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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the quarterly period ended January 31, 2013

 

OR

 

o

Transition report under Section 13 or 15(d) of the Exchange Act.

 

For the transition period from                    to                  .

 

COMMISSION FILE NUMBER 000-51825

 

HERON LAKE BIOENERGY, LLC

(Exact name of Registrant as specified in its charter)

 

Minnesota

 

41-2002393

(State or other jurisdiction of organization)

 

(I.R.S. Employer Identification No.)

 

91246 390th Avenue, Heron Lake, MN 56137-1375

(Address of principal executive offices)

 

(507) 793-0077

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x   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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x    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 x
(Do not check if a smaller reporting company)

 

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   x   No

 

As of June 4, 2013, there were 38,622,107 Class A units issued and outstanding.

 

 

 




Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets

 

ASSETS

 

January 31, 2013

 

October 31, 2012

 

 

 

(Unaudited)

 

 

 

Current Assets

 

 

 

 

 

Cash and equivalents

 

$

749,178

 

$

653,361

 

Restricted cash

 

15,954

 

65,259

 

Restricted certificates of deposit

 

650,000

 

650,000

 

Accounts receivable

 

2,050,160

 

1,784,761

 

Inventory

 

3,183,994

 

3,588,572

 

Prepaid expenses

 

737,999

 

796,829

 

Total current assets

 

7,387,285

 

7,538,782

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and Equipment

 

 

 

 

 

Land and improvements

 

9,249,516

 

9,252,379

 

Plant buildings and equipment

 

77,022,218

 

76,155,846

 

Vehicles and other equipment

 

645,481

 

645,481

 

Office buildings and equipment

 

622,711

 

622,711

 

Construction in Progress

 

 

645,486

 

 

 

87,539,926

 

87,321,903

 

Accumulated depreciation

 

(30,264,852

)

(29,222,617

)

 

 

57,275,074

 

58,099,286

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Other intangibles, net

 

249,613

 

256,513

 

Debt service deposits and other

 

692,704

 

686,438

 

Total other assets

 

942,317

 

942,951

 

 

 

 

 

 

 

Total Assets

 

$

65,604,676

 

$

66,581,019

 

 

See Notes to Condensed Consolidated Financial Statements

 

1



Table of Contents

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets

 

LIABILITIES AND MEMBERS’ EQUITY

 

January 31, 2013

 

October 31, 2012

 

 

 

(Unaudited)

 

 

 

Current Liabilities

 

 

 

 

 

Line of credit

 

$

 

$

480,000

 

Current maturities of long-term debt

 

42,193,835

 

42,051,402

 

Accounts payable

 

1,795,573

 

2,085,882

 

Accrued expenses

 

510,143

 

382,953

 

Total current liabilities

 

44,499,551

 

45,000,237

 

 

 

 

 

 

 

Long-Term Debt, net of current maturities

 

4,421,098

 

4,031,335

 

Members’ Equity

 

 

 

 

 

Controlling interest in equity consists of 38,622,107 Class A units

 

 

 

 

 

issued and outstanding at both January 31, 2013 and October 31, 2012

 

16,423,879

 

17,344,433

 

Noncontrolling interest

 

260,148

 

205,014

 

Total members’ equity

 

16,684,027

 

17,549,447

 

 

 

 

 

 

 

Total Liabilities and Members’ Equity

 

$

65,604,676

 

$

66,581,019

 

 

See Notes to Condensed Consolidated Financial Statements

 

2



Table of Contents

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations

 

 

 

Three Months

 

Three Months

 

 

 

Ended

 

Ended

 

 

 

January 31, 2013

 

January 31, 2012

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

Revenues

 

$

44,121,305

 

$

38,861,794

 

 

 

 

 

 

 

Cost of Goods Sold

 

43,201,086

 

38,597,224

 

 

 

 

 

 

 

Gross Profit

 

920,219

 

264,570

 

 

 

 

 

 

 

Operating Expenses

 

1,015,586

 

850,607

 

 

 

 

 

 

 

Operating Income (Loss)

 

(95,367

)

(586,037

)

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

Interest income

 

16,419

 

3,940

 

Interest expense

 

(774,750

)

(659,923

)

Other income

 

24,959

 

10,818

 

Total other expense, net

 

(733,372

)

(645,165

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

(828,739

)

(1,231,202

)

 

 

 

 

 

 

Net (Income) Loss Attributable to Noncontrolling Interest

 

(91,815

)

(81,611

)

 

 

 

 

 

 

Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC

 

$

(920,554

)

$

(1,312,813

)

 

 

 

 

 

 

Weighted Average Units Outstanding - Basic and Diluted

 

38,622,107

 

38,176,379

 

 

 

 

 

 

 

Net Income (Loss) Per Unit - Basic and Diluted

 

$

(0.02

)

$

(0.04

)

 

See Notes to Condensed Consolidated Financial Statements

 

3



Table of Contents

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

 

 

Three Months

 

Three Months

 

 

 

Ended

 

Ended

 

 

 

January 31, 2013

 

January 31, 2012

 

Cash Flow From Operating Activities

 

 

 

 

 

Net income (loss)

 

$

(828,739

)

$

(1,231,202

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,049,135

 

1,411,977

 

Change in fair value of derivative instruments

 

 

243,326

 

Change in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

49,305

 

(310,334

)

Accounts receivable

 

(265,399

)

1,030,377

 

Inventory

 

404,578

 

(248,160

)

Derivative instruments

 

 

25,859

 

Prepaid expenses and other

 

52,564

 

(99,896

)

Accounts payable

 

(290,309

)

(961,630

)

Accrued expenses

 

90,509

 

171,702

 

Net cash provided by operating activities

 

261,644

 

32,019

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(218,023

)

(775,519

)

Net cash used in investing activities

 

(218,023

)

(775,519

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from long-term debt

 

621,880

 

 

Payments on long-term debt

 

(569,684

)

(4,621,937

)

Release of restricted cash

 

 

84,949

 

Member contributions

 

 

707,017

 

Net cash provided by (used in) financing activities

 

52,196

 

(3,829,971

)

 

 

 

 

 

 

Net Increase (Decrease) in cash and equivalents

 

95,817

 

(4,573,471

)

 

 

 

 

 

 

Cash and Equivalents - Beginning of period

 

653,361

 

7,140,573

 

 

 

 

 

 

 

Cash and Equivalents - End of period

 

$

749,178

 

$

2,567,102

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Interest expense paid

 

$

686,910

 

$

638,038

 

 

 

 

 

 

 

Supplemental Disclosure of Non-Cash Activities

 

 

 

 

 

Cost of raising capital offset against member contributions

 

$

 

$

165,045

 

Distribution to noncontrolling interest in accrued expenses

 

36,681

 

 

 

Notes to Condensed Consolidated Financial Statements are an integral part of these Statements.

 

4



Table of Contents

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

January 31, 2013 (Unaudited)

 

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and 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 Company’s audited financial statements for the year ended October 31, 2012, contained in the Company’s annual report on Form 10-K.

 

In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments consisting of normal recurring accruals, with the exception of the adjustments to reduce inventory and forward contracts to net realizable value that we consider necessary to present fairly the Company’s results of operations, financial position and cash flows. The results reported in these condensed consolidated interim financial statements should not be regarded as necessarily indicative of results that may be expected for any other quarter or for the fiscal year.

 

Nature of Business

 

The Company owns and operates a 50 million gallon ethanol plant near Heron Lake, Minnesota.  In addition, the Company produces and sells distillers grains with solubles and corn oil as co-products of ethanol production.

 

The Company entered into an asset purchase agreement dated January 22, 2013, which provided for the sale of substantially all of the Company’s assets to, and the assumption of certain of the Company’s liabilities by, Guardian Energy Heron Lake, LLC (Guardian). On April 4, 2013, the Company terminated the agreement in accordance with its terms. The Company is currently seeking to raise funds in order to pay down its debt to AgStar Financial Services, PCA (“AgStar”), to provide adequate working capital to operate the Company effectively and to meet AgStar’s requirements.

 

Pursuant to an asset purchase agreement dated January 3, 2013, the Company’s subsidiary, Lakefield Farmers Elevator, LLC, sold substantially all of its assets consisting of the elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota to FCA Co-op, a Minnesota cooperative, for $3.75 million plus the purchase price for corn and fuel inventory (the “Elevator Sale”).  The Elevator Sale closed on February 1, 2013.

 

Principles of Consolidation

 

The financial statements include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiaries, Lakefield Farmers Elevator, LLC and HLBE Pipeline Company, LLC, collectively, the “Company.”  HLBE Pipeline Company, LLC owns 73% of Agrinatural Gas, LLC (“Agrinatural”). Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the financial statements of Agrinatural with its consolidated financial statements, with the equity and earnings (loss) attributed to the remaining 27% noncontrolling interest identified separately in the accompanying Consolidated Balance Sheets and Statements of Operations. All significant intercompany balances and transactions are eliminated in consolidation.

 

Noncontrolling Interest

 

Amounts recorded as noncontrolling interest on the balance sheet relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Agrinatural will provide natural gas to the plant with a specified price per MMBTU for an initial term of 10 years, with two renewal options for five year periods.

 

5



Table of Contents

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

January 31, 2013 (Unaudited)

 

Accounting Estimates

 

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  The Company uses estimates and assumptions in accounting for significant matters including, among others, the analysis of impairment of long-lived assets, contingencies and valuation of forward purchase contract commitments and inventory.  The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

 

Long-Lived Assets

 

The Company reviews property, plant and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the assets; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.  If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

The Company’s ethanol production plant has a nameplate capacity of 50 million gallons per year. The carrying value of the Company’s facilities at January 31, 2013 and October 31, 2012 was approximately $57.3 million and $58.1 million, respectively. In accordance with the Company’s policy for evaluating impairment of long-lived assets described above, management evaluated the recoverability of the facilities based on projected future cash flows from operations over the facilities’ estimated useful lives. Management determined that the projected future undiscounted cash flows from operations of these facilities exceed their carrying value at January 31, 2013; therefore, no impairment loss was indicated or recognized.  In determining the projected future undiscounted cash flows, the Company has made significant assumptions concerning the future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity.  Given the uncertainties in the ethanol industry, should management be required to adjust the carrying value of the facilities at some future point in time, the adjustment could be significant and could significantly impact the Company’s financial position and results of operations.  No adjustment has been made to these financial statements for this uncertainty.

