UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2019

Commission file number: 000-52421

 

ADVANCED BIOENERGY, LLC

(Exact name of Registrant as Specified in its Charter)

 

 

 

8000 Norman Center Drive, Suite 610

Bloomington, MN 55437

(763) 226-2701

(Address, including zip code, and telephone number,

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Membership Units

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☐    No  ☑

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 every Interactive Data File required to be submitted 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 such files.)    Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth 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.

 

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   ☑

Our membership units are not publicly traded; therefore, our public float is not measurable.

As of December 1, 2019, the number of outstanding membership units was 25,410,851.

 

 

 

---

ADVANCED BIOENERGY, LLC

FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2019

INDEX

 

 

 

 

2

---

IMPORTANT NOTE REGARDING RECENT EVENTS

This Annual Report on Form 10-K for the year ended September 30, 2019 should be read in light of the recent events described under Part I, Item 1. “Business – Company Overview and Recent Events.”

 

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K contains forward-looking statements. 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 Part I, Item 1A, “Risk Factors” section of this Annual Report on Form 10-K.

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 include any statements regarding the conduct of our liquidation, dissolution and winding up, including, but not limited to, estimates regarding the timing of, or assets available for, distribution to our members.

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 statement or to update the reasons actual results could differ materially from those anticipated in any forward-looking statement. Readers are urged to carefully review and consider “Risk Factors” and other disclosures made by us in this Annual Report on Form 10-K and in our other reports filed from time to time with the U.S. Securities and Exchange Commission, which we refer to as the SEC.

INDUSTRY AND MARKET DATA

We obtained the industry, market and competitive position data used throughout this report from our own research, studies conducted by third parties, independent industry associations, governmental associations or general publications and other publicly available information. In particular, we have based much of our discussion of the ethanol industry, including government regulation relevant to the industry and forecasted growth in demand, on information published by the Renewable Fuels Association (“RFA”) and Growth Energy, the national trade associations for the U.S. ethanol industry. Because the RFA and Growth Energy are trade organizations for the ethanol industry, they may present information in a manner that is more favorable to that industry than would be presented by an independent source. Although we believe these sources are reliable, we have not independently verified the information. Forecasts are particularly likely to be inaccurate, especially over long periods of time.

ETHANOL UNITS

All references in this report to gallons of ethanol are to gallons of denatured ethanol. Denatured ethanol is ethanol blended with 2.0% to 2.5% denaturant, such as gasoline, to render it undrinkable and thus not subject to alcoholic beverage taxes.

SEGMENT REPORTING

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 financial results, the Company’s plants are aggregated into one reportable segment.

 

 

3

---

PART I

COMPANY OVERVIEW

Advanced BioEnergy, LLC (the “Company,” “we,” “our,” “Advanced BioEnergy” or “ABE”) was formed in 2005 as a Delaware limited liability company. Our business is carried out primarily through our wholly-owned subsidiary, ABE South Dakota, LLC (“ABE South Dakota”).

On August 1, 2019, Advanced BioEnergy and ABE South Dakota entered into an asset purchase agreement (the “Asset Purchase Agreement ”) with Glacial Lakes Energy, LLC (“GLE”), under which ABE South Dakota agreed to sell its Aberdeen and Huron South Dakota ethanol plants and related businesses to GLE (the “Asset Sale”). The Asset Purchase Agreement and Asset Sale, which constitutes the sale of substantially all of the assets of the Company, was unanimously approved by the Company’s Board of Directors.

At a Special Meeting of Members held on September 19, 2019, the Company’s members approved the Asset Purchase Agreement and the Asset Sale.  Also at the Special Meeting of Members, the members approved a Plan of Liquidation and Dissolution (the “Plan of Liquidation”) for the voluntary liquidation and dissolution of the Company.

On December 19, 2019, Advanced BioEnergy, ABE South Dakota and GLE closed the Asset Sale. At the closing, ABE South Dakota sold to GLE substantially all of the assets related to its business of producing ethanol and co-products, including wet, modified and dried distillers’ grains and corn oil, through its plants located in Aberdeen, South Dakota and Huron, South Dakota.

Under the Asset Purchase Agreement, the purchase price was $47.5 million, plus the value of the Company’s inventory at closing, which was approximately $2.3 million.  At the closing, Buyer paid to ABE South Dakota a total of $8.3 million in cash, which reflects the purchase price, less the approximately $31.0 million to repay the AgCountry Master Credit Agreement obligations, less the amount of certain accrued contract liabilities, and less $4.75 million of the purchase price that was deposited into an indemnity escrow account. The indemnity escrow account will be used to satisfy any of Buyer’s claims for indemnification under the Asset Purchase Agreement and any amounts remaining after the eighteen (18)-month anniversary of the closing will be released to the Company. The Company also paid approximately $0.7 million in transaction expenses at closing.

Upon the closing of the Asset Sale, the Company commenced its liquidation in accordance with the Plan of Liquidation. In connection with the Company’s liquidation in accordance with the Plan of Liquidation, the Company’s Board of Directors determined that the Company’s transfer records will be closed from and after the close of business on December 19, 2019. The Board of Directors will not consider and the Company will not record or recognize any transfer of the Company’s units occurring after the close of business on December 19, 2019.

Under the Plan of Liquidation, the Board of Directors of the Company may establish a liquidating trust and distribute assets of the Company to the liquidating trust.  At this time, the Board of Directors of the Company has determined not to establish a liquidating trust.  However, the Company will continue the process of liquidating its assets and winding up the Company otherwise in accordance with the Plan of Liquidation.

The Company’s Board of Directors intends to meet in January 2020 to determine the next steps in the Plan of Liquidation, including the amount and timing of any initial distribution to members, which the Company expects will be in January or February 2020.  The Board anticipates that the amount of the initial distribution to members will be between $7.7 and $8.4 million or $0.30 to $0.33 per unit based on 25,410,851 units outstanding as of December 19, 2019, with a final distribution to be paid upon release of the indemnity escrow account.

This Annual Report on Form 10-K presents the Company’s business, assets, and financial results and position as of September 30, 2019 unless otherwise stated.  The information presented in this Annual Report on Form 10-K is not necessarily indicative of results to be expected during the period from October 1, 2019 to the December 19, 2019 closing date of the Asset Sale.  Following the December 19, 2019 closing date, the Company has not engaged and will not engage in any business activities except to the extent necessary to preserve the value of its assets, wind up its business affairs and distribute its assets in accordance with the Plan of Liquidation.  Accordingly, our financial position or financial performance for any period prior to December 19, 2019 will be of limited value to a member’s understanding of the timing and amount of potential distributions during liquidation.  See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

4

---

FACILITIES

The table below provides a summary of our dry mill ethanol plants in operation as of September 30, 2019:

 

 

 

ETHANOL

Ethanol sales have represented 76%, 77%, and 82% of our revenues in the years ended September 30, 2019, 2018, and 2017, respectively. In 2018, the United States consumed 14.42 billion gallons of ethanol representing 10.1% of the 142.86 billion gallons of finished motor gasoline consumed, according to the U.S Energy Information Administration (“EIA”). Ethanol is currently blended with gasoline to meet regulatory standards as a clean air additive, an octane enhancer, a fuel extender and as a gasoline alternative.

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 November 2019, current annualized ethanol production is approximately 15.9 billion gallons per the RFA. On June 26, 2018 the EPA announced proposed RVOs for 2019, which include 15.0 billion gallons for corn-based ethanol, consistent with both the 2018 RVOs and the original statutory volumes. On November 30, 2018 the EPA announced the final RVOs for 2019.  The final RVOs for 2019 were consistent with the volumes proposed in June, with an increase only in advanced biofuel volumes to 4.92 billion gallons from the proposed 4.88 billion gallons.  The 15.0 billion gallons that can be met with corn-based ethanol remains the same as the June 2018 proposal and the original statutory volumes.

5

---

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):

 

 

Ethanol Competition

The ethanol we produce is similar to ethanol produced by other plants. The RFA reports that as of November 2019, current annual U.S. ethanol production capacity was approximately 16.5 billion gallons per year, with actual annualized production around 15.9 billion gallons per year. On a national level, there are numerous other production facilities with which we are in direct competition, many of which have greater resources than we do. As of November 2019, South Dakota had 15 ethanol plants producing an aggregate of 1.1 billion gallons of ethanol per year.

The largest ethanol producers include:  Archer Daniels Midland Company; Cargill, Inc.; Flint Hills Resources, LP; Green Plains Renewable Energy, Inc.; POET, LLC and Valero Renewable Fuels. Producers of this size may have an advantage over us from economies of scale and stronger negotiating positions with purchasers. We market our ethanol primarily on a regional and national basis. We believe that we are able to reach the best available markets through the use of experienced ethanol marketers and by the rail delivery methods we use. Our plants compete with other ethanol producers on the basis of price, and, to a lesser extent, delivery service. We believe that we can compete favorably with other ethanol producers due to our proximity to ample grain, natural gas, electricity and water supplies at favorable prices.

Competition from Alternative Fuels

Alternative fuels and alternative ethanol production methods are continually under development. The major oil companies have significantly greater resources than we have to develop alternative products and to influence legislation and public perception of ethanol. New ethanol products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages and harm our business.

Ethanol Marketing

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. These ethanol marketing agreements were originally set to expire on June 30, 2019.  On April 1, 2019, the agreements were amended to change the term to month-to-month, with three months written notice by either party required to terminate the agreement.  On September 27, 2019, the Company provided notice of termination to NGL due to the pending Asset Sale, which closed on December 19, 2019.  The agreements will terminate on December 31, 2019.

6

---

CO-PRODUCTS

Sales of distillers’ grains have represented 20%, 20%, and 14% of our revenues for the years ended September 30, 2019, 2018, and 2017, respectively. When the plants are operating at capacity, they produce approximately 231,000 tons of dried distillers’ grains equivalents per year, approximately 15-16 pounds per bushel of corn used. Distillers’ grains are a high-protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry, but also to the poultry and swine markets. Dry mill ethanol processing creates three forms of distillers’ grains: (i) wet distillers’ grains with solubles, known as wet distillers’ grains; (ii) modified wet distillers’ grains with solubles, known as modified distillers’ grains; and (iii) dry distillers’ grains with solubles. 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. In this Form 10-K, we sometimes refer to these products as “distillers’ grains” or “distillers’.”

