Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - Central Iowa Energy, LLC | c96358exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Central Iowa Energy, LLC | c96358exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Central Iowa Energy, LLC | c96358exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Central Iowa Energy, LLC | c96358exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarter ended December 31, 2009
OR
o | Transition report under Section 13 or 15(d) of the Exchange Act. |
For the transition period from to
Commission file number 000-52429
CENTRAL IOWA ENERGY, LLC
(Exact name of small business issuer as specified in its charter)
Iowa | 71-0988301 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
3426 EAST 28TH STREET N.
NEWTON, IOWA 50208
(Address of principal executive offices)
NEWTON, IOWA 50208
(Address of principal executive offices)
(641) 791-1010
(Issuers telephone number)
(Issuers telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated filer o | Non-Accelerated Filer þ | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
State the number of shares outstanding for each of the issuers classes of common equity as of the
latest practicable date:
As of February 1, 2010 there were 26,672 units outstanding.
INDEX
Page No. | ||||||||
3 | ||||||||
3 | ||||||||
15 | ||||||||
25 | ||||||||
27 | ||||||||
27 | ||||||||
27 | ||||||||
27 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
30 | ||||||||
30 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
CENTRAL IOWA ENERGY, LLC
Balance Sheets
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and equivalents |
$ | 145,474 | $ | 410,540 | ||||
Due from broker |
75 | 75 | ||||||
Trade accounts receivable related party, less allowance for doubtful
accounts |
776,859 | 161,974 | ||||||
Federal incentive receivable |
1,627 | 1,063 | ||||||
Prepaid expenses |
103,688 | 141,411 | ||||||
Inventories |
142,095 | 226,871 | ||||||
Total current assets |
1,169,818 | 941,934 | ||||||
Property and Equipment |
||||||||
Land and improvements |
7,680,111 | 7,680,111 | ||||||
Office equipment |
40,603 | 40,603 | ||||||
Office building |
629,300 | 629,300 | ||||||
Plant and process equipment |
32,748,111 | 32,748,111 | ||||||
41,098,125 | 41,098,125 | |||||||
Less accumulated depreciation |
7,014,148 | 6,365,941 | ||||||
Net property and equipment |
34,083,977 | 34,732,184 | ||||||
Other Assets |
||||||||
Financing costs, net of amortization |
138,039 | 150,472 | ||||||
Restricted cash |
461,616 | 460,188 | ||||||
Total other assets |
599,655 | 610,660 | ||||||
Total Assets |
$ | 35,853,450 | $ | 36,284,778 | ||||
LIABILITIES AND EQUITY |
||||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
$ | 23,956,318 | $ | 23,977,472 | ||||
Revolving line of credit |
550,000 | 550,000 | ||||||
Accounts payable |
504,760 | 515,732 | ||||||
Accounts payable related party |
846,192 | 487,660 | ||||||
Accrued interest payable |
113,015 | 110,094 | ||||||
Accrued expenses |
271,774 | 379,192 | ||||||
Total current liabilities |
26,242,059 | 26,020,150 | ||||||
Long-Term Debt, less current maturities |
| | ||||||
Deferred Grant Financing |
745,000 | 745,000 | ||||||
Commitments and Contingencies |
||||||||
Members Equity |
||||||||
Member contributions, net of costs related to capital contributions,
26,672 units outstanding |
23,849,120 | 23,849,120 | ||||||
Deficit accumulated |
(14,982,729 | ) | (14,329,492 | ) | ||||
Total members equity |
8,866,391 | 9,519,628 | ||||||
Total Liabilities and Members Equity |
$ | 35,853,450 | $ | 36,284,778 | ||||
Notes to Financial Statements are an integral part of this Statement.
3
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CENTRAL IOWA ENERGY, LLC
Unaudited Condensed Statement of Operations
Three Months Ended | Three Months Ended | |||||||
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues |
||||||||
Sales to related party |
$ | 2,074,237 | $ | 5,097,513 | ||||
Federal incentives |
22,902 | 600,856 | ||||||
2,097,139 | 5,698,369 | |||||||
Cost of Goods Sold |
2,116,859 | 7,485,160 | ||||||
Gross Loss |
(19,720 | ) | (1,786,791 | ) | ||||
Operating Expenses |
||||||||
Professional fees |
143,244 | 136,759 | ||||||
General and administrative |
241,337 | 433,958 | ||||||
Total |
384,581 | 570,717 | ||||||
Operating Loss |
(404,301 | ) | (2,357,508 | ) | ||||
Other Income (Expenses) |
||||||||
Other income |
114,248 | 4,950 | ||||||
Interest expense |
(363,184 | ) | (552,170 | ) | ||||
Total |
(248,936 | ) | (547,220 | ) | ||||
Net Loss |
$ | (653,237 | ) | $ | (2,904,728 | ) | ||
Weighted Average Units Outstanding |
26,672 | 26,672 | ||||||
Net Loss Per Unit Basic and
Diluted |
$ | (24.49 | ) | $ | (108.91 | ) | ||
Notes to Unaudited Financial Statements are an integral part of this Statement.
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CENTRAL IOWA ENERGY, LLC
Unaudited Statement of Cash Flows
Three Months Ended | Three Months Ended | |||||||
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash Flows from Operating Activities |
||||||||
Net loss |
$ | (653,237 | ) | $ | (2,904,728 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities: |
||||||||
Depreciation and amortization |
660,640 | 665,984 | ||||||
Change in assets and liabilities |
||||||||
Due from broker |
| 209,558 | ||||||
Accounts receivable |
(614,885 | ) | 1,015,364 | |||||
Other receivable |
(564 | ) | 395,885 | |||||
Inventories |
84,776 | 4,931,788 | ||||||
Prepaid expenses |
37,723 | 1,335 | ||||||
Derivative instruments |
| (331,683 | ) | |||||
Accounts payable |
347,560 | (1,308,684 | ) | |||||
Accrued expenses |
(107,418 | ) | (28,088 | ) | ||||
Accrued interest payable |
2,921 | (14,006 | ) | |||||
Net cash provided by (used in) operating activities |
(242,484 | ) | 2,632,725 | |||||
Cash Flows from Investing Activities |
||||||||
Capital expenditures |
| (45,775 | ) | |||||
Increase in restricted cash |
(1,428 | ) | (400,000 | ) | ||||
Net cash used in investing activities |
(1,428 | ) | (445,775 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Proceeds (payments) on revolving line of credit, net |
| (1,150,000 | ) | |||||
Payments for long-term debt |
(21,154 | ) | (581,911 | ) | ||||
Net cash used in financing activities |
(21,154 | ) | (1,731,911 | ) | ||||
Net Increase (Decrease) in Cash |
(265,066 | ) | 455,039 | |||||
Cash and
cash equivalents Beginning of Period |
410,540 | 690,509 | ||||||
Cash and cash equivalents End of Period |
$ | 145,474 | $ | 1,145,548 | ||||
Supplemental Disclosure of Cash Flow Information, |
||||||||
Cash payments for interest |
$ | 347,830 | $ | 546,207 | ||||
Notes
to Financial Statements are an integral part of this Statement.
5
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CENTRAL IOWA ENERGY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY Central Iowa Energy, LLC, (an Iowa Limited Liability Company) was
organized with the intentions of developing, owning and operating a 30 million gallon biodiesel
manufacturing facility near Newton, Iowa. The Company commenced operations in April 2007.
BASIS OF PRESENTATION The accompanying unaudited condensed interim financial statements have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted as permitted by such rules and regulations. These
financial statements and related notes should be read in conjunction with the financial
statements and notes thereto included in the Companys audited financial statements for the year
ended September 30, 2009 included in the Companys Annual Report on Form 10-K.
In the opinion of management, the condensed interim financial statements reflect all adjustments
(consisting of normal recurring accruals) that they consider necessary to present fairly the
Companys results of operations, financial position and cash flows. The results reported in
these condensed interim financial statements should not be regarded as necessarily indicative of
results that may be expected for the entire year.
USE OF ESTIMATES Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles of the United States of
America. 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.
REVENUE RECOGNITION Revenues are recognized when the customer has taken title and has assumed
the risks and rewards of ownership, prices are fixed or determinable, and collectibility is
reasonably assured.
FEDERAL INCENTIVE PAYMENTS AND RECEIVABLES Revenue from federal incentive programs is recorded
when the Company has sold blended biodiesel and satisfied the reporting requirements under the
applicable program. When it is uncertain that the Company will receive full allocation and
payment due under the federal incentive program, it derives an estimate of the incentive revenue
for the relevant period based on various factors including the most recently used payment factor
applied to the program. The estimate is subject to change as management becomes aware of
increases or decreases in the amount of funding available under the incentive programs or other
factors that affect funding or allocation of funds under such programs.
CASH AND EQUIVALENTS The Company considers all highly liquid debt instruments with a maturity
of three months or less to be cash and equivalents.
The Company maintains its accounts primarily at two financial institutions. At times throughout
the year, the Companys cash and equivalents balances may exceed amounts insured by the Federal
Deposit Insurance Corporation.
ACCOUNTS
RECEIVABLE Accounts receivable are presented at face value, net of the allowance for
doubtful accounts. The allowance for doubtful accounts is established through provisions charged
against income and is maintained at a level believed adequate by management to absorb estimated
bad debts based on historical experience and current economic conditions.
During the quarter ended December 31, 2008 a customer defaulted on a fixed price contract for
the delivery of 500,000 gallons of biodiesel. In accordance with the terms of the contract the
penalty for not accepting delivery of the product is computed based on the difference between
the contract price and the market value of the product on the date of the default. The Company
is currently going through arbitration in accordance with the terms of the contract to collect
the $1,021,916 shortfall. While the Company believes that the amount is due under the terms of
the contract, due to the uncertainty surrounding the outcome of the arbitration proceeding and
the financial viability of the customer the entire balance has been reserved.
6
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CENTRAL IOWA ENERGY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
The Companys policy is to charge simple interest on trade receivables past due balances.
Accrual of interest is discontinued when management believes collection is doubtful. Receivables
are considered past due based upon payment terms set forth at the date of the related sale. The
Company has no receivables accruing interest at December 31, 2009.
INVENTORIES
Inventories are valued at the lower of cost or market using the first-in,
first-out (FIFO) method.
DERIVATIVE INSTRUMENTS The Company accounts for derivative instruments and hedging activities
in accordance with Accounting Standards Codification (ASC) Topic No. 815, Derivatives and
Hedging. ASC 815 requires a company to evaluate its contracts to determine whether the contracts
are derivatives. Certain contracts that literally meet the definition of a derivative may be
exempted from ASC 815 as normal purchases or normal sales. Normal purchases and normal sales
are contracts that provide for the purchases or sale of something other than a financial
instrument or derivative instrument that will be delivered in quantities expected to be used or
sold over a reasonable period in the normal course of business. Contracts that meet the
requirements of normal purchases or sales are documented as normal and exempted from accounting
and reporting requirements of ASC 815.