 

Fair Value of Financial Instruments

 

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. No events occurred during the periods ended January 31, 2013 or October 31, 2012 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

 

The carrying value of cash and equivalents, restricted cash, restricted certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The fair value of long-term debt has been estimated using discounted cash flow analysis based upon the Company’s current incremental borrowing rates for similar types of financing arrangements. The fair value of outstanding debt will fluctuate with changes in applicable interest rates. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company’s debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules. The Company believes the carrying amount of the debt and line of credit approximates the fair value.

 

Loans with AgStar consist of term loans of approximately $41.1 million with interest at market rates that are believed to approximate fair value. Due to the current defaults under the loan agreements which have triggered an additional 2.0% default interest, the forbearance agreement that anticipates the Company raising funds to pay down debt and provide sufficient working capital, the Company believes the carrying value of the debt continues to approximate the fair value.

 

6



Table of Contents

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

January 31, 2013 (Unaudited)

 

Environmental Liabilities

 

The Company’s operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates.  These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location.  Accordingly, the Company has adopted policies, practices, and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability that could result from such events.  Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.

 

2.     GOING CONCERN

 

The financial statements have been prepared on a going-concern basis, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. The Company has previously disclosed lower working capital than desired and operating losses related to difficult market conditions and operating performance. The Company has instances of unwaived debt covenant violations at January 31, 2013, failed to pay when due the required monthly principal payments on December 1, 2012 and January 1, 2013, and has failed to pay requirement monthly installments of principal on February 1, 2013, March 1, 2013, April 1, 2013 and May 1, 2013, and is operating under a forbearance agreement with AgStar. These conditions contributed to the long-term debt with AgStar being classified as current at January 31, 2013 as well as working capital to be negative. These factors and the continued volatility in commodity prices raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company has continued to make changes to plant operations, including converting from a coal-fired ethanol plant to a natural gas plant in October 2011 and the addition of corn oil separation in February 2012. While these changes have improved the operating performance of the plant, and lead to lower operating costs, market conditions have resulted in losses. These losses and the repayment of debt have caused working capital to decline and contributed to the debt covenant violations at January 31, 2013. The Company did not timely make required principal payments to AgStar on the first day of December 2012 through May 2013. Payment for December 2012 and January 2013 were made pursuant to a forbearance agreement with AgStar dated April 12, 2013.  As of the date of filing of this Form 10-Q, the Company has paid required installments of principal that were due February 1, 2013, March 1, 2013, April 1, 2013, May 1, 2013, and June 1, 2013, under its renegotiated loan agreement with AgStar, using the proceeds of the Board of Govenors subordinated loan to the Company.

 

As mentioned above, the Company closed on Elevator Sale on February 1, 2013.  The net proceeds from this sale of approximately $3.7 million were used to pay the Company’s indebtedness to AgStar as required by the amended and restated forbearance agreement dated January 22, 2013.

 

As a path forward the Company renegotiated its loans with AgStar into a Term Loan and a Revolving Term Loan and entered into a Sixth Amended and Restated Master Loan Agreement with AgStar on May 17, 2013. The Revolving Term Loan will be used by the Company to optimize its cash management. As a part of the loan program, the Company plans to raise a minimum of $6.4 million by issuing convertible secured subordinated debt.  Prior to the planned offering of the convertible secured subordinated debt, the Company’s Board of Governors loaned the Company $1.4 million in convertible secured subordinated debt, which was used to bring the previous AgStar loans up to date. A minimum of an additional $5 million must be raised from members or outside investors.  These funds will be used to improve working capital by paying down the Revolving Term Loan and meeting the required $5 million payment obligation on the Revolving Term Loan by July 31, 2013. Should the minimum debt of $6.4 million not be raised and the Company could not make the required $5 million payment, the Company would consider other go-forward options including the possibility of selling the plant, and AgStar could exercise its rights and remedies under the loan agreements for payment default.

 

3.     UNCERTAINTIES

 

The Company has certain risks and uncertainties that it experienced during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers.  Ethanol sales average 75% - 85% of total revenues and corn costs average 65% - 75% of cost of goods sold.

 

7



Table of Contents

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

January 31, 2013 (Unaudited)

 

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements.

 

4.     CONCENTRATIONS

 

The Company sells all of the ethanol and dry distiller grains produced to one customer under marketing agreements at January 31, 2013.

 

5.     INVENTORY

 

Inventory consisted of the following:

 

 

 

January 31,

 

October 31,

 

 

 

2013

 

2012

 

Raw materials

 

$

494,464

 

$

521,865

 

Work in process

 

1,244,290

 

1,149,214

 

Supplies

 

955,057

 

922,384

 

Other grains

 

490,183

 

995,109

 

Total

 

$

3,183,994

 

$

3,588,572

 

 

The Company stored grain inventory for farmers until the closing of the Elevator Sale on February 1, 2013.  The value of these inventories owned by others is approximately $104,000 and $790,000 based on market prices at January 31, 2013 and October 31, 2012, respectively, and is not included in the amounts above.

 

6.     DERIVATIVE INSTRUMENTS

 

As of January 31, 2013, the Company had no derivative instruments in place.

 

The following tables provide details regarding the losses from the Company’s derivative instruments included in the Condensed Consolidated Statements of Operations, none of which were designated as hedging instruments:

 

 

 

Statement of

 

Three-Months Ended January 31,

 

 

 

Operations Location

 

2013

 

2012

 

Corn contracts

 

Cost of goods sold

 

$

 

$

7,416

 

 

 

 

 

 

 

 

 

Natural gas contracts

 

Cost of goods sold

 

 

396,014

 

Totals

 

 

 

$

 

$

403,430

 

 

7.     LINE OF CREDIT

 

Agrinatural obtained a line of credit with lending institution in September 2012 which provided up to $600,000 until March 31, 2013. Interest was charged at 5.43%. On January 1, 2013, this line of credit was replaced by a note payable. This note payable, along with a previously existing note payable due March 15, 2015, is secured by substantially all business assets of Agrinatural. These notes are listed in Note 8 below.

 

8



Table of Contents

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

January 31, 2013 (Unaudited)

 

8.     DEBT FINANCING

 

Debt financing consists of the following:

 

 

 

January 31, 2013

 

October 31, 2012

 

Term note payable to lending institution, see terms below

 

$

36,360,313

 

$

36,627,901

 

 

 

 

 

 

 

Revolving term note to lending institution, see terms below

 

4,711,163

 

4,211,163

 

 

 

 

 

 

 

Assessments payable

 

2,887,720

 

2,895,151

 

 

 

 

 

 

 

Notes payable to electrical company

 

350,000

 

457,328

 

 

 

 

 

 

 

Corn oil recovery system note payable

 

966,643

 

 

 

 

 

 

 

 

Notes payable on pipeline assets (Agrinatural notes)

 

1,339,094

 

 

 

 

 

 

 

 

Construction notes payable

 

 

1,891,194

 

 

 

 

 

 

 

Total

 

46,614,933

 

46,082,737

 

 

 

 

 

 

 

Less amounts due on demand or within one year

 

42,193,835

 

42,051,402

 

 

 

 

 

 

 

Net long term debt

 

$

4,421,098

 

$

4,031,335

 

 

At January 31, 2013 and October 31, 2012, the Company was out of compliance with certain covenants in the AgStar loan agreements including the minimum working capital amount, minimum tangible net worth amount, and the fixed charge coverage ratio, and reclassified the debt with AgStar to current. Further, the Company failed to pay when due the required monthly principal payments on December 1, 2012 and January 1, 2013, and has failed to pay requirement monthly installments of principal on February 1, 2013, March 1, 2013, April 1, 2013 and May 1, 2013. In connection with a forbearance agreement dated April 12, 2013, the Company paid the December 2012 and January 2013 installments of principal.  In connection with the renegotiated loan agreement with AgStar entered into on May 17, 2013, the Company has paid the required installments of principal that were due February 1, 2013, March 1, 2013, April 1, 2013, May 1, 2013, and June 1, 2013.

 

On December 21, 2012, the Company and AgStar entered into a forbearance agreement whereby the Company agreed to, among other things, sell substantially all plant assets to Guardian. AgStar also began charging a default interest premium on the AgStar loans of an additional 2.0%. Advances on the revolving term note were frozen until the Company entered into an asset sale agreement for substantially all plant assets.   The forbearance agreement dated December 21, 2012 was subsequently amended and restated on January 22, 2013, February 12, 2013 and March 29, 2013, in order to permit the Company to close on the transactions contemplated by the asset purchase agreement dated January 22, 2013 between the Company and Guardian.  The asset purchase agreement with Guardian was terminated by the Company on April 4, 2013.  The forbearance agreement was amended and restated again on April 12, 2013 in order to accommodate certain proposals related to recapitalization and restructuring of the loans.

 

The forbearance agreement was amended and restated for a fifth time on May 10, 2013 in order to extend the forbearance period relating to the above-described covenant defaults and required monthly principal installment payments to permit the Company additional time to document and implement a written management, governance improvement and capitalization plan.   On May 17, 2013, we entered into a Sixth Amended and Restated Master Loan Agreement and related loan documents with AgStar to replace and supersede our Fifth Amended and Restated Master Loan Agreement dated as of September 1, 2011, our Fifth Amended and Restated Forbearance Agreement dated May 10, 2013, and related loan documents.  Under the Sixth Amended and Restated Master Loan Agreement, AgStar agreed to restructure our Term Loan and our Term Revolving Loan based upon our submission of a loan restructuring proposal and payment of approximately $1.4 million in cash for Term Loan principal payments in arrears and reduction of the Term Revolving Note.

 

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

January 31, 2013 (Unaudited)

 

Term Note

 

The Company has a five-year term loan initially amounting to $40,000,000, comprised of two tranches of $20,000,000 each, with the first tranche bearing interest at a variable rate equal to the greater of LIBOR plus 3.50% or 5.0%, and the second tranche bearing interest at 5.75%.  The Company must make equal monthly payments of principal and interest on the term loan based on a 10-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016.  In addition, the Company is required to make additional payments annually on debt for up to 25% of the excess cash flow, as defined by the agreement, up to $2 million per year.  As part of the agreement, the premium above LIBOR on the loans may be reduced based on a financial ratio.  The loan agreements are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements.  As described above, the Company was not in compliance with the covenants of its master loan agreement and had missed two months’ principal payments with AgStar as of January 31, 2013. Accordingly, all AgStar debt is included in current liabilities.