We installed corn oil extraction technology at our Aberdeen plant in 2012. We installed corn oil extraction technology at our Huron plant that became fully operational in October 2016. Corn oil systems are designed to extract non-edible corn oil during the thin stillage evaporation process immediately prior to production of distillers’ grains. Corn oil is produced by processing evaporated thin stillage through a disk stack style centrifuge. Corn oil has a lower density than the 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.

Industrial uses for corn oil include feedstock for biodiesel, livestock feed additives, rubber substitutes, rust preventatives, inks, textiles, soaps and insecticides. Our corn oil is primarily sold by truck to biodiesel manufacturers.

Competition

In the sales of distillers’ grains, we compete with other ethanol producers, as well as a number of large and smaller suppliers of competing animal feed. We believe the principal competitive factors are price, proximity to purchasers and product quality. Currently we derive 64% of our distillers’ grain revenues from the sale of dried distillers’ grains, which have an indefinite shelf life and can be transported by truck or rail, and 36% from the sale of modified or wet distillers’ grains, which have a shorter shelf life and are typically sold in local markets and delivered via truck.

We compete with other ethanol producers in the sale of corn oil. We ship all of the corn oil from our facilities via truck.  Many ethanol producers have added corn oil technology to their facilities.

Co-Product Marketing

ABE South Dakota has an agreement with Dakotaland Feeds, LLC (“Dakotaland Feeds”) to market and sell wet distillers grains produced at the Huron plant and modified distillers grains produced at the Aberdeen plant. ABE South Dakota has a marketing agreement with Gavilon Ingredients, LLC (“Gavilon”) for the dried distillers’ grains produced at the Huron and Aberdeen plants that became effective July 1, 2013. The marketing agreement requires Gavilon to use commercially reasonable efforts to purchase substantially all of the dried distillers’ grains produced at the Huron and Aberdeen plants which were originally set to expire on July 31, 2019. On May 8, 2019, the term of the agreement was amended to continue until either party gave no less than sixty days written notice. On September 30, 2019, the Company provided notice of termination due to the pending Asset Sale. The agreement terminated on November 30, 2019.  The Company continued to sell dried distillers’ to Gavilon through the closing of the Asset Sale. The Aberdeen plant self-marketed its wet and a small portion of modified distillers’ grains.

ABE South Dakota was party to an agreement with Gavilon to market all the corn oil produced by the Huron and Aberdeen plants through November 30, 2019 and September 30, 2019, respectively. On, July 16, 2019, a notice of termination for the Huron plant was given to Gavilon which terminated the contract as of October 20, 2019. The Company continued to sell corn oil to Gavilon through the closing of the Asset Sale. On August 21, 2019 a termination notice for the Aberdeen plants was given to Gavilon whereby the agreement terminated on the closing date of the Asset Sale.

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 Agtegra Cooperative 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 then 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 blend constitute denatured fuel ethanol.

7

---

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: (i) wet distillers’ grains with solubles, known as wet distillers’ grains; (ii) modified wet distillers’ grains with solubles, known as modified distillers’ grains; and (iii) 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.

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.

RAW MATERIALS

Corn

Our production facilities produce ethanol by using a dry-mill process, with an annual production capacity of approximately 80 million gallons, which yields approximately 2.8 gallons of denatured ethanol per bushel of corn. When our South Dakota facilities are operating at capacity, they process approximately 27 million bushels of corn per year. We have a grain origination agreement with Agtegra Cooperative (“Agtegra”) under which Agtegra originates, stores and delivers corn to the Aberdeen and Huron plants. Although our agreement with Agtegra allows us to purchase corn from other sources, we have historically not done this. Our agreement with Agtegra was automatically renewed in November 2016 and was set to expire in November 2019.  On May 4, 2018, we issued a partial notice of termination of this agreement with respect to the Aberdeen plant due to our plans to construct a grain storage and receiving facility.  This partial termination became effective on November 8, 2019.  On April 16, 2019, the remaining agreement for the Huron plant was amended to terminate with 24 months written notice by either party.

We purchase corn from Agtegra through forward fixed-priced contracts, forward basis contracts and daily spot pricing. Our forward contracts specify the amount of corn, the price and the time period over which the corn is to be delivered. These forward contracts are at fixed-prices or prices based on the Chicago Board of Trade (“CBOT”) prices.

Natural Gas

When our South Dakota facilities operate at capacity, they require approximately 2.1 million British Thermal Units (“mmbtu”) of natural gas per year. Natural gas prices and availability are affected by weather conditions and overall economic conditions. We have constructed our own natural gas pipeline for the Aberdeen plant. This pipeline originates at a mainline and allows our Aberdeen plant to source gas from various national marketers without paying transportation cost to the local utility. Our Huron plant does not have an owned pipeline and is subject to additional transportation charges. The Huron plant generally purchases its natural gas from national suppliers. Natural gas prices can be volatile; therefore from time to time we use hedging strategies to reduce our exposure to natural gas price fluctuations.

Shipment of Ethanol by Rail Car

We transport ethanol to our customers primarily via tanker rail cars. As of September 30, 2019, we are leasing ethanol tank cars under leases that expire at varying times over the next five years. Over the past several years, there have periodically been periods of increased rail traffic congestion throughout the United States, primarily due to the increase significant in cargo trains carrying shale oil. From time to time, this congestion has affected our ability to have our tanker rail cars return 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. To mitigate this risk, the Company added one million gallons of denatured ethanol storage at the Aberdeen plant, which became operational in January 2015.

ENVIRONMENTAL MATTERS

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground; the generation, storage, handling, use, transportation and disposal of hazardous materials; and the health and safety of our employees. Any violation of these laws and regulations or permit conditions could result in substantial fines, natural resource damage, criminal sanctions, and damage claims from third parties, and permit revocations or facility shutdowns. We believe we are currently in substantial compliance with environmental laws and regulations and do not anticipate a

8

---

material adverse effect on our business or financial condition as a result of our efforts to comply with these requirements. However, our business is still subject to risks associated with environmental and other regulations and associated costs. Protection of the environment requires us to incur expenditures for equipment, processes and permitting. We use various pollution control equipment in our production facilities. In fiscal 2015, we installed a Continuous Emissions Monitoring System (“CEMS”) at our Aberdeen plant to enable us to burn increased levels of natural gas while ensuring compliance with emissions regulations. The total capital expenditure related to the bag house and CEMS unit was approximately $420,000.

EMPLOYEES

As of December 1, 2019, we had 55 full-time employees. None of our employees are covered by a collective bargaining agreement.

SEASONALITY

Our operating results are influenced by seasonal fluctuations in the price of our primary operating inputs, corn and natural gas, and the price of our primary products, ethanol and distillers’ grains. Historically, the spot price of corn tends to rise during the spring planting season in May and June and tends to decrease during the fall harvest in October and November. The price for natural gas however, tends to move opposite of corn and tends to be lower in the spring and summer and higher in the fall and winter. The price of distillers’ grains tends to rise during the fall and winter cattle feeding seasons and be lower in the spring and summer when pasture grazing is readily available, although this effect can be mitigated if export markets are strong.

REPORTS

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available on the Company’s website www.advancedbioenergy.com as soon as reasonably practicable after it electronically files these materials with the SEC.

 

 

We have identified and discussed below the most significant risk factors affecting the Company following the commencement of our liquidation, dissolution and winding up on December 19, 2019 pursuant to the Plan of Liquidation. There may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect the implementation of the Plan of Liquidation.

RISKS RELATED TO OUR LIQUIDATION

We cannot determine at this time the amount or timing of any distributions to our members because there are many factors, some of which are outside of our control, which could affect our ability to make such distributions.

We plan to distribute, in an initial distribution (with potential subsequent distributions thereafter), a portion of the net proceeds from the Asset Sale and the Company’s other cash, subject to establishing a contingency reserve for remaining costs and liabilities. The amount and timing of the distributions to members will be determined by the Board in its discretion, subject to the provisions of the Plan of Liquidation. However, the Board anticipates an initial distribution in January 2020 in an amount between $7.7 and $8.4 million or $0.30 to $0.33 per unit based on 25,410,851 units outstanding as of December 19, 2019. Subsequent distributions will be made in such amounts and at such times as determined by the Board in its discretion in accordance with the Plan of Liquidation. The Board anticipates that there will be a subsequent distributions of approximately $7,500,000 or approximately $0.30 per unit.

The timing and amount of distributions are subject to change depending on a variety of factors, including, but not limited to, whether we are able to sell our remaining assets and the prices therefor; the timing of the sale of our remaining assets; the amount we will be required to pay to satisfy unknown or contingent liabilities in the future, including the cost of winding down our business through the date of our final dissolution; inaccuracies in the cost estimates to resolve currently known contingent liabilities; general business and economic conditions; and other matters.

In addition, we will continue to incur claims, liabilities and expenses following the Asset Sale closing as we effect the liquidation, such as personnel expense, insurance, taxes, legal and accounting fees and miscellaneous office expenses. Our estimates regarding our expense levels may be inaccurate. Any unforecasted or unexpected claims, liabilities or expenses that arise during liquidation and dissolution or any claims, liabilities or expenses that exceed our estimates could leave us with less cash than is necessary to pay liabilities and expenses and would likely reduce the amount of cash available for ultimate distribution to our members. Further, if cash to be received from the sale of our remaining assets is not adequate to provide for all of our obligations, liabilities, expenses and claims, we will not be able to make any subsequent distribution to our members.

Accordingly, there can be no assurance as to the timing or amount of distributions to our members.

9

---

If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, each of our members who receives liquidating distributions could be held liable for payment to our creditors of that member’s pro rata unit of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to that member in the liquidation.

Following the winding up of our business and affairs, we will file a Certificate of Cancellation with the Secretary of State of the State of Delaware to dissolve the Company. If a court holds at any time that we have failed to make adequate provision for our expenses and liabilities in the liquidation or if the amount ultimately required to be paid in respect of such liabilities exceeds the amount available from our contingency reserve, our creditors could seek an injunction against the making of distributions on the grounds that the amounts to be distributed are needed to provide for the payment of our expenses and liabilities. Any such action could delay or substantially diminish the amount of any cash distributions to members. If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, creditors could assert claims against each member receiving a distribution for the payment of any shortfall, up to the amounts previously received by the member in distributions from us. In such event, a member could be required to return all distributions previously made to such member pursuant to the Plan of Liquidation and could receive nothing from us under the Plan of Liquidation. Moreover, in the event a member has paid taxes on amounts previously received by the member, a repayment of all or a portion of such amount could result in a member incurring a net tax cost if the member’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. The Board is not required to obtain a solvency opinion as a condition to authorizing a liquidating distribution and we cannot ensure that the contingency reserve established by us will be adequate to cover all expenses and liabilities.