The Company enters into option contracts in order to reduce the risk caused by market
fluctuations of soybean oil, heating oil and natural gas. These contracts are used to fix the
purchase price of the Companys anticipated requirements of soybean oil and natural gas in
production activities and to manage exposure to changes in biodiesel prices. The fair value of
these contracts is based on quoted prices in active exchange-traded or over-the-counter markets.
The fair value of the derivatives is continually subject to change due to the changing market
conditions. Although the Company believes its derivative positions are economic hedges, none
have been designated as a hedge for accounting purposes and derivative positions are recorded on
the balance sheet at their fair market value, with changes in fair value recognized in current
period earnings in cost of goods sold.
The following amounts have been included in cost of goods sold for the three months ended
December 31, 2009 and 2008:
Three Months Ended | Three Months Ended | |||||||
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Realized gain |
$ | | $ | 826,742 | ||||
Change in unrealized gain |
| 331,683 | ||||||
Net gain |
$ | | $ | 1,158,425 | ||||
PROPERTY
AND EQUIPMENT Property and equipment is carried at cost. Depreciation and
amortization are provided over estimated useful lives by use of the straight line method.
Maintenance and repairs are expensed as incurred; major improvements and betterments are
capitalized. The Company initiated operations on April 3, 2007 and began depreciating the
portion of the plant in service at that time.
Depreciation is computed using the straight-line method over the following estimated useful
lives:
Land improvements |
15-20 years | |||
Office building |
10-20 years | |||
Office equipment |
5 years | |||
Plant and process equipment |
10-20 years |
The Company reviews its property and equipment for impairment whenever events indicate that the
carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum
of the future cash flows is less than the carrying amount of the asset. The amount of the loss
is determined by comparing the fair
market values of the asset to the carrying amount of the asset. No loss has been recorded during
the three months ended December 31, 2009 or 2008.
7
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CENTRAL IOWA ENERGY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
RESTRICTED CASH Restricted cash consists of a certificate of deposit totaling approximately
$400,000 and an escrow account totaling approximately $61,616 at December 31, 2009. These funds
have been restricted for purposes in accordance with the terms of a loan agreement with a third
party lender. As of December 31, 2009 and 2008 there are no other bank or legal restrictions
regarding cash.
FINANCING COSTS Financing costs and loan origination fees are stated at cost and are amortized
using the effective interest method over the life of the loan agreements. Amortization commenced
as the Company borrowed funds on the loans. Amortization for the three months ended December 31,
2009 and 2008 was $12,433 and $19,970, respectively.
FAIR
VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments is
determined by reference to various market data and other valuation techniques as appropriate.
The carrying value of cash and equivalents, due from broker, receivables and accounts payable
approximates the fair value because of the short maturity of these financial instruments. The
carrying value of the debt also approximates fair value as the interest rate reprices when
market interest rates change. The fair value of the derivate instruments is based on quoted
prices in active exchange-traded or over-the-counter markets.
The Company follows the guidance set forth in the FASB Codification Topic 820 for assets and
liabilities recognized at fair value on a recurring basis. Topic 820 establishes a framework for
measuring fair value and requires enhanced disclosures about assets and liabilities carried at
fair value.
As defined in Topic 820, fair value is the price that would be received to sell and asset or
paid to transfer a liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the measurement date. Topic
820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair
value into three board levels as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities as
of the reported date. The types of assets and liabilities included in Level 1 are highly liquid
and actively traded instruments with quoted prices, such as commodity derivative contracts
listed on the Chicago Board of Trade.
Level 2 Pricing inputs are other than quoted prices in active markets, but are either directly
or indirectly observable as of the reported date. The types of assets and liabilities included
in Level 2 are typically either comparable to actively traded securities or contracts, or priced
with models using highly observable inputs.
Level 3 Significant inputs to pricing have little or no observability as of the reporting
date. The types of assets and liabilities included in Level 3 are those with inputs requiring
significant management judgment or estimation, such as the complex and subjective models and
forecasts used to determine the fair value of financial transmission rights.
As of December 31, 2009, the Company did not have any assets or liabilities which would require
disclosure.
DEFERRED GRANT FINANCING Pursuant to a private redevelopment agreement dated November 21,
2006, Jasper County agreed to construct sewer improvements for the Companys biodiesel project
site. The agreement authorizes the County to finance these improvements through the issuance of
bonds or notes. In return for these improvements, the Company was required to construct a
thirty million gallon per year biodiesel plant requiring a total investment of at least
$38,000,000 and to create at least twenty new full-time jobs at our plant and maintain such jobs
until June 30, 2015. Also, the Company was required to enter into an assessment agreement with
Jasper County to establish a minimum actual value of our property and related improvements for
the purposes of the calculation and assessment of our real property taxes. In the event of
default the Company would be required to pay the County for the improvements. For financial
statement purposes the
costs of the improvements have been capitalized in land improvements and the obligation will be
shown as a long-term liability until the obligation is reduced or expires.
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CENTRAL IOWA ENERGY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
INCOME TAXES The Company is organized as a limited liability company under state law and is
treated as a partnership for income tax purposes. Under this type of organization, the
Companys earnings pass through to the partners and are taxed at the partner level.
Accordingly, no income tax provision has been calculated. Differences between financial
statement basis of assets and tax basis of assets is related to capitalization and amortization
of organization and start-up costs for tax purposes, whereas these costs are expensed for
financial statement purposes and accelerated depreciation for tax purposes as compared to
straight line depreciation for financial statement purposes.
NOTE 2: INVENTORIES
Inventories consist of the following as of December 31, 2009 and 2008:
2009 | 2008 | |||||||
Raw materials |
$ | 108,978 | $ | 272,639 | ||||
Work in process |
| 34,549 | ||||||
Finished goods |
33,117 | 2,537,496 | ||||||
Total |
$ | 142,095 | $ | 2,844,684 | ||||
NOTE 3: RELATED PARTY TRANSACTIONS
In August 2006, the Company entered into a management and operational services agreement with
REG for the overall management of the Company. The entity provides a general manager, an
operations manager, acquires feed stocks and the basic chemicals necessary for operations and
performs administrative, sales and marketing functions. The Company pays a per gallon fee based
on the number of gallons of biodiesel produced. In addition, the agreement provides for the
payment of a yearly bonus based upon the Companys net income. Total fees expensed under the
agreement for the three months ended December 31, 2009 and 2008 were none and approximately
$59,000, respectively. The agreement will renew annually unless terminated by either party upon
one years prior written notice. On April 7, 2009 the Company received a written notice of
termination from REG due to changes in the biodiesel market since the original agreements were
signed. Therefore the current agreement will expire on May 1, 2010. REG has proposed that the
parties review and cooperate to negotiate a new contract mutually beneficial to the Company and
REG; however, there is no guarantee that a new contract will be entered into between the
parties.
In November 2008, the Company entered into a Toll Processing Agreement with REG for the delivery
of corn oil to the Company for pre-treatment processing. REG agrees to pay the Company a fixed
processing fee per pound of corn oil delivered minus the amount from the sale of materials
obtained from the pre-treatment processing.
In January 2009, the Company entered into an additional Toll Processing Agreement with REG for
the delivery of various feedstocks to the Company for processing into biodiesel meeting certain
specifications. REG agrees to pay a fixed fee per gallon produced from said feedstocks. The
Company will retain all co-products produced as a result of the processing at no additional
cost. The term of the agreement continues from January 2009 until March 30, 2010 and shall
continue thereafter on a month to month basis unless terminated in writing by either party at
least one month in advance of the termination date. The Company also entered into an addendum
to the agreement which provides for the processing of certain other feedstocks into biodiesel.
The Company shall pay to REG a by-product payment for the co-products produced and sold from the
processing of this additional feedstock. The payment accrued under this addendum for the three
months ended December 31, 2009 was approximately $345,000. All other terms of the agreement are
unchanged.
9
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CENTRAL IOWA ENERGY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
On November 20, 2009, the Company entered into a Second Amended and Restated Asset Purchase
Agreement which supersedes the original Asset Purchase Agreement the Company entered into on May
8, 2009 and the first Amended and Restated Asset Purchase Agreement entered into on August 7,
2009, and pursuant to which the Company anticipates consolidating its business and operations
with REG under REG Newco, Inc. (Newco), a Delaware corporation. The proposed consolidation
will occur through the acquisition by REG Newton, LLC, a wholly-owned subsidiary of Newco, of
substantially all of the Companys assets and certain liabilities (the Transaction). The
Transaction also provides for REGs merger with and into a wholly-owned subsidiary of Newco,
with REG being the surviving entity (the REG Merger). Additionally, two other potential
transactions involving REG and Newco are contemplated in the Second Amended and Restated Asset
Purchase Agreement: (i) the acquisition by REG Wall Lake, LLC, a wholly-owned subsidiary of
Newco, of substantially all of the assets of, and the assumption of certain liabilities of,
Western Iowa Energy, LLC, an Iowa limited liability company (WIE), and (ii) the merger of REG
Danville, LLC, a wholly-owned subsidiary of Newco, with and into Blackhawk Biofuels, LLC, a
Delaware limited liability company (Blackhawk) with Blackhawk being the surviving entity
(together with the REG Merger, the Common Plan Transactions). The closing of the REG Merger is
a condition to the closing of the Transaction; however, the closings of the other Common Plan
Transactions are not conditions to the closing of the Transaction. Accordingly, it is possible
that REG may be consolidated under Newco with the business and operations of any one or more of
CIE, WIE and Blackhawk.
The Second Amended and Restated Asset Purchase Agreement provides that at the closing of and in
consideration of the Transaction, the Company will receive an aggregate of 4,414,345 shares of
Common Stock of Newco and 164,197 shares of Preferred Stock of Newco (subject to adjustment for
fractional shares). Upon closing of the Transaction and the Common Plan Transactions, the
Company will hold in the aggregate approximately 1.20% of the total issued and outstanding
shares of Newco Preferred Stock and approximately 11.89% of the issued and outstanding shares of
Newco Common Stock. The Company expects to distribute two percent of these Newco shares to its
financial advisor for certain financial advisory services rendered in connection with the
Transaction and the Company may also be required to liquidate or hold back additional Newco
shares to satisfy any creditors of the Company that remain following the close of the
Transaction. It is expected that the balance of the Companys Newco shares will be distributed
to the Companys unit holders in proportion to their respective positive capital account
balances in connection with the Companys anticipated dissolution, liquidation and winding up
following the close of the Transaction. The closing of the Transaction is conditioned upon the
receipt of certain regulatory approvals, including without limitation the SECs approval of
Registration Statement on Form S-4 registering the shares of Newco stock issuable in
consideration of the Transaction and describing the terms of the proposed consolidations; the
approval of the unit holders of the Company of the Transaction; and the approval of the
shareholders of REG of the Transaction, among other things. If the Transaction is duly approved
by the Companys unit holders, the Company intends to seek unit holder approval of the Companys
dissolution, liquidation and winding up (if not otherwise obtained in connection with approval
of the Transaction) and to thereafter liquidate, windup, dissolve and terminate its existence as
soon as practicable following closing of the Transaction. Until the Company is dissolved and its
existence is terminated after closing of the Transaction, Newco has agreed to pay certain
mutually agreeable ongoing costs related to the Company for a period up to six months following
closing of the Transaction.