 

Revolving Term Note

 

The Company has obtained a five-year term revolving loan commitment in the amount of $8,008,689 until September 1, 2016.  Amounts borrowed by the Company under the term revolving loan and repaid or prepaid may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment.  Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, payable monthly.  The Company also pays an unused commitment fee on the unused portion of the term revolving loan commitment at the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the term revolving loan.  Under the terms of the agreement, the term revolving loan commitment is scheduled to decline by $500,000 annually, beginning on September 1, 2012 and each anniversary date thereafter.  The maturity date of the term revolving loan is September 1, 2016. As of January 31, 2013, the Company has $600,000 standby letter of credit with its natural gas provider which reduces the amounts available. This letter of credit has subsequently been released. At January 31, 2013, the Company has $1.75 million available under the revolving term note.

 

Renegotiated Notes

 

On May17, 2013, the Company renegotiated it AgStar debt into a Term Loan and a Revolving Term Loan. Balances on the two loans were $17.4 million and $19.0 million, respectively. Initially, the Revolving Term Loan can be drawn upon up to a maximum limit of $20.5 million for cash flow needs. The Revolving Term Loan availability will decline by $2 million annually beginning in October 2013.  As set forth in Note 2, the Company is required to raise $5 million by issuing subordinated debt to its members or investors by July 31, 2013, that must be used to pay down the Revolving Term Loan.  Interest on the Revolving Term Loan is at the greater of the one month LIBOR plus 3.50% or 5.0%.  Interest on the Term Loan is at 5.75% initially converting to the greater of AgStar’s current index rate plus 3.50% or 5.0% in September 2014.  The loan agreements are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt, and require minimum debt service coverage, net worth, and working capital requirements.  The Term Loan also provides required excess cash flow payments.  The Term Loan and Revolving Term Loan mature in September 2016.

 

Estimated maturities of long-term debt at January 31, 2013 are as follows based on the most recent debt agreements:

 

2014

 

$

42,193,835

 

2015

 

1,300,472

 

2016

 

762,571

 

2017

 

544,193

 

2018

 

494,640

 

After 2018

 

1,319,222

 

 

 

 

 

Total long-term debt

 

$

46,614,933

 

 

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

January 31, 2013 (Unaudited)

 

9.     LEASES

 

The Company leases equipment, primarily rail cars, under operating leases through 2017.   Rent expense for both the three months ended January 31, 2013 and 2012 was approximately $532,000 and $508,000, respectively.

 

At January 31, 2013, the Company had the following minimum future lease payments, which at inception had non-cancelable terms of more than one year:

 

2014

 

$

1,313,000

 

2015

 

1,232,000

 

2016

 

842,000

 

2017

 

833,000

 

2018

 

693,000

 

 

 

 

 

Total lease commitments

 

$

4,913,000

 

 

10.  COMMITMENTS AND CONTINGENCIES

 

Forward Contracts

 

The Company has natural gas agreements with a minimum purchase commitment of approximately 1.6 million MMBTU per year until October 31, 2014.

 

11.  SALE OF ASSETS

 

The Company entered into an asset purchase agreement on January 3, 2013, with FCA Co-op for the sale of the Company’s grain storage and handling facilities. The sale closed on February 1, 2013, for approximately $3,750,000. The net proceeds of the sale were used to repay AgStar debt.

 

The Company entered into an asset purchase agreement on January 22, 2013, with Guardian Energy Heron Lake, LLC for the sale of the ethanol plant assets. The purchase price was to be the sum of $55,000,000 plus closing net working capital, less the amount owed on the closing date under assumed debt.   On April 4, 2013, the Company terminated the asset purchase agreement dated January 22, 2013 between the Company and Guardian.

 

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

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains, in addition to historical information, forward-looking statements that are based on our expectations, beliefs, intentions or future strategies. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements because of certain factors, including those set forth below under Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, as well as in other filings we make with the Securities and Exchange Commission. All forward-looking statements included herein are based on information available to us as of the date hereof, and we undertake no obligation to update any such forward-looking statements.

 

The following is a discussion and analysis of Heron Lake BioEnergy’s financial condition and results of operations as of and for the three month periods ended January 31, 2013 and 2012. This section should be read in conjunction with the condensed consolidated financial statements and related notes in Item 1 of this report and the Company’s Annual Report on Form 10-K for the year ended October 31, 2012.

 

We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the three months ended January 31, 2013.

 

Overview

 

Heron Lake BioEnergy, LLC is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota. The plant has a stated capacity to produce 50 million gallons of denatured fuel grade ethanol and 160,000 tons of dried distillers’ grains (DDGS) per year. Our revenues are derived from the sale and distribution of our ethanol throughout the continental United States and in the sale and distribution of our distillers’ grains (DGS) locally, and throughout the continental United States. Our subsidiary, Lakefield Farmers Elevator, LLC, had grain facilities at Lakefield and Wilder, Minnesota that were sold on February 1, 2013.  Our subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas, LLC, the pipeline company formed to construct, own, and operate a natural gas pipeline that provides natural gas to the Company’s ethanol production facility through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota.

 

Our operating results are largely driven by the prices at which we sell ethanol and distillers grains and the costs related to their production, particularly the cost of corn. Historically, the price of ethanol tended to fluctuate in the same direction as the price of unleaded gasoline and other petroleum products. However, during fiscal 2010 and continuing into fiscal 2013, ethanol prices tended to move up and down proportionately with changes in corn prices. The price of ethanol can also be influenced by factors such as general economic conditions, concerns over blending capacities, and government policies and programs. The price of distillers grains is generally influenced by supply and demand, the price of substitute livestock feed, such as corn and soybean meal, and other animal feed proteins. Our largest component of cost of production is corn. The cost of corn is affected primarily by factors over which we lack any control such as crop production, carryout, exports, government policies and programs, and weather. The growth of the ethanol industry has increased the demand for corn. We believe that continuing increases in global demand will result in corn prices above historic averages.   During the first quarter of fiscal year 2013 ended January 31, 2013, the price of ethanol on the Chicago Board of Trade fluctuated from $2.16 to $2.44 per gallon; our average sales price was $2.19 per gallon, with basis.  During the same period, the price of corn on the Chicago Board of Trade fluctuated from a low of $6.80 to a high of $7.60 per bushel; our average purchase price was $7.19 per bushel, with basis.

 

Trends and Uncertainties Impacting Our Operations

 

Our current and future results of operation are affected and will continue to be affected by factors such as (a) volatile and uncertain pricing of ethanol and corn; (b) availability of corn that is, in turn, affected by trends such as corn acreage, weather conditions, and yields on existing and new acreage diverted from other crops; and (c) the supply and demand for ethanol, which is affected by acceptance of ethanol as a substitute for fuel, public perception of the ethanol industry, government incentives and regulation, and competition from new and existing construction, among other things. Other factors that may affect our future results of operation include those factors discussed in “Item 1. Business” of our Annual Report on Form 10-K for the year ended October 31, 2012 and “Part II, Item 1A Risk Factors” of this Form 10-Q.

 

Critical Accounting Estimates

 

A description of our critical accounting estimates was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended October 31, 2012. At January 31, 2013, our critical accounting estimates continue to include those described in our Annual Report on Form 10-K. In addition, our analysis of future projections, resolution of debt terms and other assumptions in consideration of continuing as a going concern include critical accounting estimates.

 

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Results of Operations

 

The following table shows summary information from our Condensed Consolidated Statements of Operations for the three months ended January 31, 2013 and 2012.

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

January 31, 2013

 

January 31, 2012

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

Revenues

 

$

44,121,305

 

$

38,861,794

 

 

 

 

 

 

 

Cost of Goods Sold

 

43,201,086

 

38,597,224

 

 

 

 

 

 

 

Gross Profit

 

920,219

 

264,570

 

 

 

 

 

 

 

Operating Expenses

 

1,015,586

 

850,607

 

 

 

 

 

 

 

Operating Income (Loss)

 

(95,367

)

(586,037

)

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

Interest income

 

16,419

 

3,940

 

Interest expense

 

(774,750

)

(659,923

)

Other income

 

24,959

 

10,818

 

Total other expense, net

 

(733,372

)

(645,165

)

 

 

 

 

 

 

Net Income (Loss)

 

(828,739

)

(1,231,202

)

 

 

 

 

 

 

Net (Income) Loss Attributable to Noncontrolling Interest

 

(91,815

)

(81,611

)

 

 

 

 

 

 

Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC

 

$

(920,554

)

$

(1,312,813

)

 

Revenues

 

Revenues increased by 13.5% for the quarter ended January 31, 2013 as compared to the quarter ended January 31, 2012 due to higher revenue from ethanol and DGS sales, as well as the addition of corn oil sales during the quarter ended January 31, 2013 that were not present in the first quarter of fiscal 2012. Net ethanol revenues during the quarter ended January 31, 2013 were approximately $32.2 million compared to approximately $31.8 million during the quarter ended January 31, 2012, representing approximately 72% and 82%, respectively, of our sales. The similar ethanol revenue was a result of a 2.7% decrease in the average price per gallon of ethanol in the quarter ended January 31, 2013 as compared to the quarter ended January 31, 2012, along with a 1% decrease in gallons sold.  There were no ethanol derivative gains or losses during the quarters ended January 31, 2013 and 2012.

 

Total sales of DGS during the quarter ended January 31, 2013 were approximately $10.3 million comprising 24% of our revenues. DGS sales during the quarter ended January 31, 2012 were $6.6 million or 17% of revenues. The average DGS price increased 27% for the quarter ended January 31, 2013 as compared to the quarter ended January 31, 2012, with approximately the same volume of DGS sold during the first quarter of fiscal year 2013 and fiscal year 2012.

 

Corn oil separation began in February 2012. Corn oil sales for the quarter ended January 31, 2013 were approximately $1.1 million.  The remaining amount of revenues is made up of incidental other sales.