The tax treatment of any liquidating distributions may vary from member to member, and the discussion in this proxy statement regarding such tax treatment is general in nature. You should consult your own tax advisor instead of relying on the discussions of tax treatment in this proxy statement for tax advice.

We have not requested a ruling from the Internal Revenue Service with respect to the anticipated tax consequences of the liquidation, and we will not seek an opinion of counsel with respect to the anticipated tax consequences of any liquidating distributions. If any of the anticipated tax consequences to members proves to be incorrect, the result could be increased taxation at the member level, thus reducing the benefit to our members and us from the liquidation and distributions. Tax considerations applicable to particular members may vary with and be contingent upon the member’s individual circumstances.

We will continue to incur claims, liabilities and expenses that will reduce the amount available for distribution to members.

Claims, liabilities and expenses (such as costs, salaries, directors’ and officers’ insurance, payroll and local taxes, legal and accounting fees and miscellaneous office expenses) will continue to be incurred as we wind down our operations. These expenses will reduce the amount of assets available for ultimate distribution to members. If we incur obligations, liabilities, expenses and claims in excess of those we currently anticipate, the amount distributed to our members may be lower than we currently estimate.

We will continue to incur the expenses of complying with public company reporting requirements.

Following the Asset Sale and through the subsequent liquidation and dissolution, we have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act even though compliance with these reporting requirements may be economically burdensome. In connection with the liquidation, the Company intends to seek relief from the SEC to deregister its units or suspend certain of its reporting obligations under the Exchange Act.  However, there can be no assurance that any such relief will be granted.  Until we are able to deregister our units and suspend our periodic reporting obligations under the Exchange Act, we will remain a reporting issuer and will incur attendant costs relating to filing such reports with the SEC. The expenses incurred by us in complying with the applicable reporting requirements would reduce the assets available for ultimate distribution to our members.

We depend on certain key personnel to administer our liquidation, and the loss of any of these persons may prevent us from implementing the liquidation in an effective and timely manner.

The timely and successful implementation of the Plan on Liquidation depends largely upon the continued services of our chief executive officer and other key personnel. Any loss or interruption of the services of one of these key personnel could result in our inability to timely and cost-effectively manage through the process of liquidation, dissolution and winding up pursuant to the Plan of Liquidation, including increased expenses associated with the implementation of the Plan of Liquidation that may reduce the assets available for ultimate distribution to our members.

10

---

The units are not transferrable and under the Plan of Liquidation, the rights of the Company’s members are limited to distributions, if any.

Upon the closing of the Asset Sale on December 19, 2019, the Company commenced its liquidation in accordance with the Plan of Liquidation. The Board of Directors has determined that from and after the close of business on December 19, 2019, the Company’s transfer records will be closed and the Company will not record or recognize any transfer of the Company’s units occurring after the close of business on December 19, 2019. Holders of units in the Company have no rights in respect of such units, except the right to receive distributions, if any, pursuant to and in accordance with the Plan of Liquidation, our Operating Agreement and Delaware law. However, there can be no assurance as to the timing or amount of distributions to our members due to the factors described in this section.

RISKS RELATED TO TAX ISSUES

Income allocations assigned to unit holder units may result in taxable income in excess of cash distributions, which means unit holders may have to pay income tax on their investment with personal funds.

Unit holders will be required to pay tax on their allocated shares of our taxable income. It is likely that a unit holder will receive allocations of taxable income in some years that result in a tax liability that is in excess of any cash distributions we may make to the unit holder in that year. Among other things, this result might occur due to accounting methodology, lending covenants that restrict our ability to pay cash distributions, or our decision to retain the cash generated by the business to fund our operating activities and obligations. In the event unit holders have used prior tax losses to offset non-ABE taxable income, the use of these losses may result in future tax liability.

IRS classification of the company as a corporation rather than as a partnership would result in higher taxation and reduced profits.

We are a Delaware limited liability company that has elected to be taxed as a partnership for federal and state income tax purposes, with income, gain, loss, deduction and credit passed through to the holders of the units. However, if for any reason the IRS successfully determines that we should be taxed as a corporation rather than as a partnership, we would be taxed on our net income at rates of up to 21%, or such lower rate as may be established by Congress, for federal income tax purposes, and all items of our income, gain, loss, deduction and credit would be reflected only on our tax returns and would not be passed through to the holders of the units. If we were to be taxed as a corporation for any reason, distributions we make to investors will be treated as ordinary dividend income to the extent of our earnings and profits, and the payment of dividends would not be deductible by us, thus resulting in double taxation of our earnings and profits. If we pay taxes as a corporation, we will have less cash to distribute to our unit holders. Treatment of our company as a corporation for tax purposes could materially adversely affect our business and financial condition.

The IRS may classify your investment as a passive activity, resulting in the inability of unit holders to deduct losses associated with their investment.

It is likely that an investor’s interest in us will be treated as a “passive activity” for tax purposes. If an investor is an individual, estate, trust or a closely held corporation, and if the investor’s interest is deemed to be a “passive activity,” then the investor’s allocated share of any loss we incur will be deductible only against income or gains the investor has earned from other passive activities. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. These rules could restrict a unit holder’s ability to currently deduct any of our losses that are passed through to such unit holder.

An IRS audit could result in adjustments to our allocations of income, gain, loss and deduction, causing additional tax liability to unit holders.

The IRS may audit our income tax returns and may challenge positions taken for tax purposes and allocations of income, gain, loss and deduction to investors. If the IRS were successful in challenging our allocations in a manner that reduces loss or increases income allocable to unit holders, our unit holders may have additional tax liabilities. In addition, such an audit could lead to separate audits of a unit holder’s tax returns, especially if adjustments are required, which could result in adjustments on unit holders’ tax returns. Any of these events could result in additional tax liabilities, penalties and interest to unit holders, and the cost of filing amended tax returns.

 

 

11

---

The table below provides a summary of our ethanol plants in operation as of September 30, 2019, which were each owned by ABE South Dakota until the closing of the Asset Sale on December 19, 2019.

 

 

We currently lease approximately 4,400 square feet for our corporate and administrative staff at our corporate headquarters in Bloomington, Minnesota, through September 2021. The current base rent is $20.00 per square foot, or approximately $7,300 per month for the twelve month that began July 1, 2018, 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 or any negotiated earlier surrender of the leased property in connection with our liquidation.

As of September 30, 2019, AgCountry held 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 pursuant to a security agreement with AgCountry.  With the December 19, 2019 repayment of our obligations to AgCountry, AgCountry released its security interest in, and liens and mortgages on, all of the properties, rights and assets of ABE South Dakota.

 

 

None.

 

 

None.

 

 

12

---

PART II

Market Information

There is no established trading market for our membership units, but from June 2015 to March 2019, our units were listed on AgStockTrade.com, an internet-based matching platform. In March 2019, we suspended unit matching on AgStockTrade.com.  In connection with the Company’s liquidation in accordance with the Plan of Liquidation, the Company’s Board of Directors determined that the Company’s transfer records will be closed from and after the close of business on December 19, 2019. The Board of Directors will not consider and the Company will not record or recognize any transfer of the Company’s units occurring after the close of business on December 19, 2019.

Holders

There were 25,410,851 units outstanding as of December 1, 2019 held by 1,610 holders of record.

Issuer Purchases of Equity Securities

We did not purchase any of our equity securities during fiscal 2019.

Distributions

We did not make any distributions to our members during fiscal 2019. With the repayment of AgCountry Master Credit Agreement obligations on December 19, 2019 and termination of the Master Credit Agreement and related documents, all loan covenants or restrictions imposed by any lender on our ability to make distributions were terminated.

The Company’s Board of Directors intends to meet in January 2020 to determine the next steps in the Plan of Liquidation, including the amount and timing of any initial distribution to members, which the Company expects will be in January or February 2020.  The Board anticipates that the amount of the initial distribution to members will be between $7.7 and $8.4 million or $0.30 to $0.33 per unit based on 25,410,851 units outstanding as of December 19, 2019, with a final distribution to be paid upon release of the indemnity escrow. The timing and amount of distributions are subject to change depending on a variety of factors. See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Future distributions to our members will be made in proportion to the units that each member holds relative to the total number of units outstanding.

 

ESTIMATED INITIAL DISTRIBUTION TO MEMBERS (unaudited)

 

13

---

Performance Graph

As disclosed above under “Market Information” and elsewhere in this Form 10-K, there is no established trading market for our membership units, which are subject to substantial transfer restrictions pursuant to our operating agreement. Given that our units are not publicly traded on an exchange or any over-the-counter market and we have very limited valuation data on our membership units, we have omitted the performance graph showing the change in our unit holder return.

Securities Authorized for Issuance under Equity Compensation Plans

The equity securities outstanding as of September 30, 2019 under equity compensation plans are (i) the 200,000 January 18, 2013 Unit Appreciation Right (which was approved by the Company’s unit holders at the 2013 Regular Meeting of Members), (ii) the 12,500 January 28, 2015 Unit Appreciation Right, and (iii) the 100,000 January 27, 2016 Unit Appreciation Right. Each of these equity awards are to the Company’s Chief Executive Officer Richard Peterson. The following table provides information as of September 30, 2019 with respect to Company’s Units under equity compensation plans.  

 

 

 

14

---

The following table presents selected consolidated financial and operating data as of the dates and for the periods indicated. The selected consolidated income statement data and other financial data for the years ended September 30, 2016 and 2015 and as of September 30, 2017, 2016 and 2015 have been derived from our audited consolidated financial statements that are not included in this Form 10-K. The selected consolidated balance sheet financial data as of September 30, 2019 and 2018 and the selected consolidated income statement data and other financial data for each of the three years in the period ended September 30, 2019 have been derived from the audited Consolidated Financial Statements included elsewhere in this Form 10-K, as well as Part I, Item 1, “Business – Company Overview and Recent Events”. You should read the following table in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following consolidated financial data.

 

 

 

 

 

15

---

GENERAL

This Management’s Discussion and Analysis section discusses the Company’s results of operations for the years ending September 30, 2019, 2018 and 2017, together with its balance sheets as of September 30, 2019, and 2018. This discussion should be read in conjunction with the consolidated financial statements included herewith and the notes to the consolidated financial statements thereto and the risk factors contained herein, as well as Part I, Item 1. “Business – Company Overview and Recent Events.”