NOTE 4: REVOLVING LINE OF CREDIT
The Company had a $2,000,000 revolving line of credit commitment with F & M Bank Iowa.
Advances under the agreement are limited based upon inventories and accounts receivable. The
Company was required to make quarterly interest payments at a variable rate equal to the LIBOR
rate plus 3.25%. The note was secured by substantially all assets of the Company. In October
2007, the Company entered into an amended and restated master loan agreement, an amended third
supplement to the amended and restated master loan agreement and an amended and restated
revolving line of credit note with F&M Bank Iowa. Under these agreements, the revolving line
of credit was increased to $4,500,000 for working capital purposes related to the operation of
the plant. The Company continued to make quarterly interest payments at a variable rate equal
to the LIBOR rate plus 3.25% and continued to pay an unused commitment fee on the average daily
unused portion of the line of credit at a rate of 0.35% per annum, payable in quarterly
installments. In April 2008, the
10
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CENTRAL IOWA ENERGY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
Company
received a notice from the lender that the interest rate increased by 2% due to its default under the loan
agreement (See Note 8). In October 2008, the Company entered into a first and second amendment
to the amended and restated master loan agreement. Under these agreements, the revolving line
of credit was decreased to $2,000,000, the interest rate was amended to be equal to 4% above the
LIBOR rate and at no time less than 6%, interest must be paid monthly, the note is secured by an
amended and restated mortgage, the tangible net worth covenant was amended, and the outstanding
principal balance and all accrued interest was payable in full in October 2009. However, as of
the date of this report, the Company had not paid the principal balance outstanding, which
constitutes a default under the financing agreements. The Company has not formally extended or
renewed the revolving line of credit. The Company continues to pay an unused commitment fee on
the average daily unused portion at the new rate of 0.50% per annum, payable in quarterly
installments. (See Note 5 for covenants) As of December 31, 2009, approximately $550,000 was
outstanding under the revolving line of credit.
NOTE 5: LONG-TERM DEBT
Long-term obligations of the Company are summarized as follows at December 31, 2009 and 2008:
2009 | 2008 | |||||||
Mortgage Term Note payable to F & M Bank Iowa See details below |
$ | 18,616,732 | $ | 18,802,899 | ||||
Iowa Department of Economic Development See details below |
302,987 | 355,000 | ||||||
Term Revolving Note payable to F & M Bank Iowa See details below |
5,000,000 | 5,000,000 | ||||||
Equipment capital lease, due in monthly installments of $3,345
through August 2010 with a final option payment of $11,500 for the
purchase of the equipment. |
36,599 | 72,046 | ||||||
$ | 23,956,318 | $ | 24,229,945 | |||||
Due to the going concern issues addressed in Note 8, the debt has been classified as current.
F&M Mortgage and Revolving Term Loan
The term loan requires monthly fixed principal of $186,167 plus interest commencing June 1,
2007, with a final payment due no later than June 1, 2012. The agreement also includes a
provision for additional payments based on the excess cash flows of the Company as defined in
the agreement.
Advances under the revolving term loan are available until the expiration of the commitment on
June 1, 2012, at which time any outstanding balance shall be due and payable in full. The note
requires monthly interest payments based on unpaid principal. The Company has advanced
$5,000,000 on the revolving line of credit agreement as of December 31, 2009.
The agreements provide for several different interest rate options including variable and fixed
options (5.49% variable on the term note and revolving line of credit note, as of December 31,
2009). The variable interest rate options are based on LIBOR rate and include adjustments for
performance which is based on the Companys tangible owners equity, measured quarterly. The
notes are secured by essentially all of the Companys assets. In April 2008, the Company
received a notice from the lender that the interest rate would be increased by 2% due to its
default under the loan agreement (See Note 8).
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CENTRAL IOWA ENERGY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
The bank note agreements for F&M Bank Iowa contains restrictive covenants which, among other
things, require the Company to maintain minimum working levels of working capital, tangible
owners equity and tangible net worth, as well as financial ratios, including a fixed charge
coverage ratio. As of December 31, 2009, the Company was in violation of the working capital,
tangible net worth, owner equity ratio and fixed charge ratio covenants.
Iowa Department of Economic Development
In July 2006, the Company entered into a financial assistance contract with the Iowa Department
of Economic Development whereby the Company has been awarded a $100,000 forgivable loan and a
$300,000 non-interest bearing loan. The Company is obligated to create 28 full-time equivalent
jobs, with 14 of the created jobs having starting wages, including benefits, that meet or exceed
$20.64 per hour. The note is due in monthly installments of $5,000 which began in May 2008. In
September 2009, the Company received a notice of default related to the contractual obligations.
The Company only created 12 of the 14 jobs required and so pursuant to the terms of the loan
agreement, the Company will be subject to certain repayment provisions. A total of $14,000 of
the $100,000 forgivable loan will be repaid along with approximately $3,300 of interest penalty.
These amounts were combined with the $205,000 balance of the non-interest bearing loan as of
November 30, 2009 and will be repaid over the remaining loan term.
NOTE 6: RETIREMENT PLAN
The Company has a 401(k) plan covering substantially all employees who meet specified age and
service requirements. Under this plan, the Company makes a matching contribution of up to 3% of
the participants eligible wages. The Company contributions for the three months ended December
31, 2009 and 2008, was $3,502 and $4,802, respectively.
NOTE 7: COMMITMENTS AND CONTINGENCIES
Utility Contracts
In July 2006, the Company executed an agreement with an unrelated party to provide the
electrical energy required by the Company for a period commencing on July 1, 2006 through July
1, 2007 and shall continue until terminated by either party providing a 90 day advance written
notice.
In November 2006, the Company executed an agreement with an unrelated party to provide the
nitrogen required by the Company for a period commencing on the date of first delivery of the
product and continuing for a period of five years and will continue thereafter until either
party terminates the agreement by providing a minimum 12 month advance written notice of intent
of termination. The Company pays a monthly service charge of $750 plus $.405 per 100 cubic feet
of nitrogen used, with adjustments permitted under conditions outlined in the agreement.
In August 2007, the Company executed an agreement with an unrelated party to provide
transportation of natural gas required by the Company for a period commencing on the date of
first delivery of the product and will continue year to year thereafter until either party
terminates the agreement. The Company pays a monthly service charge of $150 plus $.04 per 100
cubic feet of gas delivered, with adjustments permitted under conditions outlined in the
agreement.
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CENTRAL IOWA ENERGY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
Contingencies
On March 12, 2009 the European Commission applied temporary tariffs on imports of biodiesel from
the United States. These tariffs went into effect March 13, 2009 and in July 2009, the European
Commission decided to extend these tariffs beyond their initial July 2009 expiration date until
2014. At such time, the European Commission may determine to impose definitive tariffs, which
could last for five years. The
Company will likely face increased competition for sales of its biodiesel and international
demand for its product will likely decrease as a result of these tariffs.
If any governmental supports are modified or removed the Companys profitability will be
reduced. Because biodiesel has historically been more expensive to produce than diesel fuel, the
biodiesel industry has depended on governmental incentives that have effectively brought the
price of biodiesel more in line with the price of diesel fuel to the end user. These incentives
have supported a market for biodiesel that might not exist without the incentives. The most
significant of these incentives for biodiesel is the blenders tax credit which provides a $1.00
tax credit per gallon of pure biodiesel, or B100, to the first blender of biodiesel with
petroleum based diesel fuel. The blenders tax credit expired on December 31, 2009 and is
subject to any action Congress may take in 2010. The elimination or reduction of tax incentives
to the biodiesel industry could likely result in the Companys inability to produce and sell
biodiesel profitably.
NOTE 8: GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue
as a going concern. From inception to December 31, 2009, the Company has generated net losses of
$14,982,729 and experienced significant fluctuations in the costs of the basic product inputs
and sales prices. In an effort to increase profit margins and reduce losses, the Company
increased its production of animal fat-based biodiesel and decreased its production of soybean
oil-based biodiesel, as animal fats are at times less costly than soybean oil. The Company also
utilized corn oil as an alternative to soybean oil as much as possible. Furthermore, the Company
may scale back the rate at which it produces biodiesel. The Company has also entered into a toll
processing agreement with a related party under which the related party may order the Company
the production of biodiesel from feedstock supplied by the related party. Under the toll
processing agreement, the Company does not pay for the cost of feedstock but does pay for the
other costs associated with biodiesel production. There is no minimum amount of tolling orders
guaranteed under the toll processing agreement. The expiration of the blenders tax credit on
December 31, 2009, subject to any action that Congress may take in 2010, may materially impair
the Companys ability to profitably produce and sell biodiesel.
The Company has also undertaken significant borrowings to finance the construction of its
biodiesel plant. The loan agreements with the Companys lender contain restrictive covenants,
which require the Company to maintain minimum levels of working capital, tangible owners
equity, and tangible net worth, as well as a fixed charge coverage financial ratio. During the
period covered by this report, the Company failed to comply with all of the restrictive
covenants referenced above. The Company has also failed to make the payments of principal
required under its loan agreements with F&M Bank since January 2009. The failure to comply with
the loan covenants and the failure to make required principal payments constitute events of
default under the Companys loan agreements. These defaults, along with the expiration of the
blenders tax credit on December 31, 2009, raise doubts about whether the Company will continue
as a going concern.
On April 3, 2008, the Company was officially notified by the lender that they were in default
under the loan agreement, and on April 24, 2008 the Company received written notice from the
lender that the interest rate on all of the Companys credit facilities with the lender would be
increased by 2% effective June 1, 2008 (the Rate Notice). The Rate Notice provides that the
lender has agreed to temporarily forebear from exercising some of its rights and remedies under
the loan agreements pending additional information and performance by the Company. However, in
the future it is possible that the lender may elect to exercise one or more of the other
remedies provided under the loan agreements and by applicable law, including, without
limitation, acceleration of the due date of the unpaid principal balance outstanding on the
Companys real and personal property. The Companys ability to continue as a going concern is
dependent on the Companys ability to comply with the loan covenants and the lenders
willingness to waive any non-compliance with such covenants. In October 2008, the Companys
lender decreased the line of credit to $2 million.
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CENTRAL IOWA ENERGY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2009 and 2008
On November 20, 2009, the Company entered into a Second Amended and Restated Asset Purchase
Agreement with a related party as discussed in Note 3. The related party would acquire
substantially all of the Companys assets, assume certain liabilities and therefore operate the
Companys biodiesel production facilities. The
closing of the Second Amended and Restated Asset Purchase Agreement is conditioned upon certain
events and if successful, the Company intends to liquidate, windup and dissolve and terminate
its existence as soon as practicable following the Companys receipt of the requisite unit
holder approval for the same and closing of the asset purchase transaction. Until the Company is
dissolved and its existence is terminated after closing, the acquiring company has agreed to pay
certain mutually agreeable ongoing costs related to the Company. Although closing is anticipated
to occur in early 2010, there can be no assurances that the transaction contemplated by the
Second Amended and Restated Asset Purchase Agreement will ever close.