 

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Cost of Goods Sold

 

Our costs of sales include, among other things, the cost of corn used in ethanol and DGS production (which is the largest component of costs of sales); natural gas, processing ingredients, electricity, and wages, salaries and benefits of production personnel. We use approximately 1.7 million bushels of corn per month at the plant.

 

The per bushel cost of corn increased approximately 15% in the quarter ended January 31, 2013 as compared to the quarter ended January 31, 2012. We had losses related to corn derivative instruments of approximately $7,000 and losses related to natural gas derivative instruments of approximately $396,000 for the quarter ended January 31, 2012. We had no losses or gains in either of these areas for the current quarter. We had increased gross margin in the first quarter of fiscal 2013 as compared to first quarter of fiscal 2012 due to increased distillers grains revenue driven by increased prices and the addition of corn oil sales in the first quarter of fiscal year 2013 that were not present in the first quarter of fiscal year 2012.

 

The cost of corn fluctuates based on supply and demand, which, in turn, is affected by a number of factors which are beyond our control. We expect our gross margin to fluctuate in the future based on the relative prices of corn and fuel ethanol. We may use futures and option contracts to minimize our exposure to movements in corn prices, but there is no assurance that these hedging strategies will be effective. As a result, gains or losses on derivative instruments do not necessarily coincide with the related commodity purchases. This may cause fluctuations in our statement of operations. While we do not use hedge accounting to match gains or losses on derivative instruments, we believe the derivative instruments provide an economic hedge.

 

Operating Expenses

 

Operating expenses consist of selling, general and administrative expense and include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs. Operating expense for the quarter ended January 31, 2013 was approximately $1,000,000, an increase of approximately 19.4% as compared to operating expense of approximately $851,000 for the quarter ended January 31, 2012.  The increase in the first quarter of fiscal year 2013 as compared to the prior fiscal year first quarter was primarily due to costs related to the sale of the Lakefield Farmers Elevator and the ethanol plant assets.  These expenses represented 2.3% of total revenues for the three months ended January 31, 2013 and 2.2% of total revenues for the three months ended January 31, 2012.   These expenses generally do not vary with the level of production at the plant.

 

Other Expense, Net

 

Other expenses consisted primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense, which was up 17% for the three months ended January 31, 2013, as compared to the three months ended January 31, 2012, is dependent on the balances outstanding and on interest rates, including any default interest rate. Of the total indebtedness at January 31, 2012 to AgStar, approximately $18.2 million bears interest at a fixed rate of 5.75%, approximately $22.9 million bears interest at a variable rate of the increased expense represents default interest on the AgStar debt and increased borrowing for the corn oil separation system.

 

Liquidity and Capital Resources

 

As of January 31, 2013, we had cash and equivalents (other than restricted cash) of approximately $749,000, current assets of approximately $7.4 million and total assets of approximately $65.6 million.

 

Our principal sources of liquidity consist of cash provided by operations, cash and equivalents on hand, and available borrowings under our master loan agreement with AgStar. Under the master loan agreement, we have two forms of debt: a term note and a revolving term note.  The total indebtedness to AgStar at January 31, 2013, was $41.1 million, consisting of $36.4 million under the term note and $4.7 million under the revolving term note.  The term note has a variable rate portion comprising $18.2 million and a fixed rate portion comprising $18.2 million. Our revolving term note allows borrowing up to $2.5 million, less any letters of credit.  Among other provisions, our master loan agreement contains covenants requiring us to maintain various financial ratios and tangible net worth. It also limits our annual capital expenditures and membership distributions. All of our assets and real property are subject to security interests and mortgages in favor of AgStar as security for the obligations of the master loan agreement.  At January 31, 2013, we were not in compliance with the covenants of our master loan agreement with AgStar relating to minimum working capital amount, minimum tangible net worth amount, and the fixed charge coverage ratio. Further, the Company did not timely make required principal payments to AgStar on the first day of December 2012 through May 2013. Payment for December 2012 and January 2013 were made pursuant to a forbearance agreement with AgStar dated April 12, 2013.  As of the date of filing of this Form 10-Q, the Company has not paid required installments of principal that were due February 1, 2013, March 1, 2013, April 1, 2013 and May 1, 2013.

 

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The Company’s failure to comply with the covenants of the master loan agreement and failure to timely pay required installments of principal has resulted in events of default under the master loan agreement, entitling AgStar to accelerate and declare due all amounts outstanding under the master loan agreement. If AgStar accelerated and declared due all amounts outstanding under the master loan agreement, the Company would not have adequate cash to repay the amounts due, resulting in a loss of control of our business or bankruptcy.

 

On December 21, 2012, the Company and AgStar entered into a forbearance agreement whereby the Company agreed to, among other things, sell substantially all plant assets to Guardian. AgStar also began charging a default interest premium on the AgStar loans of an additional 2.0%. Advances on the revolving term note were frozen until the Company entered into an asset sale agreement for substantially all plant assets.  The forbearance agreement dated December 21, 2012 was subsequently amended and restated on January 22, 2013, February 12, 2013 and March 29, 2013, in order to permit the Company to close on the transactions contemplated by the asset purchase agreement dated January 22, 2013 between the Company and Guardian.  The asset purchase agreement with Guardian was terminated by the Company on April 4, 2013.  The forbearance agreement was amended and restated again on April 12, 2013 in order to accommodate certain proposals related to recapitalization and restructuring of the loans.  The forbearance agreement was amended and restated for a fifth time on May 10, 2013 in order to extend the forbearance period relating to the above-described covenant defaults and required monthly principal installment payments to permit the Company additional time to document and implement a written management, governance improvement and capitalization plan.

 

As of May 9, 2013, the outstanding principal balance of the Company’s indebtedness to AgStar was a term note of approximately $35.8 million ($17.9 million at a variable rate and $17.9 million at a fixed rate) and revolving term note of approximately $2.0 million. The Company’s current plan to remedy the covenant and payment defaults under its indebtedness to AgStar and improve its cash and liquidity position includes (1) finalizing a loan restructuring plan and restructuring the indebtedness to AgStar through an amended and restated master loan agreement; (2) raising additional capital through offerings of debt securities to the Company’s members and others; and (3) improving operations of its plant and cash flow generated from operations.  There can be no assurance that the Company will be able to reach an agreement with AgStar on the restructuring of its indebtedness, achieve or maintain compliance with its agreements with AgStar, raise additional capital through an offering of its debt or equity securities or both, or improve its financial performance.

 

There is no assurance that our cash, cash generated from operations and, if necessary, available borrowing under our agreement with AgStar, will be sufficient to fund our anticipated capital needs and operating expenses, particularly if the sale of ethanol and DGS does not produce revenues in the amounts currently anticipated or if our operating costs, including specifically the cost of corn, natural gas and other inputs, are greater than anticipated.  Due to current volatility in the ethanol and corn markets, our future profit margins might be tight or not exist at all.

 

Our principal uses of cash are to pay operating expenses of the plant and to make debt service payments on our long-term debt. During the three months ended January 31, 2013, the Company paid long term debt of approximately $570,000 and borrowed approximately $622,000.

 

The following table summarizes our sources and uses of cash and equivalents from our condensed consolidated statements of cash flows for the periods presented (in thousands):

 

 

 

Three Months Ended
January 31

 

 

 

2013

 

2012

 

Net cash provided by operating activities

 

$

261,644

 

$

32,019

 

Net cash (used in) investing activities

 

(218,023

)

(775,519

)

Net cash provided by (used in) financing activities

 

52,196

 

(3,829,971

)

Net increase (decrease) in cash and equivalents

 

$

95,817

 

$

(4,573,471

)

 

During the three months ended January 31, 2013, operating activities provided approximately $262,000 in cash. This consists primarily of the net loss of $828,000 plus non-cash expenses including depreciation and amortization of $1.0 million, increasing accounts receivable by $265,000, decreasing in inventory of $405,000, and decreasing accounts payable by $290,000.

 

During the three months ended January 31, 2012, operating activities provided approximately $32,000. This consists primarily of the net loss of $1.2 million plus non-cash expenses including depreciation and amortization of $1.4 million, decreasing accounts receivable by $1.0 million, increases in inventory of $248,000, and decreasing accounts payable by $1.0 million.

 

During the three months ended January 31, 2013, we used approximately $218,000 for investing activities to pay for capital expenditures. We used approximately $570,000 to make payments on long-term debt and had approximately $622,000 of proceeds from long-term debt.

 

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During the three months ended January 31, 2012, we used approximately $776,000 for investing activities to pay for capital expenditures.  This consists primarily of costs associated with the conversion of our plant to natural gas and the installation of the natural gas pipeline. We used $3.8 million in financing activities consisting primarily of payments on long-term debt.  We also received net proceeds of $707,000 from the sale of equity, which constitutes cash provided by investing activities.

 

Outlook

 

Ethanol prices have been very volatile over the past 6 months, and we expect to see that continue into 2013. There are many factors that will continue that volatility of prices into 2013, including amount of domestic ethanol production, the amount of ethanol exports and domestic usage, petroleum and gasoline prices, and the development of other alternative fuels.  As of March 2, 2013, the Energy Information Administration reported that ethanol production for the week was 266.4 million gallons, or a 13.89 billion gallon annualized rate.

 

Prices for DGS are also affected by a number of factors beyond our control such as the supply of and demand for DGS as an animal feed, prices of competing feeds, and perceptions of nutritional value of DGS as compared to those of competing feeds. We believe that current market prices for DGS can be sustained long-term as long as the prices of competing animal feeds remain steady or increase, livestock feeders continue to create demand for alternative feed sources such as distillers’ grains and the supply of distillers’ grains remains relatively stable. On the other hand, if competing commodity price values retreat and DGS supplies increase due to growth in the ethanol industry, DGS prices may decline.

