 

$

(287

)

 

$

23,178

 

 

2015 Senior Credit Agreement for the South Dakota Plants

On December 29, 2015, ABE South Dakota entered into a Master Credit Agreement (“2015 Credit Agreement”) with AgCountry Farm Credit Services, PCA as lender (“AgCountry”) to refinance its existing 2010 Senior Credit Agreement. On December 29, 2015, the Company also entered into (i) a First Supplement to the 2015 Credit Agreement covering a $10.0 million Revolving Term Facility and (ii) a Second Supplemental covering a $20.0 million Term Loan. The transaction funded on December 30, 2015.

The $20.0 million Term Loan has a variable interest rate (“Variable Rate”) equal to the one-month LIBOR rate plus a “Margin” of 350 basis points. The applicable LIBOR interest rate at December 31, 2017 was 1.24%. Beginning April 1, 2016, the Company began making quarterly principal payments of $1.0 million, plus accrued interest, on the Term Loan. The Term Loan will be fully amortized over five years with the final payment on January 1, 2021. The Company may elect one or more fixed or adjustable interest rates, rather than the Variable Rate, based on AgCountry’s cost of funds at the time of the election, plus the Margin. Any election must apply to $1.0 million or more owing on the Term Loan. At December 31, 2017, the balance of the Term Loan was $13.0 million.

The $10.0 Revolving Term Facility also has a Variable Rate equal to the one-month LIBOR rate plus an initial Margin of 350 basis points. Borrowings under the Revolving Term Facility may be advanced, repaid and re-borrowed during the term. The Company is required to make quarterly interest payments on the Revolving Term Facility, with the full principal amount outstanding due on January 1, 2021. Under the Revolving Term Facility, the Company is required to pay unused commitment fees of 50 basis points. At December 31, 2017, the balance of the Revolving Term Facility was $10.0 million.

10


The Margin will (i) decrease to 3.25% when the aggregate principal balance of all outstanding loans and the unfunded commitment level is $20.0 million or less, and (ii) decrease to 3.00% when this amount is $15.0 million or less.

ABE South Dakota, LLC also entered into a Security Agreement with AgCountry under which borrowings under the 2015 Credit Agreement are secured by substantially all of ABE South Dakota’s assets. AgCountry holds a first priority security interest and mortgage in all inventory, accounts receivable, intangibles, equipment, fixtures, buildings, and a first mortgage in land owned or leased by ABE South Dakota.

The 2015 Credit Agreement also includes customary financial and non-financial covenants that limit capital expenditures, distributions and debt and require minimum working capital, current ratio, debt to EBITDA, and fixed charge coverage ratios.

2016 Term Loan

On September 28, 2016, ABE South Dakota entered into the Third Supplement to the 2015 Credit Agreement (“2016 Term Loan”) with AgCountry to finance the corn oil extraction system at the Huron plant.  The total loan commitment for the 2016 Term Loan was $1.7 million, and the loan has a variable interest rate equal to the one-month LIBOR rate plus a “Margin” of 350 basis points.  A total of $1.1 million of the $1.7 million commitment was drawn from this loan. On January 1, 2017, the Company began making quarterly payments of accrued interest on the 2016 Term Loan. On April 1, 2017, the Company began making quarterly principal payments of $212,500 on the 2016 Term Loan. As of December 31, 2017 the balance of the 2016 Term Loan was $0.5 million. 

Amendment and Waivers to 2015 Credit Agreement

On September 28, 2016, ABE South Dakota entered into a Limited Waiver and First Amendment to the 2015 Credit Agreement (“First Amendment”) to (i) eliminate the Owner’s Equity Ratio Covenant, (ii) temporarily increase the Capital Expenditures Covenant to $3.0 million for fiscal 2016 to finance the corn oil extraction system at the Huron plant, and (iii) waive other obligations related to the post closing agreement With respect to the Company’s 2013 sale of its Fairmont, Nebraska plant. 

On November 19, 2016, ABE South Dakota received a waiver to the 2015 Credit Agreement from that waived certain Events of Default related to the Working Capital requirement and the Total Outstanding Debt to EBITDA Ratio at September 30, 2016.