In the event that the Asset Purchase Agreement fails to close, the Board of Directors may
consider pursuing any one or more of the following courses of action;
| Raising equity through one or more private placement offerings or state registered
offering of the Companys membership units; |
||
| Seeking additional sources of short-term debt financing and credit facilities; |
||
| Refinancing the current debt financing and credit facilities; or |
||
| Seeking strategic business opportunities, including with other biodiesel plants; |
There can be no assurances that if they pursue any of the foregoing courses of action that they
will be successful. They may consider pursuing other options in addition to those identified
above.
Additionally, in October 2008, they obtained approval of a pre-application for a United States
Department of Agriculture (USDA) loan guarantee. A USDA loan guarantee may make them a better
candidate to receive additional debt financing or to refinance their current long-term financing
with their current lender.
NOTE 9: SUBSEQUENT EVENTS
The Company has performed an evaluation of subsequent events through February 16, 2010, which is
the date the financial statements were issued.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
We prepared the following discussion and analysis to help you better understand our financial
condition, changes in our financial condition, and results of operations for the three month period
ended December 31, 2009. This discussion should be read in conjunction with the financial
statements and notes and the information contained in our annual report on Form 10-K for the fiscal
year ended September 30, 2009.
Cautionary Statements Regarding Forward Looking Statements
This report contains forward-looking statements that involve known and unknown risks and
relate to future events, our future financial performance, or our expected future operations and
actions. In some cases, you can identify forward-looking statements by terminology such as may,
will, should, expect, plan, anticipate, believe, estimate, future, intend,
could, hope, predict, target, potential, or continue or the negative of these terms or
other similar expressions. These forward-looking statements are only our predictions based upon
current information and involve numerous assumptions, risks and uncertainties. Our actual results
or actions may differ materially from these forward-looking statements for many reasons, including
the reasons described under RISK FACTORS and elsewhere in this report. While it is impossible to
identify all such factors, factors that could cause actual results to differ materially from those
estimated by us may include:
| Changes in interest rates or the availability, terms and conditions of credit; |
| Our ability to cure our defaults under our financing agreements, and our lenders willingness to refrain
from exercising its remedies in response to our defaults thereunder; |
| Our ability to generate free cash flow to invest in our business and service our debt; |
| Our ability to raise additional equity capital proceeds; |
| Overcapacity within the biodiesel industry resulting in increased competition and costs for feedstock
and/or decreased prices for our biodiesel and glycerin; |
| Decrease in the demand for biodiesel; |
| Actual biodiesel and glycerin production varying from expectations; |
| Availability and cost of products and raw materials, particularly soybean oil, animal fats, and methanol; |
| Changes in the price and market for biodiesel and its co-products, such as glycerin; |
| Our ability to market and our reliance on third parties to market our products; |
| Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement
practices such as: |
| national, state or local energy policy; |
||
| federal and state biodiesel tax incentives; |
||
| legislation establishing a renewable fuel standard or other legislation mandating the use of
biodiesel or other lubricity additives; or |
||
| environmental laws and regulations that apply to our plant operations and their enforcement; |
| Total U.S. consumption of diesel fuel and biodiesel, fuel prices, and consumer attitudes regarding the
use of biodiesel; |
| Fluctuations in petroleum and diesel prices; |
| Changes in our business strategy, capital improvements or development plans; |
| Results of our hedging strategies; |
| Our liability resulting from litigation; |
| Our ability to retain key employees and maintain labor relations; |
| Changes and advances in biodiesel production technology; |
| Competition from alternative fuels and alternative fuel additives; |
| The occurrence of events of default under our financing agreement, our failure to comply with loan
covenants contained in our financing agreements and the response of our lender to such defaults and
non-compliance; |
| Our ability to continue to export our biodiesel and the European Commissions imposition of tariffs or
other duties on biodiesel imported from the U.S.; |
| Current unfavorable domestic and international economic conditions; |
| Our ability to enter into toll processing agreements or other arrangements that shift responsibility for
feedstock procurement and costs to other parties; |
| Changes in plant production capacity or technical difficulties in operating the plant for any reason,
including changes due to events beyond our control or as a result of intentional reductions in
production or plant shutdowns; |
| The closing, or the failure to close, of the transaction contemplated by the Amended and Restated Asset
Purchase Agreement entered into by the Company with REG and certain other parties affiliated with REG; |
| Our ability to generate profits; |
| Our reliance on REG for management, marketing and procurement services and our ability to successfully
operate the plant in light of REGs intent to terminate our current Management and Operational Services
Agreement; and |
| Other factors described elsewhere in this report.
|
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We undertake no duty to update these forward-looking statements, even though our situation may
change in the future. Furthermore, we cannot guarantee future results, events, levels of activity,
performance, or achievements. We caution you not to put undue reliance on any forward-looking
statements, which speak only as of the date of this report. You should read this report, the
documents that we reference in this report, and the documents we have filed as exhibits to this
report completely and with the understanding that our actual future results may be materially
different from what we currently expect. We qualify all of our forward-looking statements by these
cautionary statements.
Overview
Central Iowa Energy, LLC was formed as an Iowa limited liability company on March 31, 2005.
References to Central Iowa Energy, we, us, our and the Company refer to the entity and
business known as Central Iowa Energy, LLC. We own and operate a 30 million gallon per year
biodiesel production plant near Newton, Iowa. We have been engaged in the production and sale of
biodiesel and its primary co-product, glycerin, since April 2007. Our plant is capable of producing
biodiesel from both vegetable oil, including soybean oil and corn oil, and animal fats. Our
facility is also capable of pretreating crude vegetable oils, including soybean oil and corn oil,
and animal fats. Pursuant to our Management and Operational Services Agreement (MOSA) with
Renewable Energy Group, Inc. (REG), REG is required to manage our plant, acquire feedstock and
chemicals necessary for the plants operation, sell and market our products and perform certain
administrative functions. On April 7, 2009, REG provided the Company with twelve months written
notice of its intent to terminate the MOSA. We expect the MOSA will terminate by May 1, 2010. Due
to our significant reliance on REG for the management of our plant, the procurement of our inputs,
and the sale and marketing of our biodiesel, this could have a material adverse affect on our
ability to operate and generate revenues in the event we are not able to negotiate a new MOSA with
REG or enter into an agreement for similar services with another third party. For the three month
period ended December 31, 2009, no amounts were payable under the MOSA due to the fact that we did
not produce biodiesel other than pursuant to a toll processing agreement entered into with an
entity affiliated with REG. Under the toll processing agreement, the per gallon fixed fee provided
for in the MOSA that is typically applicable to each gallon of biodiesel produced at our plant does
not apply to the gallons of biodiesel produced under the toll processing agreement.
We are subject to industry-wide factors that affect our operating and financial performance.
Our operating results are typically driven by the prices at which we sell our biodiesel and
glycerin and the costs of our feedstock and operating costs. Our revenues are typically impacted by
such factors as the available supply and demand for biodiesel, the price of diesel fuel (with which
biodiesel prices often correlate), general economic conditions, the weather, our dependence on one
major customer who markets and distributes our products, the intensely competitive nature of our
industry, the extensive environmental laws that regulate our industry, possible legislation at the
federal, state and/or local level, and changes in federal biodiesel supports and incentives. To
the extent that we continue to produce biodiesel exclusively pursuant to tolling arrangements,
however, our revenues will not be dependent on variable feedstock costs and biodiesel prices.
Current feedstock costs, combined with falling biodiesel prices and demand, have generally made
profit margins small or nonexistent in the biodiesel industry. Demand for biodiesel has also
decreased due to the unfavorable economic conditions that are prevailing in the U.S. and abroad.
We incurred a net loss of $653,237 for the three months ended December 31, 2009. We are
currently experiencing liquidity concerns due to our lack of working capital, our failure to
generate significant funds from operations, and the unavailability of additional short-term
financing and credit. For the three months ended December 31, 2009, we produced approximately
2,894,627 gallons of biodiesel pursuant to toll arrangements.
Based upon our nameplate production capacity of 30,000,000 gallons of biodiesel per year (or
2,500,000 gallons per month), we produced biodiesel at approximately 39% of our production capacity
for the period ended December 31, 2009. Our only biodiesel production during the period covered by
this report was pursuant to a toll processing agreement with REG Marketing & Logistics, LLC (REG
Marketing), an entity affiliated with REG, pursuant to which REG Marketing has the right to order
from the Company the production of biodiesel meeting certain specifications and yield requirements
from certain types of feedstock supplied by REG Marketing, in exchange for which we are entitled to
receive a fixed fee per gallon of biodiesel produced. The term of this toll processing agreement
will continue until March 30, 2010 and will continue thereafter month-to-month unless terminated by
either party at least one month in advance of the termination date. However, the toll processing
agreement does not guarantee that we will receive any minimum amount of biodiesel orders. For the
second quarter of fiscal year 2010, we anticipate that we will continue to operate at or below
approximately 40% of our nameplate production capacity. We do not have contracts lined up for the
purchase of our biodiesel over the second quarter of fiscal year 2010. We expect that all of our
biodiesel production during the remainder of fiscal year 2010 will be pursuant to the toll
processing agreement with REG Marketing or similar arrangements, although there can be no
assurances that we will obtain any orders pursuant to such tolling arrangements.
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We previously entered into a toll processing agreement with an entity affiliated with REG for
the pre-treatment processing of corn oil from time to time, for which we will receive a fixed fee
per pound of corn oil delivered minus the amount from the sale of materials obtained from the
pre-treatment processing. We may continue to operate under this same or similar arrangements
throughout the remainder of the 2010 fiscal year, although there can be no assurances that we will
obtain any orders pursuant to such tolling arrangements.
We expect to continue operating on an as-needed basis for toll processing orders for the
foreseeable future until general biodiesel demand increases and our liquidity situation has
improved. We do not expect to have sufficient working capital on hand in the foreseeable future to
acquire feedstock to produce biodiesel other than pursuant to a toll processing arrangement, which
generally shifts the risk of feedstock costs and biodiesel prices to the other party. It is also
uncertain whether we will maintain sufficient funds to cover the non-feedstock costs of production
associated with biodiesel production under toll processing arrangements. Decreased demand for
biodiesel, the expiration of the blenders credit, our failure to obtain biodiesel purchase
contracts or toll processing orders and our lack of working capital may have a material adverse
affect on our ability to generate revenues.
Proposed Consolidation With REG
On November 20, 2009 we entered into a Second Amended and Restated Asset Purchase Agreement
with REG, REG Newco, Inc., a Delaware corporation (Newco), and REG Newton, LLC, a wholly-owned
subsidiary of Newco and an Iowa limited liability company (REG Newton) (the Asset Purchase
Agreement) pursuant to which we anticipate consolidating our business and operations with REG
under Newco (the Transaction). REG currently provides biodiesel plant management, feedstock
procurement and product marketing services under our MOSA. REG was also the design-builder of our
plant. The proposed consolidation will occur through the acquisition by REG Newton of substantially
all of our assets and certain liabilities. The Asset Purchase Agreement also contemplates the
potential consolidation under Newco of the business and operations of two other biodiesel plants,
Western Iowa Energy, LLC (WIE) and Blackhawk Biofuels, LLC (Blackhawk).