 

Corn prices have been volatile for the past year due in part to higher demand from the renewable fuels industry. The expansion of ethanol productive capacity has brought about a substantial increase in demand for corn and thus in corn prices.  The volatility is also a result of less than trend line yields in the U.S. last 2 years, thus impacting the corn supply. Due to increased exposure of ethanol, corn is now being viewed as an “energy commodity” as opposed to strictly a “grain commodity,” contributing to the upward pressure on corn prices. The U.S. Department of Agriculture’s March 28, 2013 Corn Supply and Use Report projects U.S. corn prices to average between $6.65 and $7.15 per bushel for the 2012-13 crop year. The report estimated that 97.3 million acres of corn will be planted in 2013 which is just slightly higher than was planted in 2012.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

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Table of Contents

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are subject to market risks concerning our debt financing and future prices of corn, natural gas, ethanol and distillers grains.  We consider market risk to be the impact of adverse changes in market prices on our results of operations.  In general, ethanol prices are affected by the supply and demand for ethanol, the cost of ethanol production, the availability of other fuel oxygenates, the regulatory climate and the cost of alternative fuels such as gasoline. The price of corn is affected by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. From time to time, we may purchase corn futures and options to hedge a portion of the corn we anticipate we will need. In addition, we may contract for future physical delivery of corn. We are exposed to the full impact of market fluctuations associated with interest rates and commodity prices.

 

We are also subject to market risk on the selling prices of our distiller grains. These prices fluctuate seasonally when the price of corn or other cattle feed alternatives fluctuate in price.

 

As an example of our potential sensitivity to price changes, if the price of ethanol rises or falls $0.10 per gallon, our annual revenues may increase or decrease accordingly by approximately $5.5 million, assuming no other changes in our business. Additionally, if the price of corn rises or falls $0.25 per bushel, our annual cost of goods sold may increase or decrease by $5.2 million, again assuming no other changes in our business.  During the first quarter of fiscal year 2013 ended January 31, 2013, the price of ethanol on the Chicago Board of Trade fluctuated from $2.16 to $2.44 per gallon; our average sales price was $2.19 per gallon, with basis.  During the same period, the price of corn on the Chicago Board of Trade fluctuated from a low of $6.80 to a high of $7.60 per bushel; our average purchase price was $7.19 per bushel, with basis.  Our future earnings may be affected by changes in interest rates due to the impact those changes have on our interest expense on borrowings under our credit facilities. As of January 31, 2013, we had $41.1 million of outstanding borrowings with variable interest rates. With each 1% change in interest rates our annual interest expense would change by $411,000.

 

Item 4. Controls and Procedures

 

Effectiveness of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were not effective.  As previously reported in our Form 10-K for the year ended October 31, 2012, our management concluded that our disclosure controls and procedures were not effective as of October 31, 2012 due to a material weakness in internal control over financial reporting relating to the errors in pricing ethanol and distillers grains revenue and the effects of this revenue recognition error upon the financial statements and reports.  This material weakness is not considered fully remediated as of January 31, 2013 because while remedial procedures have been implemented, they have not operated for an appropriate period and have not been tested to allow management to conclude that they are operating effectively.  Accordingly, the Company’s disclosure controls and procedures are likewise not considered effective.  Additionally, the Company failed to timely file this Form 10-Q for the quarter ended January 31, 2013 with the Securities and Exchange Commission, which constitutes a separate event indicating that the Company’s disclosure controls and procedures were not effective.  The Form 10-Q for the quarter ended January 31, 2013 was not timely filed because of combination of the departure of two key financial personnel during the first fiscal quarter, the hiring of a new Chief Financial Officer during the first fiscal quarter, and the diversion of management attention to other critical matters involving AgStar, Guardian and the sale of the elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota by the Company’s subsidiary, Lakefield Farmers Elevator, LLC.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred in the fiscal quarter ended January 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, other than the implementation of additional controls and procedures to remediate the material weakness in internal control over financial reporting described above.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Discussions of legal matters are incorporated by reference from Part I, Item 1, Note 10 “Commitments and Contingencies — Legal Proceedings” of this Form 10-Q, and should be considered an integral part of Part II, Item 1, “Legal Proceedings”.

 

Item 1A. Risk Factors

 

The most significant risk factors applicable to the Company are described below and supersede the risk factors in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended October 31, 2012.  If any of the following risks actually occur, our results of operations, cash flows and the value of our units could be negatively impacted.

 

Risks Relating to Our Operations

 

Because we are primarily dependent upon one product, our business is not diversified, and we may not be able to adapt to changing market conditions or endure any decline in the ethanol industry.

 

Our success depends on our ability to efficiently produce and sell ethanol, and, to a lesser extent, distillers’ grains. We do not have any other lines of business or other significant sources of revenue to rely upon if we are unable to produce and sell ethanol and distillers’ grains, or if the market for those products decline. Our lack of diversification means that we may not be able to adapt to changing market conditions, changes in regulation, increased competition or any significant decline in the ethanol industry.

 

Our profitability depends upon purchasing corn at lower prices and selling ethanol at higher prices and because the difference between ethanol and corn prices can vary significantly, our financial results may also fluctuate significantly.

 

The substantial majority of our revenues are derived from the sale of ethanol. Our gross profit relating to the sale of ethanol is principally dependent on the difference between the price we receive for the ethanol we produce and the price we pay for the corn we used to produce our ethanol.

 

The price we receive for our ethanol is dependent upon a number of factors. Increasing domestic ethanol capacity may boost demand for corn, resulting in increased corn prices and corresponding decrease in the selling price of ethanol as production increases. Further, the price of corn is influenced by weather conditions (including droughts or over abundant rainfall) and other factors affecting crop yields, farmers’ planting decisions and general economic, market and regulatory factors, including government policies and subsidies with respect to agriculture and international trade, and global and local supply and demand. Declines in the corn harvest, caused by farmers’ planting decisions or otherwise, could cause corn prices to increase and negatively impact our gross margins.

 

We have experienced low or negative margins in the past, reflecting a higher expenses for the corn we purchase and lower revenues from ethanol we produce. For example, our cost of goods sold as a percentage of revenues was 97.9% and 99.3% for the fiscal quarters ended January 31, 2013 and January 31, 2012, respectively. Reduction in ethanol prices without corresponding decreases in corn costs or increases in corn prices without corresponding increases in ethanol prices has adversely affected our financial performance in the past and may adversely affect our financial performance in the future.

 

If the supply of ethanol exceeds the demand for ethanol, the price we receive for our ethanol and distillers’ grains may decrease.

 

According to the Renewable Fuels Association, domestic ethanol production capacity has increased steadily each year from 1999 to 2012. However, demand for ethanol may not increase as quickly as expected or to a level that exceeds supply, or at all.

 

Excess ethanol production capacity may result from decreases in the demand for ethanol or increased domestic production or imported supply. There are many factors affecting demand for ethanol, including regulatory developments and reduced gasoline consumption as a result of increased prices for gasoline or crude oil. Higher gasoline prices could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage, or higher prices could spur technological advances, such as the commercialization of engines utilizing hydrogen fuel-cells, which could supplant gasoline-powered engines. There are a number of governmental initiatives designed to reduce gasoline consumption, including tax credits for hybrid vehicles and consumer education programs.

 

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If ethanol prices decline for any reason, including excess production capacity in the ethanol industry or decreased demand for ethanol, our business, results of operations and financial condition may be materially and adversely affected.

 

In addition, because ethanol production produces distillers’ grains as a co-product, increased ethanol production will also lead to increased production of distillers’ grains. An increase in the supply of distillers’ grains, without corresponding increases in demand, could lead to lower prices or an inability to sell our distillers’ grains production. A decline in the price of distillers’ grains or the distillers’ grains market generally could have a material adverse effect on our business, results of operations and financial condition.

 

The price of distillers’ grains is affected by the price of other commodity products, such as soybeans, and decreases in the price of these commodities could decrease the price of distillers’ grains.

 

Distillers’ grains compete with other protein-based animal feed products. The price of distillers’ grains may decrease when the price of competing feed products decrease. The prices of competing animal feed products are based in part on the prices of the commodities from which they are derived. Downward pressure on commodity prices, such as soybeans, will generally cause the price of competing animal feed products to decline, resulting in downward pressure on the price of distillers’ grains. The price of distillers’ grains is not tied to production costs. However, decreases in the price of distillers’ grains would result in less revenue from the sale of distillers’ grains and could result in lower profit margins.

 

We face intense competition that may result in reductions in the price we receive for our ethanol, increases in the prices we pay for our corn, or lower gross profits.

 

Competition in the ethanol industry is intense. We face formidable competition in every aspect of our business from both larger and smaller producers of ethanol and distillers’ grains. Some larger producers of ethanol, such as Archer Daniels Midland Company, Cargill, Inc., Valero Energy Corporation, have substantially greater financial, operational, procurement, marketing, distribution and technical resources than we have. Additionally, smaller competitors, such as farmer-owned cooperatives and independent companies owned by farmers and investors, have business advantages, such as the ability to more favorably procure corn by operating smaller plants that may not affect the local price of corn as much as a larger-scale plant like ours or requiring their farmer-owners to sell them corn as a requirement of ownership.

 

Because Minnesota is one of the top producers of ethanol in the U.S., we face increased competition because of the location of our ethanol plant in Minnesota. Therefore, we compete with other Minnesota ethanol producers both for markets in Minnesota and markets in other states.

 

We also face increasing competition from international ethanol suppliers. Most international ethanol producers have cost structures that can be substantially lower than ours and therefore can sell their ethanol for substantially less than we can. While ethanol imported to the U.S. was subject to an ad valorem tax and a per gallon surcharge that helped mitigate the effects of international competition for U.S. ethanol producers, the tax and per gallon surcharge expired on December 31, 2011. Because the tax and surcharge on imported ethanol was not extended beyond December 31, 2011, we face increased competition from imported ethanol and foreign producers of ethanol. In addition, ethanol imports from certain countries are exempted from these tariffs under the Caribbean Basin Initiative to spur economic development in Central America and the Caribbean. Imports of ethanol from Central American and Caribbean countries represent a significant portion of the gallons imported into the U.S. each year and a source of intense competition for us due to the lower production costs these ethanol producers enjoy.

 

Competing ethanol producers may introduce competitive pricing pressures that may adversely affect our sales levels and margins or our ability to procure corn at favorable prices. As a result, we cannot assure you that we will be able to compete successfully with existing or new competitors.

 

We engage in hedging transactions which involve risks that can harm our business.

 

In an attempt to offset some of the effects of pricing and margin volatility, we may hedge anticipated corn purchases and ethanol and distillers’ grain sales through a variety of mechanisms. Because of our hedging strategies, we are exposed to a variety of market risks, including the effects of changes in commodities prices of ethanol and corn.

 

Hedging arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices paid or received by us. Hedging activities can themselves result in losses when a position is purchased in a declining market or a position is sold in a rising market. Our losses or gains from hedging activities may vary widely.