On October 16, 2017, ABE South Dakota received a waiver to the 2015 Credit Agreement from that waived an Event of Default related to the Capital Expenditure Covenant for fiscal 2017. The Capital Expenditure Covenant for fiscal 2016 was increased to $3.0 million due to addition of the corn oil extraction system at Huron. However, a portion of the capital expenditure cost was incurred in fiscal 2017, so an additional waiver was granted for this period.

ABE Letter of Credit

The Company has a $1.0 million irrevocable and non-transferable standby letter of credit related to a rail car sublease.  This letter of credit is collateralized by $1.0 million of cash in a restricted account; the cash in this account has been classified as restricted cash.

5. Major Customers

ABE South Dakota has ethanol marketing agreements with NGL Energy Partners, LP (“NGL”), a diversified energy business.  These ethanol marketing agreements require that we sell to NGL all of the denatured fuel-grade ethanol produced at the South Dakota plants.  The term of these ethanol marketing agreements expires on June 30, 2019.

ABE South Dakota is party to a co-product marketing agreement with Dakotaland Feeds, LLC (“Dakotaland Feeds”), whereby Dakotaland Feeds markets wet distillers produced at the Huron plant and modified distillers produced at the Aberdeen plant to third parties for an agreed-upon commission.  ABE South Dakota has a marketing agreement with Gavilon to market the dried distillers’ grains produced at the Aberdeen and Huron plants through July 31, 2018.  ABE South Dakota self-markets its wet and a small portion of modified distillers’ grains produced at the Aberdeen plant.

ABE South Dakota is party to an agreement with Gavilon to market all the corn oil produced by the Huron and Aberdeen plants through September 30, 2018 and November 30, 2018, respectively.

11


Sales and receivables from the ABE South Dakota’s major customers were as follows (in thousands):

 

 

 

As of and for the Quarter Ending

 

 

As of and for the Quarter Ending

 

 

As Of

 

 

 

December 31,

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

NGL Energy - Ethanol

 

 

 

 

 

 

 

 

 

 

 

 

Three months revenues

 

$

23,490

 

 

$

31,802

 

 

 

 

 

Receivable balance at period end

 

 

2,090

 

 

 

6,718

 

 

$

3,116

 

Gavilon - Corn Oil & Distillers Grains

 

 

 

 

 

 

 

 

 

 

 

 

Three months revenues

 

$

3,810

 

 

$

3,633

 

 

 

 

 

Receivable balance at period end

 

 

468

 

 

 

181

 

 

$

326

 

Dakotaland Feeds - Distillers Grains

 

 

 

 

 

 

 

 

 

 

 

 

Three months revenues

 

$

2,638

 

 

$

2,747

 

 

 

 

 

Receivable balance at period end

 

 

546

 

 

 

454

 

 

$

575

 

 

6. Risk Management

The Company is exposed to a variety of market risks, including the effects of changes in commodity prices and interest rates. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company’s risk management program seeks to reduce the potentially adverse effects that the volatility of these markets may have on its current and future operating results. To reduce these effects, the Company generally attempts to fix corn purchase prices and related sale prices of ethanol, distillers’ grains and corn oil, with forward purchase and sale contracts to lock in future operating margins. The Company had entered into the following fixed price forward contracts at December 31, 2017:

 

Commodity

 

Type

 

Quantity

 

Amount

(in 000's)

 

 

Period

Covered

Through

Ethanol

 

Sale

 

316,800 gallons

 

$

365

 

 

January 31, 2018

Distillers grains

 

Sale

 

21,661 tons

 

 

1,827

 

 

January 31, 2018

Corn oil

 

Sale

 

45,000 lbs

 

 

8

 

 

January 31, 2018

 

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales” and therefore are not marked to market in the financial statements.