Under the Asset Purchase Agreement, we will receive in consideration of the Transaction an
aggregate of approximately 4,414,345 shares of Common Stock of Newco and 164,197 shares of
Preferred Stock of Newco (subject to adjustment for fractional shares) for distribution to our unit
holders as provided below. Based on the assumption that the Transaction and the other consolidation
transactions involving WIE and Blackhawk close, we will receive in the aggregate approximately
1.20% of the total issued and outstanding shares of Newco Preferred Stock and approximately 11.89%
of the issued and outstanding shares of Newco Common Stock. We expect to distribute two percent
(2%) of the Newco shares of Common Stock and Preferred Stock to our financial advisor, Houlihan
Smith & Company, Inc., for certain financial advisory services rendered to the Company, including
services rendered in connection with the Transaction, and we may also be required to distribute,
liquidate or hold back additional Newco shares to satisfy any claims or liabilities of the Company
that remain outstanding following the close of the Transaction. It is expected that the balance of
the Newco shares will be distributed to our unit holders in proportion to their respective positive
capital account balances in connection with our anticipated dissolution, liquidation and winding up
following the close of the Transaction. We plan to seek unit holder approval
of our dissolution, liquidation and winding up at the same meeting we seek unit holder
approval of the Transaction; however, such approval is not a condition to closing of the
Transaction. If the requisite unit holder approval for our dissolution, liquidation and winding up
is not obtained at the time the Transaction is approved by the unit holders, we expect to seek such
unit holder approval at a later date, although there can be no assurances that it will be obtained.
If the Company has not obtained the requisite unit holder approval prior to closing on the
transaction, the Company will receive Newco Stock certificates issued in its name and the Newco
Stock will not be distributed to the Companys unit holders until the dissolution approval has been
received. Any shares that we are required to distribute or liquidate in satisfaction of
liabilities or claims arising or incurred prior to our dissolution and liquidation will reduce the
number of shares of Newco Stock available for distribution to unit holders. Upon receipt of the
requisite unit holder approval, we plan to dissolve, liquidate, wind up and terminate our existence
as soon as is reasonably practicable after the closing of the Transaction. Until we are dissolved
and our existence is terminated, Newco has agreed to pay certain mutually agreeable ongoing costs
for a period up to six months following closing of the Transaction. In the event we are not
dissolved, liquidated and wound up by the end of this six month period, Newco will be under no
obligation to continue to pay for any of our ongoing costs. In the event that the Transaction is
approved, but the dissolution, liquidation and winding up is not approved at the same time, the
Company could be forced to continue its existence without any ongoing business operations or assets
to support any costs or expenses that it may incur as part of its ongoing existence.
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The closing of the Transaction is subject to a variety of conditions, including without
limitation the receipt of the approval of the Transaction by our unit holders and REGs
shareholders and the closing of the proposed REG consolidation with Newco prior to or
simultaneously with the Transaction. Closing of the Transaction is not conditioned upon the
closing of the WIE or Blackhawk consolidations or upon the Companys dissolution and liquidation.
There can be no assurances that the Transaction will ever close. The foregoing description of the
Asset Purchase Agreement is qualified in its entirety by reference to the full text of the Second
Amended and Restated Asset Purchase Agreement, which was filed as an exhibit to the Companys Form
8-K filed on November 23, 2009.
Results of Operations for the Three Months Ended December 31, 2009 and 2008
The following table shows the results of our operations and the percentage of revenues, costs
of goods sold, operating expenses and other items to total revenues in our statements of operations
for the three months ended December 31, 2009 and 2008:
Three Months Ended | Three Months Ended | |||||||||||||||
December 31, 2009 | December 31, 2008 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Statement of Operations Data | Amount | Percent | Amount | Percent | ||||||||||||
Revenues |
$ | 2,097,139 | 100.00 | % | $ | 5,698,369 | 100.00 | % | ||||||||
Cost of Goods Sold |
2,116,859 | 100.94 | % | 7,485,160 | 131.36 | % | ||||||||||
Gross (Loss) |
(19,720 | ) | (0.94 | )% | (1,786,791 | ) | (31.36 | )% | ||||||||
Operating Expenses |
384,581 | 18.34 | % | 570,717 | 10.01 | % | ||||||||||
Operating (Loss) |
(404,301 | ) | (19.28 | )% | (2,357,508 | ) | (41.37 | )% | ||||||||
Other Income (Expense) |
(248,936 | ) | (11.87 | )% | (547,220 | ) | (9.60 | )% | ||||||||
Net (Loss) |
(653,237 | ) | (31.15 | )% | (2,904,728 | ) | (50.97 | )% |
Revenues
The following table shows the sources of our revenues for the three months ended December 31,
2009 and 2008:
Three Months Ended | Three Months Ended | |||||||||||||||
December 31, 2009 | December 31, 2008 | |||||||||||||||
Revenue Source | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
Biodiesel Sales |
$ | 46,634 | 2.22 | % | $ | 4,909,981 | 86.16 | % | ||||||||
Glycerin, Fatty Acid and Soap
Stock Sales |
289,912 | 13.82 | % | 187,532 | 3.29 | % | ||||||||||
Toll Processing Service Fees |
1,737,691 | 82.86 | % | 0 | 0.00 | % | ||||||||||
Federal Incentives |
22,902 | 1.10 | % | 600,856 | 10.54 | % | ||||||||||
Total Revenues |
2,097,139 | 100.00 | % | $ | 5,698,369 | 100.00 | % |
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Revenues from operations for the three months ended December 31, 2009 totaled $2,097,139
compared with $5,698,369 for the three months ended December 31, 2008. Total revenues were
significantly lower for the three months ended December 31, 2009 compared to the same period in
2008 due to reduced biodiesel production, decreased biodiesel demand, decreased biodiesel sales
contracts, and our production of biodiesel exclusively under tolling arrangements. Under tolling
arrangements, we produce biodiesel using feedstock supplied by the party ordering biodiesel
production. The other party pays for the feedstock and we pay for the other costs of production,
receiving a fixed fee per gallon of biodiesel produced. We may also from time to time pretreat or
process feedstock pursuant to similar tolling arrangements.
A large component of our revenues for the three months ended December 31, 2009 came from toll
processing service fees, as compared to the same period in 2008 in which we earned no revenues from
toll processing services. Under biodiesel tolling arrangements, we only receive a fixed fee per
gallon of biodiesel produced, and we do not receive a variable price per gallon that fluctuates
based on prevailing biodiesel prices. The portion of our revenues for the three-month period ended
December 31, 2009 relating to biodiesel sales reflects the sale of biodiesel inventory during the
three months ended December 31, 2009 that was produced in a period prior to the three-month period
covered by this report. We did not produce any biodiesel during the first quarter of fiscal year
2010 other than pursuant to our tolling arrangements with REG Marketing. Under our biodiesel
tolling agreement with REG Marketing, we are entitled to retain the byproducts of biodiesel
production, including glycerin (subject to the payment of certain byproduct payments).
Accordingly, we continue to sell these byproducts from time to time, along with any inventory of
such byproducts from biodiesel production in prior periods. Sales from such byproducts accounted
for approximately 14% of our total revenues for the three months ended December 31, 2009. Under
tolling arrangements, the other party ordering biodiesel production is typically entitled to
receive the federal incentive payments associated with such production. The $22,902 in federal
incentives included in our revenues for the three months ended December 31, 2009 relates to federal
incentive payments receivable in connection with our sales of B99 biodiesel inventory that was
produced in previous periods.
Because biodiesel is primarily used as an additive to petroleum-based diesel, biodiesel prices
have generally correlated to diesel fuel prices. Although the price for diesel fuel has increased
over the last several years, reaching record highs, diesel fuel prices per gallon remain at levels
below or equal to the price of biodiesel. The price for B100 biodiesel in Iowa was approximately
$3.24 per gallon for the day of January 29, 2010, according to the Iowa Department of
Transportations Average Fuel Prices Report. However, according to the same report, Iowa diesel
fuel prices as of January 29, 2010 averaged approximately $1.96 per gallon, which is significantly
lower than the price per gallon for B100 biodiesel. Demand for biodiesel has been and will likely
continue to be reduced as a result of this price difference. Additionally, current economic
conditions have resulted in decreased demand for biodiesel and other fuels. Combined with the lack
of demand for biodiesel is an increased supply of biodiesel and increased competition for and costs
of our inputs, which has also led to difficulty in marketing biodiesel at profitable prices.
Additionally, demand for biodiesel typically decreases even further in the winter months because
blenders decrease their biodiesel blend percentages due to cold flow concerns. We expect these
trends to continue for the remainder of our 2010 fiscal year. Decreased demand for biodiesel may
negatively impact our ability to profitably produce and/or sell biodiesel, either pursuant to
biodiesel tolling arrangements or ordinary biodiesel sales contracts.
Demand for biodiesel has been negatively impacted by the expiration of the Volumetric Ethanol
Excise Tax Credit (VEETC), also known as the blenders tax credit, which provided a tax credit
of $1.00 per gallon of biodiesel. This tax credit expired on December 31, 2009, and at this time
it is unknown whether Congress will extend the VEETC and, if so, whether it will be extended at the
same $1.00 per gallon level. The permanent elimination or reduction of this tax incentive will
significantly reduce the market for biodiesel and could materially impair our ability to profitably
produce and sell biodiesel. Additionally, demand for biodiesel tolling, which is the only way
which we anticipate producing biodiesel in the foreseeable future, currently has been and could
continue to be reduced significantly by the expiration of this tax credit.
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Demand for biodiesel may also be harmed by the European Commissions decision to extend
anti-subsidy and anti-dumping tariffs on U.S. biodiesel imported into Europe through 2014, which
has significantly increased the price at which U.S. biodiesel producers will be able to sell
biodiesel in European markets, thereby likely significantly reducing overall demand for biodiesel
produced in the U.S.
Cost of Goods Sold
The primary components of cost of goods sold from the production of biodiesel are typically
raw materials (soybean oil, animal fats, corn oil, methanol and other chemicals), energy (natural
gas and electricity), labor and depreciation on process equipment.
Cost of goods sold for our products for the quarter ended December 31, 2009 was $2,116,859,
which is a significant decrease from $7,485,160 for the three months ended December 31, 2008. This
decrease is a result of our shift from ordinary biodiesel production to production of biodiesel
exclusively under tolling arrangements. Under biodiesel tolling arrangements, the other party
supplies the feedstock at its own cost and we typically pay for the other costs associated with
biodiesel production. Most of the costs for which we are responsible under tolling arrangements are
fixed costs rather than variable costs, such as feedstock costs, which are typically the greatest
cost component associated with ordinary biodiesel production. Because of our shift from ordinary
biodiesel production to biodiesel production exclusively pursuant to toll processing arrangements
and the differences between these two types of production, our cost of goods sold and gross
profits for the period ended December 31, 2009 and 2008 are not comparable.