OVERVIEW

Advanced BioEnergy, LLC (“Company,” “we,” “our,” “Advanced BioEnergy” or “ABE”) was formed in 2005 as a Delaware limited liability company. Until the December 19, 2019 closing the Asset Sale as described above, our business consisted of producing ethanol and co-products, including wet, modified and dried distillers’ grains, and corn oil through the two ethanol production facilities in Aberdeen and Huron, South Dakota owned and operated by our subsidiary, ABE South Dakota, LLC (“ABE South Dakota”).

The table below provides a summary of our dry mill ethanol plants in operation as of September 30, 2019:

 

 

RESULTS OF OPERATIONS

Year Ended September 30, 2019 Compared to Year Ended September 30, 2018

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 fiscal 2019 and fiscal 2018 for our South Dakota plants:

 

 

Net Sales

Net sales for fiscal 2019 were $128.0 million, compared to $133.8 million for fiscal 2018, a decrease of $5.8 million or 4%. The decrease was a result of lower ethanol and distillers’ prices combined with a decrease in ethanol gallons and distillers’ tons sold, partially offset by an increase in corn oil price and corn oil pounds sold. The decrease in ethanol and distillers prices is the result of various factors, including but not limited to, market demand for our products, the spread between ethanol/distillers, corn prices and overall gasoline demand. Ethanol gallons sold decreased 1.0 million gallons or 2% in fiscal 2019, compared to fiscal 2018. Corn oil pounds sold increased 0.2 million pounds or 1% in fiscal 2019, compared to fiscal 2018. The increase in corn oil pounds sold is the result of increased production efficiency at both plants.

16

---

Cost of Goods Sold

Cost of goods sold for fiscal 2019 was $138.3 million, compared to $133.6 million for fiscal 2018, an increase of $4.7 million. An increase in corn costs offset by a decrease in natural gas costed represented a portion of the increase in cost of goods sold in fiscal 2019. Corn costs represented 74.7% and 71.4% of cost of sales for the fiscal years 2019 and 2018, respectively. Corn prices increased approximately 10% in fiscal 2019 from fiscal 2018; however, we used 2% fewer corn bushels in fiscal 2019 than in fiscal 2018, due to lower ethanol production in fiscal 2019.

Natural gas costs represented 4.9% and 6.2% of cost of sales for fiscal years 2019 and 2018, respectively. The cost of natural gas per mmbtu decreased 18% in fiscal 2019, compared to fiscal 2018. The cost of natural gas in fiscal 2018 was higher than fiscal 2019 due to lower stocks coming out of the withdrawal season, which is the colder season from November through March, in 2017.  These lower stock levels drove prices higher during fiscal 2018.  

Selling, General, and Administrative Expenses

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

Overall selling, general and administrative costs increased by approximately $0.7 million to $3.4 million in fiscal 2019, compared to fiscal 2018. The increase was primarily a result of higher costs in fiscal 2019 related to the Asset Sale and related transactions.  As a percentage of net sales, fiscal 2019 selling, general and administrative expenses increased to 2.7%, compared to 2.0% for fiscal 2018.

Interest Expense

Interest expense for fiscal 2019 was $1.0 million compared to $0.7 million in fiscal 2018. Fiscal 2019 interest expense included $0.7 million of variable rate interest and $0.6 million of fixed rate interest related to our outstanding debt and $0.1 million of amortization of deferred financing costs offset by $0.4 million of capitalized interest. Fiscal 2018 interest expense included $0.6 million of variable rate interest related to our outstanding debt and $0.1 million of amortization of deferred financing costs.

Year Ended September 30, 2018 Compared to Year Ended September 30, 2017

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 fiscal 2018 and fiscal 2017 for our South Dakota plants:

 

 

Net Sales

Net sales for fiscal 2018 were $133.8 million, compared to $143.5 million for fiscal 2017, a decrease of $9.7 million or 7%. The decrease was a result of lower ethanol and corn oil prices combined with a decrease in ethanol gallons and distillers’ tons sold, partially offset by an increase in distillers’ price and corn oil pounds sold. The decrease in ethanol and increase in distillers’ prices is the result of various factors, including but not limited to, market demand for our products, the spread between ethanol/distillers, corn prices and overall gasoline demand. Ethanol gallons sold decreased 0.9 million gallons or 1% in fiscal 2018, compared to fiscal 2017. Corn oil pounds sold increased 0.7 million pounds or 4% in fiscal 2018, compared to fiscal 2017. The increase in corn oil pounds sold is the result of increased production efficiency at both plants.

17

---

Cost of Goods Sold

Cost of goods sold for fiscal 2018 was $133.6 million, compared to $130.2 million for fiscal 2017, an increase of $3.4 million. An increase in corn and natural gas costs represented a portion of the increase in cost of goods sold in fiscal 2018. Corn costs represented 72.0% and 71.6% of cost of sales for the fiscal years 2018 and 2017, respectively. Corn prices increased approximately 3% in fiscal 2018 from fiscal 2017; however, we used 1% fewer corn bushels in fiscal 2018 than in fiscal 2017, due to lower ethanol production in fiscal 2018.

Natural gas costs represented 6.2% and 5.5% of cost of sales for fiscal years 2018 and 2017, respectively. The cost of natural gas per mmbtu increased 17% in fiscal 2018, compared to fiscal 2017. The increased cost of natural gas in fiscal 2018 was due to lower stocks coming out of the withdrawal season, which is the colder season from November through March, in 2017.  These lower stock levels drove prices higher in fiscal 2018.  

Selling, General, and Administrative Expenses

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

Overall selling, general and administrative costs decreased by approximately $1.1 million to $2.7 million in fiscal 2018, compared to fiscal 2017. The decrease was primarily a result of higher costs in fiscal 2017 related to the tear down of the smaller Aberdeen plant, certain taxes paid in connection with transporting our ethanol in the state of Washington, and employee incentive compensation.  As a percentage of net sales, fiscal 2018 selling, general and administrative expenses decreased to 2.0%, compared to 2.6% for fiscal 2017.

Interest Expense

Interest expense for fiscal 2018 was $0.7 million compared to $0.9 million in fiscal 2017. Fiscal 2018 interest expense included $0.6 million of variable rate interest related to our outstanding debt and $0.1 million of amortization of deferred financing costs. Fiscal 2017 interest expense included $0.8 million of variable rate interest related to our outstanding debt and $0.1 million of amortization of deferred financing costs.

Changes in Financial Position for the Year ended September 30, 2019

Current Assets

The decrease in current assets at September 30, 2019 compared to September 30, 2018 of $8.2 million was primarily due to principal payments of $1.0 million, capital expenditures of $7.4 million and cash from operation of $9.8 million, offset by proceeds from debt of $10.8 million.

Property, Plant and Equipment

The $3.5 million increase in property, plant and equipment at September 30, 2019 compared to September 30, 2018 was primarily due to $7.4 million of capital expenditures offset by $3.9 million of depreciation expense.

Current Liabilities

Accounts payable and accrued expenses decreased by $1.0 million at September 30, 2019 compared to September 30, 2018. The primary reason for the increase is a difference of timing of payments to vendors along with a change in classification of the railcar damage accrual from current to long-term.

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

The current portion of long-term debt increased by $28.8 million at September 30, 2019 compared to September 30, 2018. The increase was the result of a $6.5 million short-term revolver in August 2019, and all debt becoming current due to an event of default.

Long-term debt decreased by $19.0 million at September 30, 2019 compared to September 30, 2018. This decrease was the result of all debt becoming current due to an event of default.

18

---

CAPITAL RESOURCES

During fiscal 2019, we conducted our business activities and plant operations through the parent company, Advanced BioEnergy, and its primary operating subsidiary, ABE South Dakota. ABE Fairmont has had minimal activity since the December 2012 sale of the Fairmont facility. The liquidity and capital resources for each entity are based on that entity’s existing financing arrangements and capital structure. In fiscal 2019, Advanced BioEnergy was highly restricted in its ability to use the cash and other financial resources of ABE South Dakota for the benefit of Advanced BioEnergy, with the exception of allowable distributions as defined under the Master Credit Agreement with AgCountry. With the December 19, 2019 repayment of our obligations to AgCountry, the Master Credit Agreement and related agreements were terminated in accordance with their terms.

Advanced BioEnergy, LLC

ABE had cash and cash equivalents of $0.2 million on hand at September 30, 2019. ABE did not have any debt outstanding as of September 30, 2019.

From time to time, ABE may receive certain allowable distributions from ABE South Dakota, subject to compliance with the terms and conditions of the Master Credit Agreement. ABE will not receive any distribution from ABE South Dakota for its fiscal 2019 financial results.

In connection with the execution of a rail car sublease, the Company, as parent of ABE South Dakota, agreed to post a $2.5 million irrevocable and non-transferable standby letter of credit in May 2012 for the benefit of NGL Crude Logistics, LLC (“NGL” f/k/a Gavilon) as security for the payment obligations of ABE South Dakota under certain agreements with NGL. The Company deposited $2.5 million in a restricted account as collateral for this letter of credit and classified it as restricted cash. Effective May 15, 2014, the letter of credit and corresponding deposit of collateral were decreased by $1.0 million in conjunction with an amendment to the rail car sublease. Effective June 27, 2016, the letter of credit and corresponding deposit of collateral was decreased by $0.5 million in conjunction with an amendment to the rail car sublease. Effective July 31, 2018, the letter of credit was terminated and the corresponding collateral requirement was eliminated.

ABE Fairmont

ABE Fairmont was dissolved in fiscal 2019 and did not exist at September 30, 2019.

ABE South Dakota

ABE South Dakota had cash and cash equivalents of $5.2 million on hand at September 30, 2019. As of September 30, 2019, ABE South Dakota had interest-bearing term debt outstanding of $29.9 million.

AgCountry Master Credit Agreement

On December 19, 2019, all amounts outstanding under the Master Credit Agreement dated December 29, 2015, as amended (“Master Credit Agreement”) between ABE South Dakota as borrower and AgCountry Farm Credit Services, PCA as lender (“AgCountry”) were repaid in full.  The total amount repaid was approximately $31.0 million, which was repaid from the purchase price from the Asset Sale described above. The $31.0 million payment consisted of the following amounts outstanding as of the closing date of the Asset Sale: $30.5 million in principal, $0.4 million in interest and $0.1 million in fees and expenses.  Effective upon the repayment, the Master Credit Agreement and all related documents were terminated in accordance with their terms and AgCountry released its security interest in, and liens and mortgages on, all of the properties, rights and assets of ABE South Dakota.  