7.  Parent Financial Statements

The following financial information represents the unconsolidated financial statements of Advanced BioEnergy, LLC (“ABE”) as of December 31, 2017 and September 30, 2017, and for the three months ended December 31, 2017 and 2016.  ABE’s ability to receive distributions from ABE South Dakota is based on the terms and conditions in ABE South Dakota 2015 Credit Agreement. Under the 2015 Credit Agreement, ABE South Dakota is allowed to make equity distributions of up to 40% of its net income and may distribute up to 100% of its net income if it achieves and maintains an owner’s equity ratio of at least 60% and working capital of at least $15 million. There were no distributions from ABE South Dakota during the last three fiscal years.

12


Advanced BioEnergy, LLC (Unconsolidated)

Balance Sheets

(Dollars in thousands)

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

499

 

 

$

725

 

Restricted cash

 

 

1,000

 

 

 

1,000

 

Prepaids

 

 

76

 

 

 

-

 

Total current assets

 

 

1,575

 

 

 

1,725

 

Property and equipment, net

 

 

44

 

 

 

54

 

Other assets:

 

 

 

 

 

 

 

 

Investment in ABE South Dakota

 

 

28,701

 

 

 

29,862

 

Other assets

 

 

32

 

 

 

32

 

Total assets

 

$

30,352

 

 

$

31,673

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accrued expenses

 

$

141

 

 

$

162

 

Other liabilities

 

 

30

 

 

 

31

 

Total liabilities

 

 

171

 

 

 

193

 

Members' equity:

 

 

 

 

 

 

 

 

Members' capital, no par value, 25,410,851 units issued and outstanding

 

 

44,826

 

 

 

44,826

 

Accumulated deficit

 

 

(14,645

)

 

 

(13,346

)

Total members' equity

 

 

30,181

 

 

 

31,480

 

Total liabilities and members' equity

 

$

30,352

 

 

$

31,673

 

 

13


Advanced BioEnergy, LLC (Unconsolidated)

Statements of Operations

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (losses) of consolidated subsidiary

 

$

(1,161

)

 

$

6,222

 

 

Selling, general and administrative expenses

 

 

(139

)

 

 

(188

)

 

Operating income (loss)

 

 

(1,300

)

 

 

6,034

 

 

Interest income

 

 

1

 

 

 

3

 

 

Net income (loss)

 

$

(1,299

)

 

$

6,037

 

 

 

14


Advanced BioEnergy, LLC (Unconsolidated)

Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,299

)

 

$

6,037

 

Adjustments to reconcile net income (loss) to operating activities cash flows:

 

 

 

 

 

 

 

 

Depreciation

 

 

10

 

 

 

18

 

Equity in earnings (losses) of consolidated subsidiaries

 

 

1,161

 

 

 

(6,222

)

Amortization of deferred revenue and rent

 

 

(1

)

 

 

(2

)

Change in working capital components:

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

(76

)

 

 

(74

)

Accounts payable

 

 

-

 

 

 

30

 

Accrued expenses

 

 

(21

)

 

 

(23

)

Net cash used in operating activities

 

 

(226

)

 

 

(236

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

 

-

 

 

 

-

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

-

 

 

 

-

 

Net decrease in cash and cash equivalents

 

 

(226

)

 

 

(236

)

Beginning cash and cash equivalents

 

 

725

 

 

 

5,176

 

Ending cash and cash equivalents

 

$

499

 

 

$

4,940

 

 

 

 

15


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations, performance and prospects. All statements that are not historical or current facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Certain of these risks and uncertainties are described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended September 30, 2017 and in this Form 10-Q. These risks and uncertainties include, but are not limited to, the following:

 

our operational results are subject to fluctuations in the prices of grain, utilities and ethanol, which are affected by various factors including weather, production levels, supply, demand, changes in technology and government support and regulations;

 

our margins have fluctuated in the past and could become negative, which may affect our ability to meet current obligations and debt service requirements at our ABE South Dakota entity;

 

our dependence on third parties for marketing and sale of our ethanol and co-products;

 

our dependence on South Dakota Wheat Growers for the corn we need to produce ethanol;

 

our risk mitigation strategies could be unsuccessful and could materially harm our results;

 

our cash distributions depend upon our future financial and operational performance and will be affected by debt covenants, reserves and operating expenditures;