 

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There can be no assurance that our hedging strategies will be effective and we may experience hedging losses in the future. We also vary the amount of hedging or other price mitigation strategies we undertake, and we may choose not to engage in hedging transactions at all. As a result, whether or not we engage in hedging transactions, our business, results of operations and financial condition may be materially adversely affected by increases in the price of corn or decreases in the price of ethanol.

 

Operational difficulties at our plant could negatively impact our sales volumes and could cause us to incur substantial losses.

 

We have experienced operational difficulties at our plant that have resulted in scheduled and unscheduled downtime or reductions in the number of gallons of ethanol we produce. Some of the difficulties we have experienced relate to production problems, repairs required to our plant equipment and equipment maintenance, the installation of new equipment and related testing, and our efforts to improve and test our air emissions. Although operational difficulties still remain after our conversion from coal to natural gas combustion, the amount of incidents has been reduced. Our revenues are driven in large part by the number of gallons of ethanol we produce and the number of tons of distillers’ grains we produce. If our ethanol plant does not efficiently produce our products in high volumes, our business, results of operations, and financial condition may be materially adversely affected.

 

Our operations are also subject to operational hazards inherent in our industry and to manufacturing in general, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. The occurrence of any of these operational hazards may materially adversely affect our business, results of operations and financial condition. Further, our insurance may not be adequate to fully cover the potential operational hazards described above or we may not be able to renew this insurance on commercially reasonable terms or at all.

 

Our operations and financial performance could be adversely affected by infrastructure disruptions and lack of adequate transportation and storage infrastructure in certain areas.

 

We ship our ethanol to our customers primarily by the railroad adjacent to our site. We also have the potential to receive inbound corn via the railroad, although we currently receive corn by truck. Our customers require appropriate transportation and storage capacity to take delivery of the products we produce. We also receive our natural gas through a pipeline that is approximately 16 miles in length. Without the appropriate flow of natural gas through the pipeline our plant may not be able to run at desired production levels or at all. Therefore, our business is dependent on the continuing availability of rail, highway and related infrastructure. Any disruptions in this infrastructure network, whether caused by labor difficulties, earthquakes, storms, other natural disasters, human error or malfeasance or other reasons, could have a material adverse effect on our business. We rely upon third-parties to maintain the rail lines from our plant to the national rail network, and any failure on their part to maintain the lines could impede our delivery of products, impose additional costs on us and could have a material adverse effect on our business, results of operations and financial condition.

 

In addition, lack of this infrastructure prevents the use of ethanol in certain areas where there might otherwise be demand and results in excess ethanol supply in areas with more established ethanol infrastructure, depressing ethanol prices in those areas. In order for the ethanol industry to grow and expand into additional markets and for our ethanol to be sold in these new markets, there must be substantial development of infrastructure including:

 

·                  additional rail capacity;

 

·                  additional storage facilities for ethanol;

 

·                  increases in truck fleets capable of transporting ethanol within localized markets;

 

·                  expansion of refining and blending facilities to handle ethanol; and

 

·                  growth in service stations equipped to handle ethanol fuels.

 

The substantial investments that will be required for these infrastructure changes and expansions may not be made on a timely basis, if at all, and decisions regarding these infrastructure improvements are outside of our control. Significant delay or failure to improve the infrastructure that facilitates the distribution could curtail more widespread ethanol demand or reduce prices for our products in certain areas, which would have a material adverse effect on our business, results of operations or financial condition.

 

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Competition for qualified personnel in the ethanol industry is intense and we may not be able to hire and retain qualified personnel to operate our ethanol plant.

 

Our success depends in part on our ability to attract and retain competent personnel. For our ethanol plant, we must hire qualified managers, operations personnel, accounting staff and others, which can be challenging in a rural community. Competition for employees in the ethanol industry is intense, and we may not be able to attract and retain qualified personnel. If we are unable to hire productive and competent personnel and retain our existing personnel, our business may be adversely affected and we may not be able to efficiently operate our ethanol business and comply with our other obligations.

 

Technology in our industry evolves rapidly, potentially causing our plant to become obsolete, and we must continue to enhance the technology of our plant or our business may suffer.

 

We expect that technological advances in the processes and procedures for processing ethanol will continue to occur. It is possible that those advances could make the processes and procedures that we utilize at our ethanol plant less efficient or obsolete. These advances could also allow our competitors to produce ethanol at a lower cost than we are able. If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than those of our competitors, which could cause our ethanol plant to become uncompetitive.

 

Ethanol production methods are constantly advancing. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass such as agricultural waste, forest residue and municipal solid waste. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas that are unable to grow corn. Another trend in ethanol production research is to produce ethanol through a chemical or thermal process, rather than a fermentation process, thereby significantly increasing the ethanol yield per pound of feedstock. Although current technology does not allow these production methods to be financially competitive, new technologies may develop that would allow these methods to become viable means of ethanol production in the future. If we are unable to adopt or incorporate these advances into our operations, our cost of producing ethanol could be significantly higher than those of our competitors, which could make our ethanol plant obsolete. Modifying our plant to use the new inputs and technologies would likely require material investment.

 

If ethanol fails to compete successfully with other existing or newly-developed oxygenates or renewable fuels, our business will suffer.

 

Alternative fuels, additives and oxygenates are continually under development. Alternative fuels and fuel additives that can replace ethanol are currently under development, which may decrease the demand for ethanol. Technological advances in engine and exhaust system design and performance could reduce the use of oxygenates, which would lower the demand for ethanol, and our business, results of operations and financial condition may be materially adversely affected.

 

Our sales will decline, and our business will be materially harmed if our third party marketers do not effectively market or sell the ethanol and distillers grains we produce or if there is a significant reduction or delay in orders from our marketers.

 

We have entered into an agreement with a third party to market our supply of ethanol and distillers’ grains. Our marketer is an independent business that we do not control. We cannot be certain that our marketer will market or sell our ethanol and distillers’ grains effectively. Our agreements with this marketer do not contain requirements that a certain percentage of sales are of our products, nor do the agreements restrict the marketer’s ability to choose alternative sources for ethanol or distillers’ grains.

 

Our success in achieving revenue from the sale of ethanol and distillers’ grains will depend upon the continued viability and financial stability of our marketer. Our marketer may choose to devote its efforts to other ethanol producers or reduce or fail to devote the necessary resources to provide effective sales and marketing support of our products. We believe that our financial success will continue to depend in large part upon the success of our marketer in operating its businesses. If our marketer does not effectively market and sell our ethanol and distillers’ grains, our revenues may decrease and our business will be harmed.

 

Risks Related to Our Financial Condition

 

We have previously failed to maintain the financial covenants and make the required monthly installments of principal required under our master loan agreement with AgStar.

 

At January 31, 2013, we were in default of covenants of our Fifth Amended and Restated Master Loan Agreement with AgStar Financial Services, PCA (“AgStar”) requiring us to maintain at least $5.0 million minimum working capital; at least $39.5 million of tangible net worth; and a fixed charge ratio of 1.20 to 1.00 or greater.  We also failed to make monthly principal payments to AgStar on February 1, 2013, March 1, 2013, April 1, 2013 and May 1, 2013.  As a result of these defaults, we have entered into multiple forbearance agreements with AgStar.

 

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On May 17, 2013, we entered into a Sixth Amended and Restated Master Loan Agreement and related loan documents with AgStar to replace and supersede our Fifth Amended and Restated Master Loan Agreement dated as of September 1, 2011, our Fifth Amended and Restated Forbearance Agreement dated May 10, 2013, and related loan documents.  Under the Sixth Amended and Restated Master Loan Agreement, AgStar agreed to restructure our Term Loan and our Term Revolving Loan based upon our submission of a loan restructuring proposal and payment of approximately $1.4 million in cash for Term Loan principal payments in arrears and reduction of the Term Revolving Note.

 

If we fail to observe any covenant or incur any other event of default under the Sixth Amended and Restated Master Loan Agreement, AgStar would be entitled to accelerate and declare due all amounts outstanding under our Term Loan and our Term Revolving Loan.  We do not have adequate capital to repay all of the amounts that would become due upon acceleration.

 

If we default on our master loan agreement with AgStar, AgStar may seize our assets or we may be forced to seek bankruptcy protection.

 

At January 31, 2013, our total indebtedness to AgStar was approximately $41.1 million.  All of our assets and real property are subject to security interests and mortgages in favor of AgStar as security for the obligations of the master loan agreement. Our failure to pay any required installment of principal or interest or any other amounts payable under our Term Loan or Term Revolving Loan or our failure to perform or observe any covenant under the Sixth Amended and Restated Master Loan Agreement would result in an event of default, entitling AgStar to accelerate and declare due all amounts outstanding under our Term Loan and our Term Revolving Loan.

 

Under the Sixth Amended and Restated Master Loan Agreement, we are required to make monthly interest payments on the Term Revolving Loan until the loan maturity date.  In addition to monthly interest payments, we must make a principal payment of at least $5 million on the Term Revolving Loan on or before, July 31, 2013.  Beginning on October 1, 2013, we must also reduce our outstanding revolving advances under the Term Revolving Loan.  The Term Revolving Loan commitment is scheduled to decline by $2 million annually, beginning on October 1, 2013 and each anniversary date thereafter.

 

The Sixth Amended and Restated Master Loan Agreement contains certain financial covenants, including: (i) a working capital requirement of at least $5 million, measured monthly on a consolidated basis beginning on July 31, 2013; (ii) an owner equity ratio requirement, measured quarterly on a consolidated basis, of at least 35% beginning on October 31, 2013 and at least 40% beginning on October 31, 2014; (iii) a fixed charge coverage ratio of not less than 1.15 to 1.00, measured annually at the end of each fiscal year on a consolidated basis beginning on October 31, 2014.

 

The Sixth Amended and Restated Master Loan Agreement also contains certain affirmative covenants, including: (i) identification of an interim Chief Executive Officer reasonably acceptable to AgStar on or before June 1, 2013, with a starting date no later than June 15, 2013; (ii) hiring of a permanent Chief Executive Officer reasonably acceptable to AgStar, with a starting date no later than October 31, 2013; (iii) reviewing and implementing changes to our risk management policies, procedures and personnel; and (iv) reviewing our commercial contracts with third-party service providers and suppliers.