Below is a summary of the Master Credit Agreement and its terms that were in effect as of September 30, 2019:

On December 29, 2015, ABE South Dakota entered into the Master Credit Agreement with AgCountry to refinance its existing 2010 Senior Credit Agreement. On December 29, 2015, the Company also entered into (i) a First Supplement to the Master 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 had a fixed interest rate (“Fixed Rate”) at September 30, 2019.  The Fixed Rate was equal to 6.32%. On October 26, 2018, the Company elected to lock in a fixed rate of 6.4%, rather than a variable rate, on the remaining balance of the Term Loan. On January 2, 2019, the Company entered into an Interest Rate Conversation Agreement with AgCountry, under which the Fixed Rate of 6.4% was reduced to 6.32% for the remainder of the loan term. 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 was originally scheduled to be fully amortized over five years with the final payment on January 1, 2021.  As described below, the payments originally due in January, April, July and October 2019 have been deferred and are now due at the end of the term, or January 1, 2021. At September 30, 2019, the outstanding balance on the Term Loan was $9.0 million.  

19

---

The $10.0 Revolving Term Facility has a variable rate (“Variable Rate”) equal to the one-month LIBOR rate of plus an initial Margin of 350 basis points.  At September 30, 2019, the Variable Rate was equal to the one-month LIBOR rate of 2.20% plus a 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 September 30, 2019, the balance of the Revolving Term Facility was $10.0 million.

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.

On December 29, 2015, ABE South Dakota, LLC also entered into a Security Agreement with AgCountry under which borrowings under the Master 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 Master Credit Agreement also included customary financial and non-financial covenants that limit capital expenditures, distributions and debt and require minimum working capital, owner’s equity, current ratio, debt to EBITDA ratio, and fixed charge coverage ratios as follows as of September 30, 2019:

A number of these covenants have been amended in connection with subsequent term loans, a construction loan, and amendments and waivers as described below.

2016 Term Loan

On September 28, 2016, ABE South Dakota entered into the Third Supplement to the Master 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.  Beginning January 1, 2017, the Company began making quarterly payments of accrued interest on the 2016 Term Loan. A total of $1.1 million of the $1.7 million commitment was drawn from this loan. On April 1, 2017, the Company began making quarterly principal payments of $212,500 on the 2016 Term Loan. As of September 30, 2019, the 2016 Term Loan was paid in full.

20

---

2018 Construction and Term Loan

On March 13, 2018, ABE South Dakota entered into the Fourth Supplement to the Master Credit Agreement (“2018 Term Loan”) with AgCountry to finance a grain storage and receiving facility at the Aberdeen plant. The agreement provides for a $5.0 million multiple advance credit facility. The loan has a variable interest rate equal to the one-month LIBOR rate plus a “Margin” of 350 basis points.  During the construction period, the Company will make quarterly interest payments in arrears on the first day of each quarter.  Upon completion of construction, the Company will begin making quarterly principal payments in the amount of $250,000 per quarter, plus accrued interest. The 2018 Term Loan will be fully amortized over five years, with the final payment on July 1, 2024. At September 30, 2019, $4.3 million had been drawn on the 2018 Term Loan, and $47,000 in loan fees and closing costs had been incurred, which have been classified as deferred financing costs and will be amortized as interest expense over the term of the loan.

2019 Short-Term Revolving Credit Loan

On August 7, 2019, ABE South Dakota entered into the Fifth Supplement to the Master Credit Agreement (“2019 Revolving Loan”), with AgCountry to provide a $6.5 million short-term revolving credit loan.  The 2019 Revolving Loan was obtained to finance working capital needs through the closing of the Asset Sale, as well as the purchase of approximately 800,000 bushels of corn.  The 2019 Revolving Loan has a variable interest rate equal to the one-month LIBOR rate plus a Margin of 400 basis points.  Borrowings under the Revolving Loan may be advanced, repaid and re-borrowed during the term, except during an outstanding Event of Default. The Company is required to make monthly interest payments on the Revolving Loan which began September 1, 2019, with the full principal amount outstanding due on the earlier of November 1, 2019 or the date on which the obligations have been declared or have automatically become due and payable, whether by acceleration or otherwise.  At September 30, 2019, the balance of the 2019 Revolving Loan was $6.5 million

Amendments and Waivers to Master Credit Agreement

On September 28, 2016, ABE South Dakota entered into a Limited Waiver and First Amendment to the Master 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 post-closing obligations.  

On November 19, 2016, ABE South Dakota received a waiver to the Master Credit Agreement from AgCountry 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 Master Credit Agreement from AgCountry 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 the 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.

On March 13, 2018, in conjunction with the 2018 Term Loan, ABE South Dakota entered into a Second Amendment to the Master Credit Agreement (“Second Amendment”) to temporarily increase the Capital Expenditures Covenant to $6.0 million per year for the years ending September 30, 2018 and 2019.  The covenant will revert back to $2.0 million per year for all years ending after September 30, 2019.  

As a result of a depressed margin environment in fiscal 2019 and fiscal 2018, ABE South Dakota requested waivers for certain specific Events of Default in fiscal 2019 and at September 30, 2018, and requested covenant amendments for specific future covenants for which ABE South Dakota projected possible non-compliance.  Although ABE South Dakota’s lender, AgCountry Farm Credit Services, PCA, granted certain waivers and covenant amendments to the Master Credit Agreement, as discussed below, we were unable to meet other certain covenant and payment obligations subsequent to those waived and accordingly, an Event of Default occurred.  

On October 19, 2018, ABE South Dakota entered into a Limited Waiver and Third Amendment to the Master Credit Agreement (“Third Amendment”) to waive certain Events of Default related to covenant compliance as of September 30, 2018 and temporarily amend certain future covenants.  The Third Amendment included the following covenant waiver and amendments: (i) the Fixed Charge Coverage Ratio was waived as of September 30, 2018 and reduced to a ratio of 1.00:1.00 as of September 30, 2019, and reverts back to 1.15:1.00 at September 30, 2020, (ii) the Working Capital Covenant was reduced to $10 million at September 30, 2018 and December 31, 2018, $9 million at March 31, 2019 and June 30, 2019, then increased to $10 million at September 30, 2019 and $12 million at September 30, 2020 and all times thereafter, (iii) the Capital Expenditures covenant was increased to $8.0 million for the year ending September 30, 2019, and reverts back to $2.0 million for all subsequent years, and (iv) the outstanding Debt to EBITDA Ratio was waived at September 30, 2018 and will revert back to the requirement that it be less than 4:00:1:00 on the last day of each fiscal year end beginning September 30, 2019.

21

---

On December 28, 2018, ABE South Dakota entered into a Limited Waiver and Deferral Agreement and Fourth Amendment to the Master Credit Agreement (“Fourth Amendment”) to defer three future principal payments and waive and temporarily amend certain future covenants.  The Fourth Amendment included the following covenant waivers and amendments:  

On July 17, 2019, ABE South Dakota entered into a Limited Waiver Agreement to the Master Credit Agreement (“Limited Waiver”) to waive the Event of Default related to compliance with the Working Capital Covenant at May 31, 2019 and June 30, 2019.  As a condition to AgCountry granting the Limited Waiver, ABE South Dakota’s parent company, Advanced BioEnergy, LLC was required to make a cash investment not less than $300,000 to be available for ABE South Dakota’s working capital needs.

On August 7, 2019, ABE South Dakota entered into a Second Limited Waiver Agreement to the Master Credit Agreement (“Second Limited Waiver”) to waive outstanding and expected Events of Default related to compliance with the Working Capital Covenant at July 31, 2019 and August 31, 2019, and the Current Ratio Covenant at June 30, 2019, July 31, 2019 and August 31, 2019.

On October 9, 2019, ABE South Dakota entered into a Third Limited Waiver and Deferral Agreement (“Third Limited Waiver”) to: (i) waive outstanding Events of Default related to compliance with the Working Capital and Current Ratio covenants at September 30, 2019, (ii) extend the funding period of the 2018 Term Loan to November 1, 2019, (iii) amend the repayment obligations of the 2018 Term Loan to begin January 1, 2020, and (iv) defer the principal payment due October 1, 2019 to the Term Loan Maturity Date.

CASH FLOWS

The following table shows our cash flows for the years ended September 30:

 

 

 

Cash Flow from Operations

Our cash flows from operations in fiscal 2019 were lower compared to fiscal 2018, primarily due to decreased margins in fiscal 2019.

Our cash flows from operations in fiscal 2018 were lower compared to fiscal 2017, primarily due to decreased margins in fiscal 2018.

Cash Flow from Investing Activities

We used more cash for investing activities in fiscal 2019 compared to fiscal 2018, primarily as a result of $7.4 million spent on capital expenditures in fiscal 2019 compared to $4.2 million in fiscal 2018.

We used more cash for investing activities in fiscal 2018 compared to fiscal 2017, primarily as a result of $4.2 million spent on capital expenditures in fiscal 2018 compared to $3.0 million in fiscal 2017.

22

---

Cash Flow from Financing Activities

We had more cash provided by financing activities in fiscal 2019 versus fiscal 2018 primarily due to debt proceeds of $10.8 million in fiscal 2019. In fiscal 2019 $1.0 million was used for debt payments versus $4.7 million in fiscal 2018.

We used less cash for financing activities in fiscal 2018 versus 2017 primarily due to a $3.8 million distribution to unit holders in fiscal 2017. This was offset by $1.1 million drawn from the 2016 Term Loan for the Huron corn oil project in fiscal 2017.  It was also offset by debt payments of $4.7 million in fiscal 2018 versus $4.4 million in fiscal 2017.     

CREDIT ARRANGEMENTS

A summary of debt in effect at September 30, 2019 is as follows (in thousands, except percentages):

 

 

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations as of September 30, 2019.

 

 

 

In connection with the closing of the Asset Sale, the Company assigned or cancelled any and all lease commitments above as they relate to ABE South Dakota and will have no further payment obligations.  Following the closing of the Asset sale, ABE has future commitments for fiscal 2020 of $163,000, fiscal 2021 of $153,000 and fiscal 2022 of $3,000, which it will resolve through the liquidation, dissolution and winding up pursuant to the Plan of Liquidation.