 

ethanol may trade at a premium to gasoline at times, causing a disincentive for discretionary blending of ethanol beyond the rates required to comply with the RFS (as defined below). Consequently, there may be a negative impact on ethanol pricing and demand;

 

current government mandated standards such as the RFS may be reduced or eliminated, and legislative acts taken by state governments such as California related to low-carbon fuels that include the effects of indirect land use, may have an adverse effect on our business;

 

alternative fuel additives may be developed that are superior to, or cheaper than ethanol;

 

transportation, storage and blending infrastructure may become impaired, preventing ethanol from reaching markets;

 

our operating facilities may experience technical difficulties and not produce the gallons of ethanol expected;

 

our units are subject to a number of transfer restrictions, and although our units are now listed on an internet-based matching platform, we cannot ensure that a market will ever develop for our units;

 

the ability of our ABE South Dakota subsidiary to make distributions to ABE in light of restrictions in this subsidiary’s credit facility;

 

anti-dumping and countervailing duties investigations by the Chinese government into U.S. distillers grains exported to China could result in reduced export demand for distillers grains and have a negative impact on domestic distillers grain prices;

 

increases in ethanol tariffs from 5 to 30 percent imposed by the Chinese government as of January 2017, could result in reduced export demand for ethanol and have a negative impact on domestic ethanol prices;

 

in late August 2017, the Brazilian government imposed a tariff of 20 percent on U.S. ethanol imports. The tariff will apply to imports after an initial tax-free quota of 600 million liters, or 158.5 million gallons, per year. The tariff could result in reduced export demand for United States ethanol and have a negative impact on domestic ethanol prices;

 

the supply of ethanol rail cars in the market has fluctuated in recent years and may affect our ability to obtain new tanker cars or negotiate new leases at a reasonable fee when our current leases expire; and

 

an increase in rail traffic congestion throughout the United States primarily due to the increase in cargo trains carrying shale oil, which, from time to time, has and may continue to affect our ability to return our tanker rail cars to the Aberdeen and Huron plants on a timely basis. Delays in returning rail cars to our plants may affect our ability to operate our plants at full capacity due to ethanol storage capacity constraints.

16


You can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed from time to time with the U.S. Securities and Exchange Commissions, which we refer to as the SEC, that advise interested parties of the risks and factors that may affect our business.

General

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements included herewith and notes to the consolidated financial statements thereto.

Overview

Advanced BioEnergy, LLC (“Company,” “we,” “our,” “Advanced BioEnergy” or “ABE”) was formed in 2005 as a Delaware limited liability company. Our business consists of producing ethanol and co-products, including wet, modified and dried distillers’ grains, and corn oil. Ethanol is a renewable, environmentally clean fuel source that is produced at numerous facilities in the United States, mostly in the Midwest. In the U.S., ethanol is produced primarily from corn and then blended with unleaded gasoline in varying percentages. The ethanol industry in the U.S. has grown significantly as the use of ethanol reduces harmful auto emissions, enhances octane ratings of the gasoline with which it is blended, offers consumers a cost-effective choice, and decreases the amount of crude oil the U.S. needs to import from foreign sources.

To execute our business plan, in November 2006 we acquired ABE South Dakota, LLC (f/k/a Heartland Grain Fuels, LP), which owned existing ethanol production facilities in Aberdeen and Huron, South Dakota. We commenced construction of our expansion facility in Aberdeen, South Dakota in April 2007, and commenced operations in January 2008. Our production operations are carried out primarily through our operating subsidiary ABE South Dakota, which owns and operates ethanol facilities in Aberdeen and Huron, South Dakota.

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Based on the related business nature and expected financial results, the Company’s plants are aggregated into one reporting segment.