The following table shows the components of our cost of goods sold for the three months ended
December 31, 2009 and 2008:
Three Months Ended | Three Months Ended | |||||||||||||||
December 31, 2009 | December 31, 2008 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Component of Cost of Goods Sold | Amount | Percent | Amount | Percent | ||||||||||||
Feedstock and Chemical Inputs |
$ | 636,283 | 30.06 | % | 7,059,214 | 94.31 | % | |||||||||
Plant Wages and Salaries |
245,974 | 11.62 | % | 285,188 | 3.81 | % | ||||||||||
Utilities |
373,514 | 17.64 | % | 326,069 | 4.36 | % | ||||||||||
Fees-Procurement, Operation
Management |
0 | 0 | % | 15,398 | 0.21 | % | ||||||||||
(Gain) on Derivative Financial
Instruments |
0 | 0 | % | (1,158,425 | ) | 15.48 | % | |||||||||
Depreciation |
648,207 | 30.62 | % | 646,013 | 8.63 | % | ||||||||||
Freight |
10,727 | 0.51 | % | 220,099 | 2.94 | % | ||||||||||
Maintenance, Supplies and
Other Expenses |
202,154 | 9.55 | % | 91,064 | 1.22 | % | ||||||||||
Total |
2,116,859 | 100.00 | % | 7,485,160 | 100.00 | % | ||||||||||
Feedstock typically makes up the greatest cost component of biodiesel production, but
biodiesel toll processing arrangements generally shift the risk of variable feedstock costs to the
other party. For the three months ended December 31, 2008, feedstock costs and other chemical
input costs account for approximately 94% of our total cost of goods sold. However, during the
same period for 2009 in which we operated exclusively pursuant to tolling arrangements, the primary
components of our cost of goods sold were the cost of prior periods biodiesel inventory that was
sold, chemical inputs, depreciation, plant wages and salaries and utilities. We expect to produce
biodiesel throughout our 2010 fiscal year primarily or exclusively pursuant to tolling
arrangements with other third parties. Accordingly, we expect that fixed and overhead costs such as
depreciation, labor costs and utilities, along with chemical inputs, will continue to comprise a
large part of our cost of goods sold for the remainder of the 2010 fiscal year and that variable
feedstock costs will not significantly impact our cost of goods sold.
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Prices for feedstock can be volatile. According to the USDAs National Weekly Ag Energy
Round-Up report, the price for crude soybean oil in Iowa for the week of February 5, 2010 ranged
from 32.71 cents to 36.41 cents per pound; up slightly from the 28.87 cents to 30.37 cents range
posted for the same week a year ago. The prices for animal fats tend to move in relation to the
price of other feedstocks such as soybean oil. According to the USDAs January 13, 2010 Oil Crop
Outlook report, lard and edible tallow prices for December 2009 were 28.75 cents and 29.99 cents
per pound, respectively, up from the December 2008 average prices 20.00 cents and 17.50 cents per
pound, respectively. Based on recent trends, we expect that cost of goods sold on a per-gallon of
biodiesel sold basis may increase or stay the same for the remainder of the 2010 fiscal year with
regard to any biodiesel that is not produced pursuant to a toll processing agreement. We expect
that feedstock prices will remain volatile, however, throughout the 2010 fiscal year, as domestic
and global economic conditions and commodities affect pricing.
For the three months ended December 31, 2009, we did not have any open contracts and therefore
did not experience any gain or loss on derivative contracts. We experienced a $1,158,425 net gain
during the three months ended December 31, 2008 related to our derivative instruments. This
hedging net gain consisted of a realized gain of $826,742 and an unrealized gain of $331,683.
Operating Expenses
Operating expenses for the three months ended December 31, 2009 totaled $384,581 as compared
to operating expenses of $570,717 for the same period in 2008. This decrease in operating expenses
is the result of a $192,621 decrease in general and administrative expenses which was offset by a
$6,485 increase in professional fees. In light of our reduced production and biodiesel output the
Company has trimmed costs where possible, which has resulted in the decrease in general and
administrative expenses. Our increase in professional fees is primarily related to legal fees
incurred in connection with the proposed Transaction.
Other Income (Expenses)
Our other expenses for the three months ended December 31, 2009 totaling $248,936 were 11.87%
of our revenues. We received a $114,240 grant from the USDAs advanced biofuels program. This was
offset by interest expense of $363,184. The decrease in interest expense as compared to prior years
is a result of a drop in the interest rates and a reduction in the average balance outstanding.
Changes in Financial Condition for the Three Months Ended December 31, 2009
The following table highlights the changes in our financial condition:
December 31, 2009 | September 30, 2009 | |||||||
Current Assets |
$ | 1,169,818 | $ | 941,934 | ||||
Current Liabilities |
$ | 26,242,059 | $ | 26,020,150 | ||||
Members Equity |
$ | 8,866,391 | $ | 9,519,628 |
Current Assets. Current assets totaled $1,169,818 at December 31, 2009 up from
$941,934 at September 30, 2009. The increase during this period is in part a result of an increase
in accounts receivable from $161,974 at September 30, 2009 to $776,859 at December 31, 2009. This
increase was offset by a reduction in inventory and cash on hand.
Current Liabilities. Current liabilities totaled $26,242,059, up slightly from
$26,020,150 at September 30, 2009. The increase of $221,909 during this period resulted primarily
from an increase in accounts payable offset by a decrease in accrued expenses. Due to the going
concern opinion contained in Note 8 to the financial statements, all long-term debt has been
classified as current.
Members Equity. Total members equity as of December 31, 2009 was $8,866,391, down
from $9,519,628 as of September 30, 2009. The decrease in total members equity is a result of our
net loss realized during the period.
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Cash Flows
Cash Flow from Operating Activities. Net cash flow used in operating activities for
the three months ended December 31, 2009 totaled $242,484. This was the result of an operating loss
of $653,237, non-cash items of $660,640 and a $249,887 decrease in working capital components. The
working capital component decrease is primarily due to a reduction in accounts receivable during
the three months ended December 31, 2009.
Cash Flow from Investing Activities. Net cash flow used in investing activities for
the three months ended December 31, 2009 totaled $1,428, which was primarily related to an increase
in our restricted cash balance due to our senior lenders requirement of a pledge of a certificate
of deposit as collateral for our irrevocable line of credit which secures our loan from the Iowa
Department of Economic Development.
Cash Flow from Financing Activities. Net cash used in financing activities for the
three months ended December 31, 2009 totaled $21,154, which was the result of payment of $21,154 on
our long-term debt.
Liquidity and Capital Resources
Short Term and Long-Term Debt Financing Sources
We currently have a term loan, term revolving loan and revolving line of credit outstanding
with our current lender, AgStar Financial Services, PCA (AgStar), which purchased the interests
of our former lender, F & M Bank Iowa, in such loans and related financing agreements.
Our $22,000,000 term loan has an interest rate with a variable base rate equal to the LIBOR
Rate plus 325 basis points. The LIBOR Rate is generally defined as the One Month London Interbank
Offered Rate reported on the 10th day of the month preceding each interest period by the
Wall Street Journal in its daily listing of money rates, defined therein as the average of
interbank offered rates for dollar deposits in the London market. We are required to make equal
monthly payments of principal and interest on the term loan until the maturity date on May 1, 2012,
at which time any outstanding and unpaid principal, interest or other charges owing under the term
loan will be due and payable. The principal payments are equal to an amount that fully amortizes
the outstanding principal balance of the term note over a period not to exceed 10 years, together
with accrued interest on the term loan. As of the quarter ended December 31, 2009, there was a
principal balance of $18,616,731 on the term loan. We have failed to make the principal payments
required on our term loan since January 2009; since that date, we have only made payments of
interest. Failure to make payments required under our financing agreements is an event of default.
We have failed to cure our default arising from our failure to make principal payments when due.
Advances under the term revolving loan up to the amount of $5,000,000 may be used for cash and
inventory management purposes. We pay interest on the term revolving loan each month. The term
revolving loan bears interest at a rate equal to the LIBOR Rate plus 325 basis points. The term
revolving loan will mature on May 1, 2012. On the maturity date, any outstanding and unpaid
principal, interest and other charges owning thereunder will be due and payable. As of the quarter
ended December 31, 2009, we had drawn the full $5,000,000 on the term revolving loan and do not
have any additional credit available thereunder.
In October 2008 our lender extended us a $2,000,000 revolving line of credit. As of December
31, 2009, $550,000 was outstanding on our line of credit. Since December 2008, we were out of
compliance with our borrowing base requirements with respect to our revolving line of credit, which
constituted an event of default that we failed to cure. Our revolving line of credit loan accrued
interest at a rate equal to the LIBOR Rate plus 400 basis points. Interest payments were required
to be made monthly and any outstanding and unpaid principal, interest or other costs owing under
the line of credit was due and payable on October 13, 2009. However, as of the date of this
report, we had not paid the principal balance outstanding on the line of credit, which constitutes
a default under our financing agreements. We have also not formally extended or renewed our
revolving line of credit. We are still accruing interest on the
amount outstanding on this line of credit.
In connection with our financing agreements, we executed a mortgage and a security agreement
in favor of AgStar granting a security interest in all of our assets, including without limitation
our real estate, our plant, fixtures located on our property, any rent or income we might receive
in connection with the use or occupancy of our land, and all of our personal property. This
security interest secures our obligations under the financing agreements, including the term loan,
the revolving term loan, and the revolving line of credit loan.
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Certain covenants in our financing agreements with our lender may restrict our operating
flexibility. Certain of these covenants restrict our ability to declare and pay any dividends to
our members or make any other distribution of assets to our members, make certain capital
expenditures, enter into certain transactions, or incur additional debt financing or further pledge
our assets. We are permitted to make dividends and distributions only in limited circumstances, and
provided that no event of default exists under the agreements.
We are also required to comply with certain financial covenants and ratios contained in our
financing agreements, including the maintenance of certain levels of working capital, tangible
net worth and tangible owners equity (as each of those terms is defined in our financing
agreements). We are also required to maintain a fixed charge ratio (as that term is defined in
our financing agreements) of not less than 1.25 to 1.00. As of the date of our report, we are in
default under the financing agreements for failure to satisfy all of the loan covenants and ratios
with which we are obligated to comply. Our failure to comply with these covenants and ratios
constitutes an event of default under our financing agreements and we have failed to cure such
defaults. Our lender has not waived our failure to comply with these loan covenants and ratios.
We have received multiple written notices of default from AgStar indicating that it is
entitled to take any one or more remedies to which it is entitled under our financing agreements
and applicable law. Our continuing default under our financing agreements has resulted in our
lenders imposition of a 2% increase in the interest rate applicable to our debt facilities, which
has been in effect since approximately July, 2008. For so long as we continue to be in default
under our financing agreements, our lender will also be entitled to take any one or more remedies
afforded to the lender under our financing agreements, including, without limitation:
| acceleration of the unpaid principal balance under the financing agreements and all
accrued interest thereon and all other amounts payable thereunder; |
| withholding of any one or more advances to which the Company may otherwise be
entitled under the financing agreements, or termination of the lenders obligation to
make any advances under the financing agreements; |
| appointment of a receiver to take possession of the collateral securing the loans
from our lender, including without limitation, our real estate, plant, and equipment; |
| requiring the Company to pledge to the lender as additional security immediately
available funds equal to the maximum amount available to be drawn under all outstanding
letters of credit under our financing agreements; |
| foreclosure on the lenders mortgage on and security interest in the Companys
property securing our loans, including our real estate, improvements, equipment and
other assets and personal property; and |
| any and all other rights and remedies afforded to our lender under applicable law or
equity. |
Our lenders exercise of any one or more of the foregoing remedies would have a material
adverse impact on the Companys financial condition and results of operations and could result in
the loss of the assets securing our loans and a permanent shut-down of our plant. This could cause
our members to lose all of their investment in the Company.