 

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Note 1 to our consolidated financial statements contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based upon management’s current judgment. We used our knowledge and experience about past events and certain future assumptions to make estimates and judgments involving matters that are inherently uncertain and that affect the carrying value of our assets and liabilities. We believe that of our significant accounting policies, the following are noteworthy because changes in these estimates or assumptions could materially affect our financial position and results of operations:

Revenue Recognition

Effective October 1, 2018, the Company adopted the new guidance of Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (Topic 606) using the modified retrospective approach. Topic 606 requires the Company to recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which ABE expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company generally recognizes revenue at a point in time.  The majority of the Company’s contracts with customers have one performance obligation and a contract duration of one year or less.  The adoption of this new guidance did not result in any change to our recognition of revenue.

23

---

The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods is are transferred to our customers when a railcar or truck is loaded , in an amount that reflects the consideration that we expect to receive in exchange for those goods.

We disclose disaggregation of revenue according to product line, along with accounts receivable from contracts with customers, in Note 7.

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.

On occasion, the Company has entered into derivative contracts to hedge the Company’s exposure to price risk related to forecasted corn purchases and forecasted ethanol sales. Accounting for derivative contracts 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.

Although the Company believes its derivative positions are economic hedges, it has not designated any of these positions as hedges for accounting purposes and has recorded its derivative positions on its balance sheet at their fair value, with changes in fair value recognized in current period earnings.

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.

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.

Property and Equipment

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

 

 

Interest capitalized in property and equipment was $353,000 and $32,000 in fiscal 2019 and 2018, respectively.

24

---

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 on 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.

INTEREST RATE/FOREIGN EXCHANGE RISK

Our future earnings may be affected by changes in interest rates due to the impact those changes have on our interest expense on borrowings under our credit facility. As of September 30, 2019, we had $20.8 million of outstanding borrowings with variable interest rates. With each 1% increase in interest rates we will incur additional annual interest charges of $0.21 million.

We have no international sales. Substantially all of our purchases are denominated in U.S. dollars.

IMPACT OF INFLATION

We believe that inflation has not had a material impact on our results of operations since inception.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

 

25

---

We consider market risk to be the impact of adverse changes in market prices on our results of operations. We are subject to significant market risk with respect to the price of ethanol and corn. For the year ended September 30, 2019, sales of ethanol represented 76% of our total revenues and corn costs represented 75% of total cost of goods sold. In general, ethanol prices are affected by the supply and demand for ethanol, the cost of ethanol production, the availability of other fuel oxygenates, the regulatory climate and the cost of alternative fuels such as gasoline. The price of corn is affected by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. At September 30, 2019, the price per gallon of ethanol and the price per bushel of corn on the CBOT were $1.37 and $3.88, respectively.

We are also subject to market risk on the selling prices of our distillers’ grains, which represented 20% of our total revenues for the fiscal year ended September 30, 2019. These prices fluctuate seasonally when the price of corn or other cattle feed alternatives fluctuate in price. The average dried distillers’ grains spot price for local customers was $126 per ton at September 30, 2019.

We are also subject to market risk with respect to our supply of natural gas that we consume in the ethanol production process. Natural gas costs represented 5% of total cost of sales for the year ended September 30, 2019. The price of natural gas is affected by overall supply, weather conditions and general economic, market and regulatory factors. At September 30, 2019, the price of natural gas on the NYMEX was $2.33 per mmbtu.

To reduce price risk caused by market fluctuations in the cost and selling prices of related commodities, we have entered into forward purchase/sale contracts. We entered into forward sales contracts which guaranteed prices on 16% of our ethanol gallons sold through October 2019. At September 30, 2019 we had entered into forward sale contracts representing 36% of our expected distillers’ grains production output through October 2019.

The following represents a sensitivity analysis that estimates our annual exposure to market risk with respect to our current corn and natural gas requirements and ethanol sales. Market risk is estimated as the potential impact on operating income resulting from a hypothetical 10% change in the fair value of our current corn and natural gas requirements and ethanol sales, net of corn and natural gas forward contracts used to hedge market risk with respect to our current corn and natural gas requirements. The results of this analysis, which may differ from actual results, are as follows:

 

 

 

 

26

---

Financial Statements

 

 

 

27

---

Report of Independent Registered Public Accounting Firm

To the Members and the Board of Directors of Advanced BioEnergy, LLC

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Advanced BioEnergy, LLC and its subsidiaries (the Company) as of September 30, 2019 and 2018, the related consolidated statements of operations, changes in members’ equity and cash flows for each of the three years in the period ended September 30, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Emphasis of Matter – Subsequent Events

As discussed in Note 12 to the financial statements, the Company sold substantially all Company assets related to its ethanol plants on December 19, 2019, and has repaid all outstanding debt obligations.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company’s auditor since 2005.

Des Moines, Iowa

December 30, 2019

 

 

28

---

ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Balance Sheets

 

 

See notes to consolidated financial statements.

 

 

29

---

ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Operations

 

 

See notes to consolidated financial statements

 

 

30

---

ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Changes in Members’ Equity

For the Years Ended September 30, 2019, 2018 and 2017

 

 

See notes to consolidated financial statements

 

 

31

---

ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Cash Flows

 

 

See notes to consolidated financial statements.

 

 

32

---

ADVANCED BIOENERGY, LLC & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

The consolidated financial statements include the accounts of 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.

Advanced BioEnergy, LLC is organized as a Delaware limited liability company. Members’ liability is limited pursuant to the Delaware Limited Liability Company Act. The Company’s operating agreement provides for the term of the entity to last until a Dissolution Event occurs as defined in the operating agreement; there is no exact Dissolution Event or date specified.

At September 30, 2019, the Company owned two ethanol production facilities in Aberdeen and Huron, South Dakota with a combined production capacity of 80 million gallons per year.  On August 1, 2019, the Company and ABE South Dakota entered into an asset purchase agreement (the “Asset Purchase Agreement ”) with Glacial Lakes Energy, LLC (“GLE”), under which ABE South Dakota agreed to sell its Aberdeen and Huron, South Dakota ethanol plants and related businesses to GLE (the “Asset Sale”). On December 19, 2019, Advanced BioEnergy, ABE South Dakota and GLE closed the Asset Sale. At the closing, ABE South Dakota sold to GLE substantially all of the assets related to its business of producing ethanol and co-products, including wet, modified and dried distillers’ grains and corn oil, through its plants located in Aberdeen, South Dakota and Huron, South Dakota.

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 included a deposit for a rail car sublease.

The following table provides a reconciliation of cash and cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts in the consolidated statement of cash flows (in thousands):

 

 

 

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.

Fair Value Measurements

In determining fair value of its derivative financial instruments, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often uses certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three fair value hierarchy categories:

Level  1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.

33

---

Level  2: Valuations for assets and liabilities traded in less-active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

Commodity futures and exchange-traded commodity options contracts are reported at fair value, utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live-trading levels from the Chicago Board of Trade (“CBOT”) and New York Mercantile Exchange (“NYMEX”) markets.

There were no material balances of financial assets or financial liabilities, including derivative financial instruments, measured at the approximate fair value at September 30, 2019 or 2018.

 

Deferred Financing Costs

Deferred financing costs are recorded at cost and include expenditures related to secure debt financing. Deferred financing costs are shown as contra debt and are being amortized into interest expense over the term of the agreement using the straight-line method, which approximates the effective interest method.

Receivables

Credit sales are made to a relatively small number 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 September 30, 2019 or September 30, 2018.

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.

Property and Equipment

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

 

 

Interest capitalized in property and equipment was $353,000 and $32,000 in fiscal 2019 and 2018, respectively.

 

During the fourth quarter of fiscal 2016, the Company decided to permanently cease operations at its smaller Aberdeen plant.  Accordingly, the Company impaired the value of this asset to an estimated salvage value of $200,000 and recorded an impairment of approximately $1.6 million during the fourth quarter of fiscal 2016. In fiscal 2017, the Company incurred an additional expenses of $387,000 related to the demolition and other costs, which is included in selling, general and administrative expenses. During fiscal 2017, the Company had received proceeds of $155,000 from the salvage value of the smaller plant, and had a remaining value of $45,000. In fiscal 2018, the Company incurred additional expenses of $215,000 related to the demolition, which is included in selling, general and administrative expenses. During fiscal 2018, the Company received proceeds of $98,000 from the salvage value of the smaller plant, and had a remaining value of $0.

34

---

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 on the asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss is 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.

On occasion, the Company has entered into derivative contracts to hedge the Company’s exposure to price risk related to forecasted corn purchases and forecasted ethanol sales. Accounting for derivative contracts 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.

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 value, with changes in fair value recognized in current period earnings.

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

Effective October 1, 2018, the Company adopted the new guidance of Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (Topic 606) using the modified retrospective approach. Topic 606 requires the Company to recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which ABE expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company generally recognizes revenue at a point in time.  The majority of the Company’s contracts with customers have one performance obligation and a contract duration of one year or less.  The Company has no significant contract assets or contract liabilities from contracts with customers. The adoption of this new guidance did not result in any change to our recognition of revenue.

The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods is are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods.

•Sales of ethanol

•Sales of distillers grains

•Sales of distillers corn oil

We disclose disaggregation of revenue according to product line, along with accounts receivable from contracts with customers, in Note 7.

35

---

Unit Based Compensation

The Company uses the estimated market value at the time the units are granted to value those units granted to officers and directors. The Company records compensation cost on the straight line method over the vesting period for service based awards. If the units vest upon achievement of a certain milestone, the Company recognizes the expense in the period in which the goal was met.

Shipping Costs

Shipping costs are not separately identified under the contract with the marketer and therefore are reflected net in sales.

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.

Segment Reporting

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.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. 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. The Company’s federal income tax returns are open and subject to examination from the 2015 tax return year and forward. Various state income tax returns are generally open from the 2014 and later tax return years based on individual state statute of limitations.

Management has evaluated the Company’s tax positions under the Financial Accounting Standards Board issued guidance on accounting for uncertainty in income taxes and concluded the Company has taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance.

Recent Accounting Pronouncements

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. Due to the Company sale of substantially all of its assets on December 19, 2019 (see Note 12), this standard will not have a material impact on these consolidated financial statements and related disclosures.