 

The Sixth Amended and Restated Master Loan Agreement also requires us to commence a member capital raise as part of a recapitalization plan to strengthen our balance sheet and improve our working capital position.  Under our member capital raise, we will offer and sell up to $12 million of 7.25% Subordinated Secured Notes due 2018.  The proceeds from the member capital raise will be used to make the required $5 million principal payment on the Term Revolving Loan due by July 31, 2013.

 

Upon the occurrence of any one or more Events of Default, as defined under the Sixth Amended and Restated Forbearance Agreement, including failure to observe any of the financial or affirmative covenants discussed above, AgStar may accelerate all of our indebtedness and may seize the assets that secure our indebtedness, causing us to lose control of our business. We may also be forced to sell our assets, restructure our indebtedness, submit to foreclosure proceedings, cease operations or seek bankruptcy or reorganization protection.

 

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We have relied upon on our master loan agreement to fund our past operations and past losses because we have not generated a sufficient level of net income or obtained sufficient working capital to fund our ongoing operations.

 

We had a net loss of approximately $921,000 for our fiscal quarter ended January 31, 2013. Our operating results have fluctuated significantly in past years. We had a net loss of approximately $32.7 million for our fiscal year ended October 31, 2012 (which included a noncash impairment charge against our assets of approximately $27.8 million), net income of approximately $570,000 for our fiscal year ended October 31, 2011, net income of approximately $1.7 million for our fiscal year ended October 31, 2010 (which included approximately $2.6 million of settlement income) and a net loss of approximately $11.3 million for our fiscal year ended October 31, 2009. Our limited net income or our net losses have primarily been driven by our low or negative margins. For example, our cost of goods sold (including lower of cost or market adjustments) as a percentage of revenues was 97.9% and 99.3% for the fiscal quarters ended January 31, 2013 and January 31, 2012, respectively. Whether we achieve a sufficient level of net income to fund our operations depends on a number of factors, including:

 

·                  our revenue in any given period, which depends both on the volume of our products produced and the price we receive for these products;

 

·                  our expense levels, particularly our operating expenses relating to corn; and

 

·                  the efficiency of our plant, particularly managing costs and expenses associated with repairs and air emissions compliance and remediation plans and avoiding plant shut downs and slow downs.

 

We have historically financed our operations primarily through borrowing under our master loan agreement with AgStar, and, to a lesser extent, cash from operating activities. As of January 31, 2013, we had cash and cash equivalents (other than restricted cash) of approximately $749,000. As of January 31, 2013, our indebtedness under the master loan agreement with AgStar was approximately $41.1 million.

 

To fund our ongoing cash needs and to service our indebtedness, we must increase the income and cash generated from our operations. We cannot assure you that we will improve our liquidity to the extent required to enable us to service or reduce our indebtedness or to fund our other capital needs, if at all.

 

Certain provisions of our master loan agreement with AgStar present special risks to our business.

 

As of January 31, 2013, our debt with AgStar consists of approximately $18.2 million in fixed rate obligations and $22.9 million in variable rate obligations.  The variable rate portion of our debt may make us vulnerable to increases in prevailing interest rates. If the interest rate on our variable rate debt were to increase, our aggregate annualized interest and principal payments would also increase and could increase significantly.

 

The principal and interest payments on our Term Loan with AgStar are calculated using an amortization period of ten years even though the note will mature on September 1, 2016.  As a result, at maturity of the term loan, there would be large amount of principal remaining under the term loan. In order to finance this large payment of principal that would be due at maturity, we may attempt to extend the term of the loan under the master loan agreement, refinance the indebtedness under the master loan agreement, in full or in part, or obtain a new loan to repay the term loan. We cannot assure you that we will be successful in obtaining an extension of or refinancing our indebtedness. We also cannot assure you that we will be able to obtain a new loan in an amount that is sufficient for our needs, in a timely manner or on terms and conditions acceptable to us or our members.

 

If we are unable to service our debt, AgStar may accelerate all of our indebtedness and may seize the assets that secure our indebtedness, causing us to lose control of our business. We may also be forced to sell our assets, restructure our indebtedness, submit to foreclosure proceedings, cease operations or seek bankruptcy or reorganization protection.

 

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Risks Related to Government Programs and Regulation

 

We have experienced significant costs in obtaining and complying with permits and environmental laws, particularly our air emissions permit, and may continue to experience significant costs in the future.

 

The costs associated with obtaining and complying with permits and complying with environmental laws have increased our costs of construction, production and continued operation. In particular, we have incurred significant expense relating to our air-emission permit in four categories: (1) obtaining our air emissions permit from the Minnesota Pollution Control Agency (“MPCA”); (2) compliance with our air emissions permit and the terms of our compliance agreement with the MPCA; (3) our dispute under the design-build agreement with Fagen, Inc. relating to equipment failures, warranty claims and other claims regarding air emissions at our plant that was the subject of an arbitration action that was settled on July 2, 2010; and (4) a March 2008 notice of violation from the MPCA that was resolved in December 2010 though a stipulation agreement.

 

While our air emissions permit issue was resolved with the December 16, 2010 issuance of a new air permit by the MPCA, our arbitration action against Fagen, Inc. has been settled, we have addressed the notice of violation through a stipulation agreement, and we successfully converted our ethanol plant from a coal-fired ethanol plant to a natural-gas fired ethanol plant in November 2011, realized significant reductions in air emissions, and have achieved compliance with the air emission requirements of our air permit, we anticipate future expense associated with compliance with our air permit and related environmental laws. The permit requires us to take additional actions relating to our plant and our operations within certain time frames.

 

Continued compliance with our air emissions permit issue will involve management time and expense and may involve ongoing operational expense or further modifications to the design or equipment in our plant. Although violations and environmental incompliance still remain after the conversion from coal to natural gas combustion, the exposure to the company has been greatly reduced.

 

There can be no assurance that we will be able to comply with the conditions of any of our permits, or with environmental laws applicable to us. A violation of environmental laws, regulations or permit conditions can result in substantial fines, natural resource damage, criminal sanctions, permit revocations or plant shutdown, any of which could have a material adverse effect on our operations.

 

Our failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

 

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground. Certain aspects of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities including the Minnesota Pollution Control Agency. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party claims for property damage and personal injury as a result of violations of or liabilities under environmental laws or non-compliance with environmental permits. We could also incur substantial costs and experience increased operating expenses as a result of operational changes to comply with environmental laws, regulations and permits. As discussed above, we have incurred substantial costs relating to our air emissions permit and expect additional costs relating to this permit in the future.

 

Further, environmental laws and regulations are subject to substantial change. We cannot predict what material impact, if any, these changes in laws or regulations might have on our business. Future changes in regulations or enforcement policies could impose more stringent requirements on us, compliance with which could require additional capital expenditures, increase our operating costs or otherwise adversely affect our business. These changes may also relax requirements that could prove beneficial to our competitors and thus adversely affect our business. In addition, regulations of the Environmental Protection Agency and the Minnesota Pollution Control Agency depend heavily on administrative interpretations. We cannot assure you that future interpretations made by regulatory authorities, with possible retroactive effect, will not adversely affect our business, financial condition and results of operations.

 

Failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

 

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Because federal and state regulation heavily influence the supply of and demand for ethanol, changes in government regulation that adversely affect demand or supply will have a material adverse effect on our business.

 

Various federal and state laws, regulations and programs impact the supply of and demand for ethanol. Some government regulation, for example those that provide economic incentives to ethanol producers, stimulate supply of ethanol by encouraging production and the increased capacity of ethanol plants. Others, such as a federal excise tax incentive program that provides gasoline distributors who blended ethanol with gasoline to receive a federal excise tax rate reduction for each blended gallon they sell, stimulate demand for ethanol by making it price competitive with other oxygenates. Further, tariffs generally apply to the import of ethanol from certain other countries, where the cost of production can be significantly less than in the U.S. These tariffs are designed to increase the cost of imported ethanol to a level more comparable to the cost of domestic ethanol by offsetting the benefit of the federal excise tax program. Tariffs have the effect of maintaining demand for domestic ethanol.

 

Additionally, the Environmental Protection Agency (EPA) has established a revised annual renewable fuel standard (RFS2) that sets minimum national volume standards for use of renewable fuels. The RFS2 also sets volume standards for specific categories of renewable fuels: cellulosic, biomass-based diesel and total advanced renewable fuels. While our ethanol does not qualify one of the new volume categories of renewable fuels, we believe that the overall renewable fuels requirement of RFS2 creates an incentive for the use of ethanol. Other federal and state programs that require or provide incentives for the use of ethanol create demand for ethanol. Government regulation and government programs that create demand for ethanol may also indirectly create supply for ethanol as additional producers expand or new companies enter the ethanol industry to capitalize on demand. In the case of the RFS2, while it creates a demand for ethanol, the existence of specific categories of renewable fuels also creates a demand for these types of renewable fuels and will likely provide an incentive for companies to further develop these products to capitalize on that demand. In these circumstances, the RFS2 may also reduce demand for ethanol in favor of the renewable fuels for which specific categories exist.

 

Federal and state laws, regulations and programs are constantly changing. We cannot predict what material impact, if any, these changes might have on our business. Future changes in regulations and programs could impose more stringent operational requirements or could reduce or eliminate the benefits we receive, directly and indirectly, under current regulations and programs. Future changes in regulations and programs may increase or add benefits to ethanol producers other than us or eliminate or reduce tariffs or other barriers to entry into the U.S. ethanol market, any of which could prove beneficial to our competitors, both domestic and international. Future changes in regulation may also hurt our business by providing economic incentives to producers of other renewable fuels or oxygenates or encouraging use of fuels or oxygenates that compete with ethanol. In addition, both national and state regulation is influenced by public opinion and changes in public opinion. For example, certain states oppose the use of ethanol because, as net importers of ethanol from other states, the use of ethanol could increase gasoline prices in that state and because that state does not receive significant economic benefits from the ethanol industry, which are primarily experienced by corn and ethanol producing states. Further, some argue that the use of ethanol will have a negative impact on gasoline prices to consumers, result in rising food prices, add to air pollution, harm car and truck engines, and actually use more fossil energy, such as oil and natural gas, than the amount of ethanol that is produced. We cannot predict the impact that opinions of consumers, legislators, industry participants, or competitors may have on the regulations and programs currently benefiting ethanol producers.