Although our lender has refrained from exercising its other rights and remedies under the
financing agreements as of the date of this report (other than the imposition of a default interest
rate), there can be no assurance that our lender will continue to forbear from accelerating the
principal and interest due under our loans or foreclosing on and taking possession of the
collateral securing our loans. Our continuing default has caused doubts about our ability to
continue as a going concern. See Note 8 to the financial statements accompanying this report.
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We are currently experiencing liquidity problems due to the lack of cash being generated from
our continuing operations and our lack of available credit. We do not currently believe that our
cash flow from continuing operations will alone be sufficient to fund our operations over the next twelve
months. If we are unable to obtain sufficient capital, credit or short-term financing to cover the
cost of our future operations and improve our liquidity, we may have to temporarily or permanently
cease operations at our plant. Accordingly, our members could lose some or all of their investment
in the Company. Please also see Proposed Consolidation With REG for a description of a Second
Amended and Restated Asset Purchase Agreement we entered into on November 20, 2009 providing for
the consolidation of our business and operations with those of REG, and potentially two other
biodiesel production facilities, under a newly formed holding company. If the consolidation is
consummated, we intend to liquidate, dissolve, and wind up as soon as is reasonably practicable
after receipt of the requisite unit holder approval for the same, and to distribute as part of our
liquidation the Newco Stock received in consideration of the Transaction to our unit holders, less
the number of shares we are required to distribute to our financial advisor, Houlihan Smith &
Company, Inc., for certain financial advisory services rendered in connection with the Transaction
and to satisfy any other outstanding claims or liabilities of the Company that may remain or arise
following closing of the Transaction.
Government Programs and Grants
We entered into a loan agreement with the Iowa Department of Economic Development (IDED) for
a total of $400,000, $300,000 of which is a zero interest loan and $100,000 of which is a
forgivable loan. The $300,000 zero interest loan must be repaid in sixty monthly installments of
$5,000. As of December 31, 2009, we owed a total of approximately $292,400 to IDED. To receive a
permanent waiver of the forgivable loan, the Company was required to meet certain conditions,
including the creation and maintenance of 14 full-time equivalent jobs which pay qualifying wages.
In September 2009, however, the Company received a written notice from IDED specifying that the
Company fell short of satisfying its job creation obligation as of the measurement date specified
in the IDED agreement by creating only 12 full-time equivalent jobs, which constitutes a 14%
deficiency and renders the Company ineligible for a full waiver of the forgivable loan amount.
IDED notified the Company that due to its job creation shortfall, an amount equal to 14% of the
forgivable loan amount (or $14,000), plus accrued interest at the rate of 6% from the date of
disbursement of funds, is immediately due and payable by the Company. The Company has been advised
that the amount which it is obligated to repay, with accrued interest, will be amortized into the
monthly payments for the remaining life of the zero-interest loan payable to IDED. These loans are
secured by a $400,000 irrevocable standby letter of credit for the benefit of IDED issued by Bank
Iowa on account of the Company; however, the Company was required to pledge to Bank Iowa a $400,000
certificate of deposit as collateral for the letter of credit.
Under our agreement with IDED, we were further eligible to receive a refund of a portion of
the sales tax paid in connection with the construction of our facility and our members were
eligible to receive approximately $2,350,000 in tax incentives and assistance pursuant to IDEDs
High Quality Job Creation Program. Pursuant to this program, our members may claim an investment
tax credit up to 5% of certain qualifying expenditures directly related to new jobs created and
maintained as a result of our business, provided that certain conditions are met. The Companys
failure to create and maintain the requisite number of jobs, however, has resulted in the Companys
obligation to repay 14% of the sales tax refunds received by the Company, plus accrued interest.
Furthermore, an amount equal to 14% of the investment tax credit available to be claimed by the
Companys members is expected to be deducted from the remaining portion of the tax credit
available to members over the remainder of the life of such tax credit. This will result in a
deduction in the amount of the tax credit available to members.
Private Redevelopment Agreement with Jasper County
Pursuant to a private redevelopment agreement between the Company and Jasper County, Iowa,
Jasper County agreed to construct certain sewer improvements for the Companys plant site, which
improvements were to be financed through the issuance of bonds or notes. In return for Jasper
Countys construction of these improvements, the Company was obligated under the agreement to
construct a 30,000,000 gallon per year biodiesel plant having a total investment amount of at least
$38,000,000 and to create at least 20 new full-time jobs at the Companys plant and maintain such
jobs until June 30, 2015. The private redevelopment agreement provides that in the event of the
Companys default, the Company could be required to pay Jasper County for the total cost of
improvements constructed by the County, or approximately $745,000. In connection with the private
redevelopment agreement, the Company was obligated to enter into an assessment agreement with
Jasper County to establish a minimum actual value of the Companys property and related
improvements for the purpose of calculating and
assessing the Companys real property taxes. The Company defaulted on the private redevelopment
agreement due to its failure to timely pay property taxes due September 30, 2009. On December 30,
2009, the Company paid its delinquent property tax installment, including interest thereon, in the
amount of approximately $130,000. The Company also failed to timely file with Jasper County an
annual report required by the agreement, but which report was subsequently filed after the filing
deadline. The Company has not received notice from Jasper County declaring an event of default
under the agreement or otherwise indicating that it intends to pursue any remedies against the
Company, including requiring the Company repay the cost of the sewer improvements. However, in the
event that Jasper County elects to seek repayment of such improvement costs, the Company will not
likely have available cash on hand to pay such obligation, which could have a material adverse
effect on the companys ability to continue to operate.
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Distribution to Unit Holders
As of December 31, 2009, the board of directors of the Company had not declared any dividends.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance
with generally accepted accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the
reported revenues and expenses.
Revenue Recognition
Revenue from the production of biodiesel and its co-products is recorded when title transfers
to customers. Biodiesel and its co-products are generally shipped FOB from the plant.
Derivative Instruments and Hedging Activities
Accounting Standards Codification (ASC) Topic 815, Accounting for Derivatives and Hedging
Activities, or ASC815, requires a company to evaluate its contracts to determine whether the
contracts are derivatives. Certain derivative contracts may be exempt under ASC815 as normal
purchases or normal sales, which are contracts that provide for the purchase or sale of something
other than a financial instrument or derivative instrument that will be delivered in quantities
expected to be used or sold over a reasonable period in the normal course of business. At this
time, our forward contracts related to the purchase of soy oil and natural gas are considered
normal purchases and, therefore, are exempted from the accounting and reporting requirements of
ASC815.
Impairment of long-lived assets
Long-lived assets, including property, plant and equipment, are evaluated for impairment on
the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impaired asset is written down to our
estimated fair market value based on the best information available. Considerable management
judgment is necessary to estimate future cash flows and may differ from actual cash flows
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of market fluctuations associated with interest rates and
commodity prices as discussed below. We have no exposure to foreign currency risk as we conduct
all of our business in U.S. Dollars. We may use derivative financial instruments as part of an
overall strategy to manage market risk. We consider market risk to be the potential loss arising
from adverse changes in market rates and prices.
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Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk
results primarily from our term loan and our term revolving loan with AgStar. Specifically, we
have approximately $18,600,000 outstanding in variable rate debt under our term loan as of December
31, 2009 and $5,000,000 outstanding in variable rate debt under our
term revolving loan. We are still accruing interest on the $550,000
outstanding in our revolving line of credit which matured in
October 2009.
The specifics of credit facilities are discussed in detail in
Item 2 MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources.
Below is a sensitivity analysis we prepared regarding our income exposure to changes in
interest rates. The sensitivity analysis below shows the anticipated effect on our income from a
10% adverse change in interest rates for a one-year period.
Outstanding Variable Rate Debt at | Interest Rate at | Adverse 10% Change in | Annual Adverse Change | |||||||||
December 31, 2009 | December 31, 2009 | Interest Rates | to Income | |||||||||
$18,600,000 Term Loan |
5.48 | % | 6.03 | % | $ | 102,300 | ||||||
$5,000,000 Term Revolving Loan |
5.48 | % | 6.03 | % | $ | 27,500 | ||||||
$550,000 Revolving Line of Credit |
6.24 | % | 6.86 | % | $ | 3,410 |
Commodity Price Risk
We may also be exposed to market risk from commodity prices from time to time. Exposure to
commodity price risk in the biodiesel production process results from our dependence on animal fats
and soybean oil (when we are engaging in ordinary biodiesel production rather than toll processing
of biodiesel) and natural gas. When we engage in ordinary biodiesel production we are also exposed
to biodiesel price risks as our revenues in such circumstances depend primarily on biodiesel sale
prices. When we produce biodiesel pursuant to toll arrangements, however, we only receive a fixed
fee per gallon and therefore are not subject to biodiesel price risks. We are further exposed to
glycerin price risks as our revenues from the sale of glycerin depends upon glycerin prices.
When we are engaged in ordinary biodiesel production rather than biodiesel toll processing, we
may seek to minimize the risks from fluctuations in the price of soybean oil and biodiesel by using
derivative instruments such as cash, futures, and option contracts for soybean oil and home heating
oil. There is currently no futures market for biodiesel. Instead, we may use home heating oil
derivatives. Home heating oil is high sulfur diesel, which is the closest commodity to biodiesel
for which there is a futures market. We are unable to manage our price risk for animal fats as
there are no futures contracts available for animal fats, and animal fats suppliers are generally
unwilling to enter into long-term contracts for animal fats.
In practice, as markets move, we may actively manage our risk and adjust hedging strategies as
appropriate. The extent to which we enter into cash, futures, or option contracts varies
substantially from time to time based on a number of factors, including our production of biodiesel
pursuant to tolling arrangements or ordinary purchase contracts, supply and demand factors
affecting the needs of customers or suppliers to purchase biodiesel or glycerin or to sell us raw
materials on a fixed basis, our views as to future market trends, seasonal factors and the costs of
futures contracts.
Although we believe our hedge positions accomplish an economic hedge against our future
purchases, they do not qualify for hedge accounting, which would match the gain or loss on our
hedge positions to the specific commodity purchase being hedged. We treat our hedge positions as
non-hedge derivatives, which means as the current market price of our hedge positions changes, the
gains and losses are immediately recognized in our cost of goods sold. The immediate recognition of
hedging gains and losses under our treatment of our hedge positions can cause net income to be
volatile from quarter to quarter due to the timing of the change in value of the derivative
instruments relative to the cost and use of the commodity being hedged. For the three months
ended December 31, 2009, due to our exclusive production of biodiesel pursuant to tolling
arrangements, we did not have any open contracts and therefore did not experience any gain or loss
on derivative contracts.