 

 

36

---

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

 

 

 

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

 

 

 

37

---

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

 

 

The estimated maturities of debt at September 30, 2019 are as follows (in thousands):

 

 

2015 Senior Credit Agreement for the South Dakota Plants

On December 19, 2019, all amounts outstanding under the Master Credit Agreement dated December 29, 2015, as amended (“Master Credit Agreement”) between ABE South Dakota as borrower and AgCountry Farm Credit Services, PCA as lender (“AgCountry”) were repaid in full.  The total amount repaid was approximately $31.0 million, which was repaid from the purchase price from the Asset Sale described in Note 12. The $31.0 million payment consisted of the following amounts outstanding as of the closing date of the Asset Sale: $30.5 million in principal, $0.4 million in interest and $0.1 million in fees and expenses.  Effective upon the repayment, the Master Credit Agreement and all related documents were terminated in accordance with their terms and AgCountry released its security interest in, and liens and mortgages on, all of the properties, rights and assets of ABE South Dakota.  

Below is a summary of the Master Credit Agreement and its terms that were in effect as of September 30, 2019:

On December 29, 2015, ABE South Dakota entered into the Master Credit Agreement with AgCountry to refinance its existing 2010 Senior Credit Agreement. On December 29, 2015, the Company also entered into (i) a First Supplement to the Master 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 had a fixed interest rate (“Fixed Rate”) at September 30, 2019.  The Fixed Rate was equal to 6.32%. On October 26, 2018, the Company elected to lock in a fixed rate of 6.4%, rather than a variable rate, on the remaining balance of the Term Loan. On January 2, 2019, the Company entered into an Interest Rate Conversation Agreement with AgCountry, under which the Fixed Rate of 6.4% was reduced to 6.32% for the remainder of the loan term.  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 was originally scheduled to be fully amortized over five years with the final payment on January 1, 2021. As described below, the payments originally due in January, April, July and October 2019 have been deferred and are now due at the end of the term, or January 1, 2021. At September 30, 2019, the outstanding balance on the Term Loan was $9.0 million.  

The $10.0 Revolving Term Facility has a variable rate (“Variable Rate”) equal to the one-month LIBOR rate of plus an initial Margin of 350 basis points.  At September 30, 2019, the Variable Rate was equal to the one-month LIBOR rate of 2.20% plus a 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 September 30, 2019, the balance of the Revolving Term Facility was $10.0 million.

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 Master 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.

38

---

The Master Credit Agreement also included financial and non-financial covenants that limit distributions and debt and require minimum working capital, owner’s equity, current ratio, debt to EBITDA ratio, and fixed charge coverage ratios. Those covenants included the following:

ABE South Dakota is also prohibited from making member distributions in excess of 40% of pre-tax net income in a given year without the prior consent of Ag Country. When ABE South Dakota achieves and maintains owners’ equity ratio of 60.0% and working capital of $15.0 million, then it may pay member dividends of 100.0% of pre-tax net income. If the owner’s equity ratio declines below 60.0%, or working capital declines below $15.0 million, then dividends will be restricted until ABE South Dakota regains compliance. ABE South Dakota must meet all loan covenants before and after any distribution.

A number of these covenants have been amended in connection with subsequent term loans, a construction loan, and amendments and waivers as described below.

2016 Term Loan

On September 28, 2016, ABE South Dakota entered into the Third Supplement to the Master Credit Agreement (“2016 Term Loan”) with AgCountry to finance the corn oil extraction system at the Huron plant.  The total loan commitment for 2016 Term Loan was $1.7 million, and the loan had 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 September 30, 2019 the 2016 Term Loan was paid in full.

2018 Construction and Term Loan

On March 13, 2018, ABE South Dakota entered into the Fourth Supplement to the Master Credit Agreement (“2018 Term Loan”) with AgCountry to finance a grain storage and receiving facility at the Aberdeen plant. The agreement provides for a $5.0 million multiple advance credit facility. The loan has a variable interest rate equal to the one-month LIBOR rate plus a “Margin” of 350 basis points.  During the construction period, the Company will make quarterly interest payments in arrears on the first day of each quarter.  Upon completion of construction, the Company will begin making quarterly principal payments in the amount of $250,000 per quarter, plus accrued interest. The 2018 Term Loan will be fully amortized over five years, with the final payment on July 1, 2024.  At September 30, 2019, $4.3 million had been drawn on the 2018 Term Loan, and $47,000 in loan fees and closing costs had been incurred, which have been classified as deferred financing costs and will be amortized as interest expense over the term of the loan.

39

---

2019 Short-Term Revolving Credit Loan

On August 7, 2019, ABE South Dakota entered into the Fifth Supplement to the Master Credit Agreement (“2019 Revolving Loan”), with AgCountry to provide a $6.5 million short-term revolving credit loan.  The 2019 Revolving Loan was obtained to finance working capital needs through the closing of the Asset Sale, as well as the purchase of approximately 800,000 bushels of corn.  The 2019 Revolving Loan has a variable interest rate equal to the one-month LIBOR rate plus a Margin of 400 basis points.  Borrowings under the Revolving Loan may be advanced, repaid and re-borrowed during the term, except during an outstanding Event of Default. The Company is required to make monthly interest payments on the Revolving Loan which began September 1, 2019, with the full principal amount outstanding due on the earlier of November 1, 2019 or the date on which the obligations have been declared or have automatically become due and payable, whether by acceleration or otherwise.  At September 30, 2019, the balance of the 2019 Revolving Loan was $6.5 million.

Amendments and Waivers to Master Credit Agreement

On September 28, 2016, ABE South Dakota entered into a Limited Waiver and First Amendment to the Master 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.  

On November 19, 2016, ABE South Dakota received a waiver to the Master Credit Agreement from AgCountry 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 Master Credit Agreement from AgCountry 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 the addition of 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.

On March 13, 2018, in conjunction with the 2018 Term Loan, ABE South Dakota entered into a Second Amendment to the Master Credit Agreement (“Second Amendment”) to temporarily increase the Capital Expenditures Covenant to $6.0 million per year for the years ending September 30, 2018 and 2019.  The covenant will revert back to $2.0 million per year for all years ending after September 30, 2019.

As a result of a depressed margin environment in fiscal 2019 and fiscal 2018, ABE South Dakota requested waivers for certain specific Events of Default in fiscal 2019 and at September 30, 2018, and requested covenant amendments for specific future covenants for which ABE South Dakota projected possible non-compliance.  Although ABE South Dakota’s lender, AgCountry Farm Credit Services, PCA, granted the waivers and covenant amendments to the Master Credit Agreement, as discussed below, we were unable to meet other certain covenant and payment obligations subsequent to those waived and accordingly, an Event of Default occurred.

On October 19, 2018, ABE South Dakota entered into a Limited Waiver and Third Amendment to the Master Credit Agreement (“Third Amendment”) to waive certain Events of Default related to covenant compliance as of September 30, 2018 and temporarily amend certain future covenants.  The Third Amendment included the following covenant waiver and amendments: (i) the Fixed Charge Coverage Ratio was waived as of September 30, 2018, reduced to a ratio of 1.00:1.00 as of September 30, 2019, and reverts back to 1.15:1.00 at September 30, 2020, (ii) the Working Capital Covenant was reduced to $10 million at September 30, 2018 and December 31, 2018, $9 million at March 31, 2019 and June 30, 2019, then increased to $10 million at September 30, 2019 and $12 million at September 30, 2020 and all times thereafter, (iii) the Capital Expenditures covenant was increased to $8.0 million for the year ending September 30, 2019, and reverts back to $2.0 million for all subsequent years, and (iv) the outstanding Debt to EBITDA Ratio was waived at September 30, 2018 and will revert back to the requirement that it be less than 4:00:1:00 on the last day of each fiscal year end beginning September 30, 2019.

On December 28, 2018, ABE South Dakota entered into a Limited Waiver and Deferral Agreement and Fourth Amendment to the Master Credit Agreement (“Fourth Amendment”) to defer three future principal payments and waive and temporarily amend certain future covenants.  The Fourth Amendment included the following covenant waivers and amendments:  

40

---

On July 17, 2019, ABE South Dakota entered into a Limited Waiver Agreement to the Master Credit Agreement (“Limited Waiver”) to waive the Event of Default related to compliance with the Working Capital Covenant at May 31, 2019 and June 30, 2019.  As a condition to AgCountry granting the Limited Waiver, ABE South Dakota’s parent company, Advanced BioEnergy, LLC was required to make a cash investment not less than $300,000 to be available for ABE South Dakota’s working capital needs.

On August 7, 2019, ABE South Dakota entered into a Second Limited Waiver Agreement to the Master Credit Agreement (“Second Limited Waiver”) to waive outstanding and expected Events of Default related to compliance with the Working Capital Covenant at July 31, 2019 and August 31, 2019, and the Current Ratio Covenant at June 30, 2019, July 31, 2019 and August 31, 2019.

On October 9, 2019, ABE South Dakota entered into a Third Limited Waiver and Deferral Agreement (“Third Limited Waiver”) to: (i) waive outstanding Events of Default related to compliance with the Working Capital and Current Ratio covenants at September 30, 2019, (ii) extend the funding period of the 2018 Term Loan to November 1, 2019, (iii) amend the repayment obligations of the 2018 Term Loan to begin January 1, 2020, and (iv) defer the principal payment due October 1, 2019 to the Term Loan Maturity Date.

Subsequent to the amendments and waivers described above, ABE South Dakota evaluated projected covenant compliance for the 12 month period following September 30, 2019.  Based on this evaluation, ABE South Dakota determined compliance over the next 12 month period was not reasonably possible and, as a result, has recognized all debt as current on its financial statements.  The debt was subsequently repaid in connection with the sale of substantially all of ABE South Dakota’s assets, see Note 12.

ABE Letter of Credit

In connection with the execution of a rail car sublease, the Company, as parent of ABE South Dakota agreed to post a $2.5 million irrevocable and non-transferable standby letter of credit in May 2012 for the benefit of its ethanol marketer as security for the payment obligations of ABE South Dakota. The Company deposited $2.5 million in a restricted account as collateral for this letter of credit and classified it as restricted cash. Effective May 15, 2014, the letter of credit and corresponding deposit of collateral was decreased by $1.0 million in conjunction with an amendment to the rail car sublease. Effective June 27, 2016, the letter of credit and corresponding deposit of collateral was decreased by $0.5 million in conjunction with an amendment to the rail car sublease.  Effective July 31, 2018, the letter of credit was terminated and the corresponding collateral requirement was eliminated.