DRY MILL PROCESS

Dry mill ethanol plants produce ethanol primarily by processing corn. Other possible feeds are grain sorghum, or other cellulosic materials. The corn is conveyed directly from South Dakota Wheat Growers to the plant where it is weighed and transferred to a scalper to remove rocks, cobs, and other debris.  The corn is then fed to a hammermill where it is ground into flour and conveyed into a slurry tank. Water, heat and enzymes are added to the flour in the slurry tank to start the process of converting starch from the corn into sugar. The slurry is pumped to a liquefaction tank where additional enzymes are added. These enzymes continue the starch-to-sugar conversion. The grain slurry is pumped into fermenters, where yeast is added to begin the batch-fermentation process. Fermentation is the process of the yeast converting the sugar into alcohol and carbon dioxide. After the fermentation is complete, a vacuum distillation system removes the alcohol from the corn mash. The 95% (190-proof) alcohol from the distillation process is then transported to a molecular sieve system, where it is dehydrated to 100% alcohol (200 proof). The 200-proof alcohol is then pumped to storage tanks and blended with a denaturant, usually natural gasoline. The 200-proof alcohol and 2.0-2.5% denaturant constitute denatured fuel ethanol.

Corn mash left over from distillation is pumped into a centrifuge for dewatering. The liquid from the centrifuge, known as thin stillage, is then pumped from the centrifuges to an evaporator, where it is concentrated into a syrup. The solids that exit the centrifuge, known as the wet cake, are conveyed to the dryer system. Syrup is added to the wet cake as it enters the dryer, where moisture is removed. The process produces distillers’ grains with solubles, which is used as a high-protein/fat animal-feed supplement. Dry-mill ethanol processing creates three forms of distillers’ grains: wet distillers’ grains with solubles, known as wet distillers’ grains; modified wet distillers’ grains with solubles, known as modified distillers’ grains; and dry distillers’ grains with solubles, known as dry distillers’ grains. Wet and modified distillers’ grains have been dried to approximately 65% and 50% moisture levels, respectively, and are predominately sold to nearby markets. Dried distillers’ grains have been dried to 11% moisture, have an almost indefinite shelf life and may be sold and shipped to more distant markets.

17


Corn oil is produced by processing evaporated thin stillage through a disk stack style centrifuge. Corn oil has a lower density than water or solids that make up the syrup. The centrifuges separate the relatively light oil from the heavier components of the syrup, eliminating the need for significant retention time. De-oiled syrup is returned to the process for blending into wet, modified, or dry distillers’ grains. The corn oil is then pumped into storage tanks before being loaded onto trucks for sale.

FACILITIES

The table below provides a summary of our ethanol plants in operation as of December 31, 2017:

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

Annual

 

 

Estimated

 

 

Estimated

 

 

 

 

 

 

 

Annual

 

 

Distillers

 

 

Annual

 

 

Annual

 

 

 

 

 

 

 

Ethanol

 

 

Grains

 

 

Corn Oil

 

 

Corn

 

 

Primary

Location

 

Opened

 

Production (3)

 

 

Production(1)

 

 

Processed

 

 

Processed

 

 

Energy Source

 

 

 

 

(Million gallons)

 

 

(000's Tons)

 

 

(000's lbs)

 

 

(Million bushels)

 

 

 

Aberdeen, SD(2)

 

January 2008

 

 

48

 

 

 

134

 

 

 

11,561

 

 

 

15.7

 

 

Natural Gas

Huron, SD

 

September 1999

 

 

32

 

 

 

97

 

 

 

5,717

 

 

 

11.4

 

 

Natural Gas

Consolidated

 

 

 

 

80

 

 

 

231

 

 

 

17,278

 

 

 

27.1

 

 

 

 

(1)

Our plants produce and sell wet, modified and dried distillers’ grains. The stated quantities are on a fully dried basis operating at nameplate capacity.

(2)

Our plant at Aberdeen formerly consisted of two production facilities that operated on a separate basis. The larger plant is represented in the table above. In April 2016, the Company ceased operations at its smaller, nine-million gallon Aberdeen facility due to inefficiencies at this older plant and capital expenditures required to keep the plant in operating condition, coupled with a weak margin environment. . In the fourth quarter of fiscal 2016, the Company decided not to resume operations at this facility in the future and, accordingly, impaired the value of this asset on its financial statements to an estimated salvage value of $200,000, which resulted in a loss of $1,584,000 in the fourth quarter of fiscal 2016.  During fiscal 2017, the Company received proceeds to date of $155,000 from the salvage of the smaller plant.  At September 30, 2017, the remaining value of the asset on the Company’s financial statements was $45,000. During the first quarter of fiscal 2018, the Company received proceeds of $26,603 from the salvage of the smaller plant.  At December 31, 2017, the remaining value of the asset on the Company’s financial statements was $18,397.