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Item 4. Controls and Procedures
Our management, including our principal executive officer and our principal financial officer,
has reviewed and evaluated the effectiveness of our disclosure controls and procedures as of
December 31, 2009. Based upon this review and evaluation, these officers believe that our
disclosure controls and procedures are effective in ensuring that material information related to
us is recorded, processed, summarized and reported as of the end of the period covered by this
report.
Our management, including our principal executive officer and principal financial officer, has
reviewed and evaluated any changes in our internal control over financial reporting that occurred
during the period ended December 31, 2009 and there has been no change that has materially affected
or is reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
Loss of or ineligibility for favorable tax benefits for biodiesel production could hinder our
ability to operate at a profit and reduce the value of our units. The biodiesel industry and our
business are assisted by various federal biodiesel incentives. One such incentive is the
Volumetric Ethanol Excise Tax Credit (VEETC), also known as the blenders tax credit, which
provides a tax credit of $1.00 per gallon of biodiesel. The blenders tax credit expired on
December 31, 2009 and there can be no guarantees that Congress will act to reinstate the tax
credit. These tax incentives for the biodiesel industry may not be renewed, or, if they are
renewed, the incentives may not be at the same level. The elimination or reduction of tax
incentives to the biodiesel industry, including the blenders tax credit, could significantly
reduce the market for biodiesel and could materially impair our ability to profitably produce and
sell biodiesel. The loss or reduction of the blenders tax credit makes it more costly or
difficult to produce and sell biodiesel and we could be forced to take significant cost savings
measures or temporarily or permanently cease production at our plant. Demand for biodiesel
tolling, which is the only way which we anticipate producing biodiesel in the foreseeable future,
currently has been and could continue to be reduced significantly. If federal biodiesel tax
incentives, including the blenders tax credit, are not reinstated or are sharply curtailed, we
believe that a decreased demand for biodiesel will continue, which could further depress biodiesel
markets and negatively impact our financial performance.
There are doubts about our ability to continue as a going concern and if we are unable to
continue our business, our units may have little or no value. As discussed in Note 8 to the
accompanying financial statements, our non-compliance with the loan covenants contained in our
financing agreements with our lender and our failure to make payments of principal under such
agreements since January 2009 has raised doubts about our ability to continue as a going concern.
We have failed to comply with all of our loan covenants as of December 31, 2009, including the
working capital, tangible owners equity, and tangible net worth covenants and the fixed charge
ratio. Failure to comply with these loan covenants, as well as failure to make payments of
principal when due, constitutes an event of default under our financing agreements entitling our
lender, at its election, to accelerate all of the unpaid principal loan balance and accrued
interest under the financing agreements or to foreclose on its mortgage and security interest in
the real and personal property securing our loans. If such an event occurs, we may be forced to
permanently shut down the plant and our members could lose all of their investment.
Liquidity constraints could require us to cease operations. We are currently experiencing
liquidity problems due to our lack of working capital, our failure to generate significant funds
from our ongoing operations, and the unavailability of additional credit. Our current lack of
working capital and ongoing liquidity constraints have made it difficult or impossible for us to
acquire adequate inputs and feedstock to produce biodiesel and, accordingly, our plant is typically
only producing biodiesel pursuant to toll processing arrangements under which the other party has
the right to order the production of biodiesel from us from feedstock supplied by such other party.
Our lack of working capital may even make it difficult to operate pursuant to a toll processing
arrangement. We have exhausted our funds available under our debt facilities and we do not have
further commitments for
financing from any lender. Should we lack adequate funds to operate our plant or become unable to
satisfy our obligations as they become due, we may have to cease operations, either on a permanent
or temporary basis.
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The second amended and restated asset purchase agreement entered into by the Company, REG, and
certain other REG affiliates is subject to a variety of closing conditions and may not close. On
November 20, 2009 the Company entered into a second amended and restated asset purchase agreement
pursuant to which the Company is expected to consolidate its business and operations with REG under
a newly formed holding company, REG Newco, Inc., a Delaware corporation. The Company thereafter
intends to dissolve, liquidate and wind up as soon as immediately practicable following the receipt
of the requisite unit holder approval for the same and the close of the consolidation transaction.
The proposed consolidation transaction, however, is subject to multiple closing conditions,
including certain regulatory approvals and the approval of the Companys unit holders and REGs
shareholders, among other conditions. In the event that any one or more of the conditions to
closing are not satisfied or any event giving rise to a partys right to terminate the agreement
arises, the consolidation transaction may not close and the Company will have to evaluate other
alternatives to cope with its financial difficulties. Furthermore, the longer that the
consolidation transaction closing or termination is delayed, the greater the Companys liquidity
constraints will likely become and the more difficult it may become for the Company to find
suitable alternatives.
Unit holder approval of the Companys dissolution, liquidation and winding up is not a
condition to the closing of the Companys proposed consolidation with REG. Unit holder approval of
the Companys dissolution, liquidation and winding up is not a condition to the closing of the
proposed consolidation of the Companys business and operations with REG under REG Newco, Inc.
and, accordingly, it is possible that the Company could remain in existence indefinitely following
a future successful closing of the consolidation transaction. Although REG Newco, Inc. has agreed
to pay for certain mutually agreeable ongoing costs for a period of up to six months following the
closing of the consolidation transaction, there is no guarantee that the Company will obtain the
requisite unit holder approval during such time period. In such event, the Company would not have
any active business operations to support any ongoing costs which it may incur as part of its
continuing existence.
Our reliance on REG could damage our profitability. We are highly dependent upon REG to
manage our plant, procure our inputs and market our products pursuant to our MOSA. Additionally,
we depend on REGs assessment of the cost and feasibility of operating our plant, REGs experience
in the biodiesel industry and its knowledge regarding the operation of the plant. If our plant
does not operate to the level anticipated by us in our business plan, we will also rely on REG to
adequately address such deficiency.
Our reliance on REG may place us at a competitive disadvantage. REG has a number of potential
conflicts of interest with us due to its ownership and management of competing biodiesel plants.
Additionally, REG has provided us with a notice of termination due to changes in the biodiesel
market since the MOSA was originally signed. Based on the terms and conditions of the MOSA, we
anticipate the date of termination to be May 1, 2010. In the event our proposed consolidation with
REG is not consummated or if our relationship with REG otherwise terminates, significant costs and
delays would likely result from the need to find other consultants or marketers or sources of
feedstock, for any reason. Any loss of our relationship with REG or failure by REG to perform its
obligations may reduce our ability to generate revenue and may significantly damage our competitive
position in the biodiesel industry such that our business could fail and members could lose all or
substantially all of their investment. Moreover, because of our substantial dependence upon REG,
our business could fail if REG is unable to continue its business.
The European Commission has imposed definitive anti-dumping and countervailing duties on
biodiesel imported into Europe, which may negatively impact biodiesel demand and our revenues. In
March 2009, the European Commission imposed anti-dumping and anti-subsidy tariffs on biodiesel
produced in the U.S. These tariffs have reduced European demand for biodiesel produced in the U.S.
In July 2009, the European Commission decided to extend these tariffs beyond their July 2009
expiration until 2014. These duties significantly increase the price at which U.S. biodiesel
producers may be able to sell biodiesel in European markets, making it difficult or impossible to
compete with European biodiesel producers and thereby increasing the supply and reducing overall
demand for biodiesel produced in the U.S. Accordingly, these duties on U.S. biodiesel imported into
Europe could significantly harm our financial performance.
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We may be required to write down our long-lived assets and these impairment charges would
adversely affect our operating results. We account for the impairment of long-lived assets to be
held and used in accordance with ASC Topic 360. In accordance with ASC Topic 360, an asset (other
than goodwill and indefinite-lived intangible assets) is considered impaired when estimated future
cash flows are less than the carrying amount of the asset. In the event the carrying amount of such
asset is not deemed recoverable, the asset is adjusted to its estimated fair value. Fair value is
generally determined based upon estimated discounted future cash flows. At December 31, 2009 the
carrying amount of our fixed assets is $34.1 million. In determining if there has been an
impairment, we have projected future cash flows assuming that we are able to obtain sufficient
working capital to operate our plant until the planned consolidation with REG and our expectations
related to the extension of the blenders credit. If conditions or events change and we have to
reconsider our plans, the projected cash flows could change requiring the assets to be adjusted to
the estimated fair value. As a result, the amount of any annual or interim impairment could be
significant and could have a material adverse effect on our reported financial results for the
period in which the charge is taken.
We do not have sufficient working capital to engage in ordinary biodiesel production. We
expect to continue operating on an as-needed basis for toll processing orders for the foreseeable
future. We do not expect to have sufficient working capital on hand in the foreseeable future to
acquire feedstock to produce biodiesel other than pursuant to a toll processing arrangement, which
generally shifts the risk of feedstock costs and biodiesel prices to the other party but do not
guarantee us any minimum biodiesel toll processing orders. It is also uncertain whether we will
maintain sufficient funds to cover the non-feedstock costs of production associated with biodiesel
production under toll processing arrangements. Our inability to engage in ordinary biodiesel
production for biodiesel sales contracts may have an adverse effect on our ability to generate
revenues. Our lack of working capital could also adversely affect our ability to operate
profitably even pursuant to tolling arrangements, which could reduce the value of our members
investments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
For the period covered by this report, we were in default of all of the financial loan
covenants and ratios contained in our loan agreements. As of February 1, 2010, we have also failed
to make approximately $2,420,200 in principal payments as required under our loan agreements since
January 2009 and have failed to repay the $550,000 principal amount outstanding under our revolving
line of credit upon its maturity in October 2009. Failure to comply with these covenants, failure
to make the required principal payments when due and failure to repay the amount outstanding under
our revolving line of credit upon maturity constitute events of default under our loan agreements,
entitling our lender to exercise any one or more of its remedies provided under the loan
agreements and applicable law, including, but not limited to, acceleration of the unpaid principal
balance under the loan agreements and all accrued interest thereon, or foreclosure on its mortgage
and security interests in the collateral which secures our loans. Although our lender has provided
us with multiple written notices of default, it has not notified us of its intention to exercise
any of its remedies as of the date of this report (other than the imposition of a default interest
rate). However, if we remain in default, there is no assurance that our lender will continue to
forebear from exercising such additional remedies.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits.
The following exhibits are filed as part of this report.
Exhibit | ||||
No. | Description | |||
31.1 | Certificate pursuant to 17 CFR 240 13a-14(a) |
|||
31.2 | Certificate pursuant to 17 CFR 240 13a-14(a) |
|||
32.1 | Certificate pursuant to 18 U.S.C. Section 1350 |
|||
32.2 | Certificate pursuant to 18 U.S.C. Section 1350 |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CENTRAL IOWA ENERGY, LLC |
||||
Date: February 16, 2010 | /s/ John E. Van Zee | |||
John E. Van Zee | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: February 16, 2010 | /s/ Kimberly Smith | |||
Kimberly Smith | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
||||
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