 

 

Unit Appreciation Rights

As of September 30, 2019, the Company had 312,500 Unit Appreciation Rights (“UAR”) fully vested and outstanding. At the time of their respective grants, (i) 200,000 of the UARs had an exercise price of $1.15 per unit, (ii) 12,500 of the UARs had an exercise price of $1.00 per unit, and (iii) 100,000 of the UARs had an exercise price of $1.24 per unit. As a result of cash distributions paid to the Company’s unit holders subsequent to the dates of the respective UAR grants, as of September 30, 2019, (i) the exercise price of the 200,000 January 2013 UARs has been reduced to $0.21 per unit, (ii) the exercise price of the 12,500 January 2015 UARs has been reduced to $0.85 and (iii) the exercise price of the 100,000 January 2016 UARs is $1.09 per unit.  The exercise price of each of these awards will be reduced by any future distributions paid to the Company’s unit holders. The units are contingently exercisable only under certain limited circumstances; therefore, the Company is not recognizing compensation expense related to the awards until these defined circumstances are probable of occurring.

Board Representation and Voting Agreement

The Company, certain directors of the Company, South Dakota Wheat Growers Association, entities associated with Clean Energy Capital, LLC (“CEC”) (and predecessor entities) and entities associated with Thomas H. Lee Partners, L.P. (“THL”) (and predecessor entities), have each executed a voting agreement (the “Voting Agreement”). The Voting Agreement requires the parties to (a) nominate for election to the Board two designees of THL and the Chief Executive Officer of the Company, (b) recommend to the members the election of each of the designees, (c) vote all units of the Company they beneficially own or otherwise control to elect each of the designees to the Board, (d) not take any action that would result in the removal of any of the designees from the Board or to increase the size of the Board to more than nine members, and (e) not grant a proxy with respect to any units that is inconsistent with the parties’ obligations under the Voting Agreement. At December 1, 2019, the parties to the Voting Agreement held in the aggregate approximately 39.6% of the outstanding units of the Company.

41

---

 

 

Lease Commitments

The Company leases ethanol and distillers rail cars, office and other equipment and an office facility under operating lease agreements with the following approximate future minimum rental commitments through 2024 for the years ended September 30 (in thousands):

 

 

The Company recognized rent expense related to the above leases of approximately $3.9 million, $3.9 million, and $4.5 million for the years ended September 30, 2019, 2018, and 2017, respectively.

 

The Company closed on the Asset Sale on December 19, 2019.  In connection with the closing of the Asset Sale, the Company assigned or cancelled any and all lease commitments above as they relate to ABE South Dakota, and will have no further payment obligations.  Following the closing of the Asset Sale, ABE has future commitments for fiscal 2020 of $163,000, fiscal 2021 of $153,000 and fiscal 2022 of $3,000, which it will resolve through the liquidation, dissolution and winding up pursuant to the Plan of Liquidation.

 

ABE South Dakota has ethanol marketing agreements with NGL Crude Logistics LLC (“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 were originally set to expire on June 30, 2019. On April 1, 2019, the agreements were amended to change the term to month-to-month, with three months written notice by either party required to terminate the agreement. On September 27, 2019, the Company provided notice of termination due to the pending Asset Sale. The agreements will terminate on December 31, 2019.

ABE South Dakota is party to a co-product marketing agreement with Dakotaland Feeds, LLC (“Dakotaland Feeds”), under which Dakotaland Feeds markets the local sale of wet distillers’ grains produced at the ABE South Dakota 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 Ingredients, LLC (“Gavilon”) to market the dried distillers’ grains at the Aberdeen and Huron plants which were originally set to expire on July 31, 2019. On May 8, 2019, the agreement was amended so the term would continue until either party gave no less than sixty days written notice. On September 30, 2019, the Company provided notice of termination due to the pending Asset Sale. The agreement terminated on November 30, 2019.  The Company continued to sell dried distillers’ to Gavilon through the closing of the Asset Sale. ABE South Dakota self-marketed its wet and a small portion of modified distillers’ grains produced at the Aberdeen plant.

ABE South Dakota was party to an agreement with Gavilon to market all of the corn oil produced by the Huron and Aberdeen plants through November 30, 2019 and September 30, 2019, respectively.  On, July 16, 2019, a notice of termination for the Huron plant was delivered to Gavilon which terminated the contract as of October 20, 2019. The Company continued to sell corn oil to Gavilon through the closing of the Asset Sale. On August 21, 2019 a termination notice for the Aberdeen plants was delivered to Gavilon whereby the agreement terminated on the closing date of the Asset Sale.

42

---

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

 

 

 

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. In addition to entering into contracts to purchase 0.1 million bushels of corn in which the basis or futures price was not locked, the Company had entered into the following fixed price forward sales and purchase contracts at September 30, 2019:

 

 

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.

 

 

The Company sponsors a 401(k) plan for eligible employees. Eligible employees may make elective deferral contributions to the plan. The Company’s matching contribution is 100% of the employee’s elective deferrals, not to exceed 5% of the employee’s eligible wages. The Company contributed approximately $146,000, $152,000, and $165,000, to the plan in the years ended September 30, 2019, 2018, and 2017, respectively.

 

 

Grain Purchases from Agtegra

The Company purchased $103.3 million, $97.3 million and $93.8 million of corn from Agtegra in the years ended September 30, 2019, 2018, and 2017 pursuant to a grain origination agreement, which covers all corn purchases in South Dakota. Agtegra owns approximately 5% of the Company’s outstanding units. As of September 30, 2019 and 2018, the Company had outstanding amounts payable to Agtegra of approximately $1.9 million and $2.7 million, respectively.

 

 

43

---

The following table presents summarized quarterly financial data for the years ended September 30, 2019 and 2018. Dollars in thousands, except per unit amounts:

 

 

 

 

 

On August 1, 2019, the Advanced BioEnergy, LLC and ABE South Dakota entered into an Asset Purchase Agreement with Glacial Lakes Energy (“GLE” or “Buyer”) under which ABE South Dakota agreed to sell substantially all the assets related to its Aberdeen and Huron, South Dakota ethanol plants and related businesses to GLE, pursuant to the terms and conditions of the Asset Purchase Agreement (the “Asset Sale”).  The Asset Sale closed on December 19, 2019.  

Under the Asset Purchase Agreement, the purchase price was $47.5 million, plus the value of the Company’s inventory at closing, which was approximately $2.3 million. At the closing, Buyer paid to ABE South Dakota a total of $8.3 million in cash, which reflects the purchase price, less the approximately $31.0 million repay the AgCountry Master Credit Agreement obligations, less the amount of certain accrued contract liabilities, and less $4.75 million of the purchase price that was deposited into an indemnity escrow account. The indemnity escrow account will be used to satisfy any of Buyer’s claims for indemnification under the Asset Purchase Agreement and any amounts remaining after the eighteen (18)-month anniversary of the closing will be released to the Company. The Company also paid approximately $0.7 million in transaction expenses at closing.

Effective upon the repayment on December 19, 2019, the Master Credit Agreement with AgCountry and all related documents were terminated in accordance with their terms and AgCountry released its security interest in, and liens and mortgages on, all of the properties, rights and assets of ABE South Dakota.

Upon the closing of the Asset Sale, the Company commenced its liquidation in accordance with the Plan of Liquidation. Under the Plan of Liquidation, the Company will be liquidated and the proceeds of the sale will be distributed to unit holders, after payment of the Company’s outstanding obligations and other expenses related to the Plan of Liquidation. The Company’s Board of Directors intends to meet in January 2020 to determine the next steps in the Plan of Liquidation, including the amount and timing of any initial distribution to members, which the Company expects will be in January or February 2020.  The Board anticipates that the amount of the initial distribution to members will be between $7.7 and $8.4 million or $0.30 to $0.33 per unit based on 25,410,851 units outstanding as of December 19, 2019, with a final distribution to be paid upon release of the indemnity escrow. However, there can be no assurance as to the timing or amount of distributions to our members.

 

44

---

ADVANCED BIOENERGY, LLC

Pro Forma Condensed Consolidated Balance Sheet (unaudited)

September 30, 2019

 

 

 

45

---

ESTIMATED INITIAL DISTRIBUTION TO MEMBERS (unaudited)

 

  

 

The following financial information represents the unconsolidated financial statements of Advanced BioEnergy as of September 30, 2019 and 2018, and for the years ended September 30, 2019, 2018 and 2017. ABE’s ability to receive distributions from ABE South Dakota is based on the terms and conditions in its Master Credit Agreement with AgCountry. Under the Master 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. In connection with the closing of the Asset Sale on December 19, 2019, the Master Credit Agreement was terminated in accordance with its terms with the repayment in full of the approximately $31.0 million in obligations to AgCountry.

46

---

Advanced BioEnergy, LLC (Unconsolidated)

Balance Sheets

 

 

47

---

Advanced BioEnergy, LLC (Unconsolidated)

Statements of Operations

 

 

48

---

Advanced BioEnergy, LLC (Unconsolidated)

Statements of Cash Flows

 

 

 

49

---

None.

 

 

Disclosure Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the officer serving as both our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by our Company in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Commission rules and forms.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and (iv) provide reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because changes in conditions may occur or the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2019. This assessment is based on the criteria for effective internal control described in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that our internal control over financial reporting was effective as of September 30, 2019.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Controls over Financial Reporting

Our management, with the participation of the officer serving as both our chief executive officer and chief financial officer, performed an evaluation as to whether any change in the internal controls over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) occurred during our fourth fiscal quarter. Based on that evaluation, the chief executive officer and chief financial officer concluded that no change occurred in the internal controls over financial reporting during the period covered by this report that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

 

 

None.

 

 

50

---

PART III

 

 

In accordance with General Instruction G(3), the information called for by this Item will be provided as part of amendment to this Form 10-K to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.

 

In accordance with General Instruction G(3), the information called for by this Item will be provided as part of amendment to this Form 10-K to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.

 

In accordance with General Instruction G(3), the information called for by this Item will be provided as part of amendment to this Form 10-K to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.

 

In accordance with General Instruction G(3), the information called for by this Item will be provided as part of amendment to this Form 10-K to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.

 

In accordance with General Instruction G(3), the information called for by this Item will be provided as part of amendment to this Form 10-K to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.

 

 

51

---

PART IV

 

 

(1) Financial Statements—an index to our financial statements is located above on page 27 of this report. The financial statements appear on page 28 through page 50 of this report.

(2)  Exhibits—the exhibits filed herewith are set forth on the Exhibit Index filed as a part of this report.

 

 

EXHIBIT INDEX

 

52

---

53

---

54

---

 

 

 

 

None.

 

 

55

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 30, 2019.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 30, 2019.

 

 

 

 

56