(3)

Actual permitted gallons are 65.7 million for Aberdeen and 42.0 million for Huron totaling 107.7 million gallons.

In October 2015, we amended the existing lease agreement for our corporate headquarters. Under the amended lease, we agreed to lease approximately 4,400 square feet for our corporate and administrative staff in Bloomington, Minnesota, through September 2021. The base rent is $19.00 per square foot, or approximately $7,000 per month for the twelve month period beginning July 1, 2016, with annual increases of $.50 per square foot. We believe this space will be sufficient for our needs until the end of the lease period.

We believe that our plants are in adequate condition to meet our current and future production goals. We believe that the plants are adequately insured for replacement cost plus related disruption expenditures.

Under the ABE South Dakota, LLC security agreement with AgCountry (defined below), AgCountry holds a first priority security interest and mortgage in all inventory, accounts receivable, intangibles, equipment, fixtures, buildings, and a first mortgage in land owned or leased by ABE South Dakota.

Plan of Operations through December 31, 2018

Over the next year, we will continue our focus on operational improvements at our South Dakota operating facilities. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at each of our plants, continuing emphasis on safety and environmental regulation, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.

18


Results of Operations for the Quarter Ended December 31, 2017 Compared to Quarter Ended December 31, 2016

The following table reflects quantities of our products sold at average net prices as well as bushels of corn ground and therms of natural gas burned at average costs for three months ended December 31, 2017 and 2016 for our South Dakota plants:

 

 

 

Three Months

 

 

Three Months

 

 

 

December 31, 2017

 

 

December 31, 2016

 

 

 

Quantity

 

 

Average Price

 

 

Quantity

 

 

Average Price

 

Product Sales Information

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Ethanol (gallons)

 

 

19,847

 

 

$

1.20

 

 

 

21,583

 

 

$

1.47

 

Distillers grains (tons)

 

 

52

 

 

$

111.71

 

 

 

54

 

 

$

100.41

 

Corn Oil (pounds)

 

 

4,558

 

 

$

0.20

 

 

 

5,188

 

 

$

0.24

 

 

Product Cost Information

 

Quantity

 

 

Average Cost

 

 

Quantity

 

 

Average Cost

 

Corn (bushels)

 

 

6,972

 

 

$

2.94

 

 

 

7,496

 

 

$

2.96

 

Natural Gas (therms)

 

 

531

 

 

$

5.50

 

 

 

562

 

 

$

3.42

 

 

Net Sales

Net sales for the quarter ended December 31, 2017 were $30.5 million, compared to $38.5 million for the quarter ending December 31, 2016, a decrease of $8.0 million or 21%. Ethanol gallons sold decreased by 8%, and ethanol prices decreased 19% for the quarter ended December 31, 2017, compared to the prior quarter ended December 31, 2016. As a percentage of net sales, ethanol sales were 78% and 83% and distillers’ sales were 19% and 14%, for the quarters ending December 31, 2017 and December 31, 2016, respectively.

Cost of Goods Sold

Cost of goods sold for the quarter ended December 31, 2017 was $30.9 million, compared to $31.2 million for the quarter ended December 31, 2016, a decrease of $0.3 million. Our primary costs in the production of ethanol and related co-products are corn and natural gas.  A $1.7 million decrease in corn costs, partially offset by a $1.0 million increase in natural gas costs represented a majority of the decrease in cost of goods sold in the quarter ended December 31, 2017. Corn costs represented 66% and 71% of cost of sales for the quarters ended December 31, 2017 and 2016, respectively. Corn prices decreased 1% during the three-month period ending December 31, 2017 compared to the prior year quarter. We used 7% less corn in the three-month period ending December 31, 2017, compared to the three months ended December 31, 2016.

Natural gas costs represented 10% and 6% of total cost of sales for the quarters ending December 31, 2017 and 2016, respectively. The cost of natural gas per mmbtu increased by 61% to $5.50 for the quarter ended December 31, 2017 compared to the previous year quarter. Prices were higher in the current year quarter due to extremely low temperatures, causing a rise in the price per mmbtu. Our natural gas consumption decreased by 6% due to decreased production in the quarter ending December 31, 2017 versus the quarter ending December 31, 2016.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses are comprised primarily of recurring administrative personnel compensation, legal, technology, consulting, insurance and accounting fees.

Overall selling, general and administrative costs for the quarter ended December 31, 2017 were $0.7 million compared to $1.1 million for the previous quarter.  The decrease was primarily related to higher contributions to industry trade organization, and higher employee bonus compensation in the quarter ended December 31, 2016.  As a percentage of net sales, selling, general and administrative expenses were 2% and 3% of net sales, for each quarter ending December 31, 2017 and 2016 respectively.

Interest Expense

Interest expense for the quarter December 31, 2017 was $202,000 compared to $228,000 for the quarter ending December 31, 2016. The lower interest expense for the current year quarter was the result of a lower level of long-term debt.

19


Changes in Financial Position for the Three Months ended December 31, 2017

Current Assets

The $0.2 million increase in current assets at December 31, 2017 compared to September 30, 2017 was primarily due to $1.3 million increase in inventory and prepaid expenses, mostly due to timing differences, offset by a decrease in operating margins in the three months ended December 31, 2017.

Property, Plant and Equipment

The $0.6 million decrease in property, plant and equipment at December 31, 2017 compared to September 30, 2017, was primarily due to $1.0 million of depreciation expense recognized in the fiscal year, partially offset by $0.4 million of capital expenditures.

Current Liabilities

Accounts payable and accrued expenses increased by $2.1 million at December 31, 2017 compared to September 30, 2017 primarily due to timing of payments to vendors.

Current Portion of Long-Term Debt and Long-term Debt

The current portion of long-term debt decreased by $212,500 at December 31, 2017 compared to September 30, 2017.  The decrease was due to decreases in the current portion of the 2016 Term Loan, which will be paid in full in fiscal year 2018.

Long-term debt decreased by $976,000 at December 31, 2017 compared to September 30, 2017. This decrease was due to a $1.0 million debt payment made in October 2017, slightly offset by deferred financing fees.

TRENDS AND UNCERTAINTIES AFFECTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS

Overview

Ethanol is currently blended with gasoline to meet regulatory standards as a clean air additive, an octane enhancer, a fuel extender and a gasoline alternative. According to the Renewable Fuels Association (“RFA”), as of October 2017, current annualized U.S. ethanol production capacity was approximately 15.7 billion gallons per year. The demand for ethanol is affected by what is commonly referred to as the “blending wall,” which is a regulatory cap on the amount of ethanol that can be blended into gasoline.  The blend wall affects the demand for ethanol, and as industry production capacity reaches the blend wall, the supply of ethanol in the market may surpass the demand. Assuming current gasoline usage in the U.S. at 143.37 billion gallons per year and a blend rate of 10% ethanol and 90% gasoline, the current blend wall is approximately 14.3 billion gallons of ethanol per year.

Ethanol is most commonly sold as E10, the 10 percent blend of ethanol that can be used in all American automobiles. Increasingly, ethanol is also available as E15, which is a higher octane fuel with a 15 percent blend of ethanol. In June 2012, the EPA approved E15 for use in vehicles with model years 2001 and later. According to the RFA, this group of approved vehicles makes up 80 percent of all vehicles on the road today.  Although regulatory issues remain in many states, E15 is now available in limited locations in 29 states.  Ethanol is also available as E85, a higher percentage ethanol blend for use in flexible fuel vehicles.

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers’ grains and natural gas. As a result of price volatility for these commodities, our operating results may fluctuate substantially. The price and availability of corn are subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, weather, federal policy and foreign trade. Because the market price of ethanol is not always directly related to corn prices, at times ethanol prices may lag movements in corn prices and compress the overall margin structure at the plants. As a result, operating margins may become negative and we may be forced to shut down our plants.

We focus on locking in margins based on a cash flows model that continually monitors market prices of corn, natural gas and other input costs against prices for ethanol and distillers grains at each of our production facilities. We create offsetting positions by using a combination of derivative instruments, fixed-price purchases and sales, or a combination of strategies to manage risk associated with commodity price fluctuations. Our primary focus is not to manage general price movements, for example minimize the cost of corn consumed, but rather to lock in favorable margins whenever possible. In the quarter ended December 31, 2017, the average Chicago OPIS Spot Ethanol Assessment was $1.37 per gallon and the average NYMEX RBOB spot gasoline price was $1.71 per gallon, or approximately $0.34 per gallon above ethanol prices.

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Federal policy has a significant impact on ethanol market demand. Ethanol blenders previously benefited from incentives that encouraged usage and a tariff on imported ethanol that supported the domestic industry, both of which have now expired. Additionally, the Environmental Protection Agency’s Renewable Fuels Standard (“RFS”) mandates increased level of usage of both corn-based and cellulosic ethanol. Any adverse ruling on, or legislation affecting, RFS mandates in the future could have an adverse impact on short-term ethanol prices and our financial performance in the future.

The ethanol industry and our business depend upon continuation of the federal and state ethanol supports such as the RFS. We believe the ethanol industry expanded due to these federal mandates, policies, and incentives. These government mandates have supported a market for ethanol that might disappear without these programs. Alternatively, the government mandates may be continued at lower levels than those at which they currently exist. In addition, state regulatory activity may also negatively affect the consumption of corn-based ethanol in certain domestic markets such as California, due to low-carbon fuel standards that take into consideration the effects caused by indirect land use.

The Renewable Fuels Standard

The Renewable Fuels Standard (“RFS”) is a national program that imposes requirements with respect to the amount of renewable fuel produced and used in the United States. The RFS was revised by the EPA in July 2010 (“RFS2”) and applies to refineries, blenders, distributors and importers. We believe the RFS2 program has and will continue to increase the market for renewable fuels, such as ethanol, as a substitute for petroleum-based fuels. The RFS2 required that 16.55 billion gallons be sold or dispensed in 2013, increasing to 36.0 billion gallons by 2022, representing 7% of the anticipated gasoline and diesel consumption in 2022. In 2013, RFS2 required refiners and importers to blend renewable fuels totaling at least 9.74% of total fuel volume, of which 8.12% of total fuel volume, or 13.8 billion gallons, could be derived from corn-based ethanol. The remainder of the requirement is to be met by non-corn related advanced renewable fuels such as cellulosic ethanol and biomass-based biodiesel. The RFS requirement for corn-based ethanol was capped at 15.0 billion gallons starting in 2015.

As of January 2018, current annualized ethanol production is approximately 15.7 billion gallons per the RFA. On November 23, 2016, the EPA announced the final rule for 2017 RVOs, which is set at 15.0 billion gallons for corn-based ethanol. This rule was set at 100% of the original conventional biofuel requirement of 15.0 billion gallons. On November 30, 2017 the EPA announced the final rule for 2018 RVOs, which is set at 15.0 billion gallons for corn-based ethanol. This rule is also set at 100% of the original conventional biofuel requirement of 15.0 billion gallons, but has a reduction in the amount of advanced biofuels required. The following chart illustrates the potential United States ethanol demand based on the schedule of minimum usage established by the RFS2 program through the year 2022 (in billions of gallons).

 

 

 

 

 

 

 

Cellulosic

 

 

 

 

 

 

 

 

 

 

RFS Requirement

 

 

 

Total Renewable

 

 

Ethanol

 

 

Biodiesel

 

 

 

 

 

 

That Can Be Met

 

 

 

Fuel

 

 

Minimum

 

 

Minimum

 

 

Advanced

 

 

With Corn-Based

 

Year

 

Requirement

 

 

Requirement

 

 

Requirement

 

 

Biofuel

 

 

Ethanol

 

2017 (1)

 

 

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