 

The EPA imposed E10 “blend wall” if not overcome will have an adverse effect on demand for ethanol.

 

We believe that the E10 “blend wall” is one of the most critical governmental policies currently facing the ethanol industry. The “blend wall” issue arises because of several conflicting requirements. First, the renewable fuels standards dictate a continuing increase in the amount of ethanol blended into the national gasoline supply. Second, the EPA mandates a limit of 10% ethanol inclusion in non-flex fuel vehicles, and the E85 vehicle marketplace is struggling to grow due to lacking infrastructure. The EPA policy of 10% and the RFS increasing blend rate are at odds, which is sometimes referred to as the “blend wall.” While the issue is being considered by the EPA, there have been no regulatory changes that would reconcile the conflicting requirements. In 2011, the United States Environmental Protection Agency allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. Management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the labeling requirements the EPA may impose. The EPA is considering instituting labeling requirements associated with E15 which may unfairly discourage consumers from purchasing E15. As a result, the approval of E15 may not significantly increase demand for ethanol.

 

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Risks Related to the Units

 

Project Viking owns a large percentage of our units, which may allow it to control or heavily influence matters requiring member approval, and Project Viking has been granted additional board rights under our member control agreement.

 

As of January 31, 2013, Project Viking, L.L.C. beneficially owned 41.4% of our outstanding units. Project Viking is owned by Roland J. (Ron) Fagen and Diane Fagen, the principal shareholders of Fagen, Inc., the design-build firm for our ethanol plant. Project Viking, together with our executive officers and governors, together control approximately 44.8% of our outstanding units as of January 31, 2013. As a result, these unit holders, acting individually or together, could significantly influence our management and affairs and all matters requiring member approval, including the election of governors and approval of significant corporate transactions.

 

Additionally, our member control agreement gives members who hold significant amounts of equity in us the right to designate governors to serve on our board of governors. For every 9% of our units held, the member has the right to appoint one person to our board. As of January 31, 2013, Project Viking, L.L.C. has the right to appoint four persons to our board pursuant to this provision. Although the designated governors do not represent a majority of our board, their presence on the board may allow Project Viking, L.L.C. to have greater influence over the decisions of our board and our business than other members.

 

Further, the interests of Project Viking, L.L.C. may not coincide with our interests or the interests of our other members. For example, Fagen, Inc. has invested and may continue to invest in a number of other ethanol producers, some of whom may compete with us. As a result of these and other potential conflicting interests, these existing members may make decisions with respect to us with which we or our members may disagree.

 

There is no public market for our units and no public market is expected to develop.

 

There is no established public trading market for our units, and we do not expect one to develop in the foreseeable future. To maintain our partnership tax status, we do not intend to list the units on any stock exchange or automatic quotation system such as OTC Bulletin Board. As a result, units held by our members may not be easily resold and members may be required to hold their units indefinitely. Even if members are able to resell our units, the price may be less than the members’ investment in the units or may otherwise be unattractive to the member.

 

There are significant restrictions on the transfer of our units.

 

To protect our status as a partnership for tax purposes and to assure that no public trading market in our units develops, our units are subject to significant restrictions on transfer and transfers are subject to approval by our board of governors. All transfers of units must comply with the transfer provisions of our member control agreement and the unit transfer policy adopted by our board of governors. Our board of governors will not approve transfers which could cause us to lose our tax status or violate federal or state securities laws. On November 5, 2008, our board of governors adopted a revised unit transfer policy. While the revised policy permits transfers of our units under certain circumstances, including certain transfers of units for value, there continue to be significant restrictions on transfer of our units. Among other things, the revised unit transfer policy places limits on the number of units that may be transferred during any fiscal year and requires the transferor and transferee to complete a unit transfer agreement and application form and submit these to us along with the required documents and an application fee.

 

On July 2, 2010, in conjunction with our recapitalization efforts and in light of the transactions and agreements the Company entered into with Project Viking, L.L.C., the board of governors determined to suspend approvals of any transfers of units, provided that related-party transfers without consideration would still be considered. This suspension was approved by the board pursuant to its authority under our member control agreement. On July 9, 2010, we notified our members of the suspension of approvals by a letter. We also removed all postings on the unit bulletin board.

 

As a result of the provisions of our member control agreement, members may not be able to transfer their units and may be required to assume the risks of the investment for an indefinite period of time.

 

A transferee may be admitted as a member only upon approval by the board of governors and upon satisfaction of certain other requirements, including the transferee meeting the minimum unit ownership requirements to become a member (which for our present units requires holding a minimum of 2,500 units). Any transferee that is not admitted as a member will be deemed an unadmitted assignee. An unadmitted assignee will be a non-member unit holder and will have the same financial rights as other unit holders, such as the right to receive distributions that we declare or that are available upon our dissolution or liquidation. As a non-member unit holder, an unadmitted assignee will not have the voting or other governance rights of members and will not be entitled to any information or accountings regarding our business or to inspect our books and records.

 

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There is no assurance that we will be able to make distributions to our unit holders, which means that holders could receive little or no return on their investment.

 

Distributions of our net cash flow may be made at the sole discretion of our board of governors, subject to the provisions of the Minnesota Limited Liability Company Act, our member control agreement and restrictions imposed by AgStar under our master loan agreement. Our master loan agreements with AgStar currently materially limit our ability to make distributions to our members and are likely to limit materially the future payment of distributions. If our financial performance and loan covenants permit, we expect to make future cash distributions at times and in amounts that will permit our members to make income tax payments. If our financial performance and loan covenants further permit, we intend to make distributions in excess of those amounts. However, our board may elect to retain cash for operating purposes, debt retirement, plant improvements or expansion. We may also never be in a position to pay distributions because of our financial performance or the terms of our master loan agreement. Consequently, members may receive little or no return on their investment in the units.

 

We may authorize and issue units of new classes which could be superior to or adversely affect holders of our outstanding units.

 

Our board of governors, upon the approval of a majority in interest of our members, has the power to authorize and issue units of classes which have voting powers, designations, preferences, limitations and special rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights, different from or superior to those of our present units. New units may be issued at a price and on terms determined by our board of governors. The terms of the units and the terms of issuance of the units could have an adverse impact on your voting rights and could dilute your financial interest in us.

 

Our use of a staggered board of governors and allocation of governor appointment rights may reduce the ability of members to affect the composition of the board.

 

We are managed by a board of governors, consisting of five elected governors and four appointed governors. The seats on the board that are not subject to a right of appointment will be elected by the members without appointment rights. An appointed governor serves indefinitely at the pleasure of the member appointing him or her (so long as such member and its affiliates continue to hold a sufficient number of units to maintain the applicable appointment right) until a successor is appointed, or until the earlier death, resignation or removal of the appointed governor.

 

Under our member control agreement, non-appointed governors are divided into three classes, with the term of one class expiring each year. As the term of each class expires, the successors to the governors in that class will be elected for a term of three years. As a result, members elect only approximately one-third of the non-appointed governors each year.

 

The effect of these provisions may make it more difficult for a third party to acquire, or may discourage a third party from acquiring, control of us and may discourage attempts to change our management, even if an acquisition or these changes would be beneficial to our members.

 

Our units represent both financial and governance rights, and loss of status as a member would result in the loss of the holder’s voting and other rights and would allow us to redeem such holder’s units.

 

Holders of units are entitled to certain financial rights, such as the right to any distributions, and to governance rights, such as the right to vote as a member. If a unit holder does not continue to qualify as a member or such holder’s member status is terminated, the holder would lose certain rights, such as voting rights, and we could redeem such holder’s units. The minimum number of units presently required for membership is 2,500 units. In addition, holders of units may be terminated as a member if the holder dies or ceases to exist, violates our member control agreement or takes actions contrary to our interests, and for other reasons. Although our member control agreement does not define what actions might be contrary to our interests, and our board of governors has not adopted a policy on the subject, such actions might include providing confidential information about us to a competitor, taking a board or management position with a competitor or taking action which results in significant financial harm to us in the marketplace. If a holder of units is terminated as a member, our board of governors will have no obligation to redeem such holder’s units.

 

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Voting rights of members are not necessarily equal and are subject to certain limitations.

 

Members of our company are holders of units who have been admitted as members upon their investment in our units and who are admitted as members by our board of governors. The minimum number of units required to retain membership is 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our board of governors to become members. Members who are holders of our present units are entitled to one vote for each unit held. The provisions of our member control agreement relating to voting rights applicable to any class of units will apply equally to all units of that class.

 

However, our member control agreement gives members who hold significant amounts of equity in us the right to designate governors to serve on our board of governors. For every 9% of our units held, the member has the right to appoint one person to our board. Project Viking, L.L.C. has the right to appoint four persons to our board pursuant to this provision. If units of any other class are issued in the future, holders of units of that other class will have the voting rights that are established for that class by our board of governors with the approval of our members. Consequently, the voting rights of members may not be necessarily proportional to the number of units held.

 

Further, cumulative voting for governors is not allowed, which makes it substantially less likely that a minority of members could elect a member to the board of governors. Members do not have dissenter’s rights. This means that they will not have the right to dissent and seek payment for their units in the event we merge, consolidate, exchange or otherwise dispose of all or substantially all of our property. Holders of units who are not members have no voting rights. These provisions may limit the ability of members to change the governance and policies of our company.

 

All members will be bound by actions taken by members holding a majority of our units, and because of the restrictions on transfer and lack of dissenters’ rights, members could be forced to hold a substantially changed investment.

 

We cannot engage in certain transactions, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, without the approval of our members. However, if holders of a majority of our units approve a transaction, then all members will also be bound to that transaction regardless of whether that member agrees with or voted in favor of the transaction. Under our member control agreement, members will not have any dissenters’ rights to seek appraisal or payment of the fair value of their units. Consequently, because there is no public market for the units, members may be forced to hold a substantially changed investment.

 

Risks Related to Tax Issues in a Limited Liability Company

 

EACH UNIT HOLDER SHOULD CONSULT THE INVESTOR’S OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL AND STATE TAX CONSEQUENCES OF AN INVESTMENT IN HERON LAKE BIOENERGY, LLC AND ITS IMPACT ON THE INVESTOR’S TAX REPORTING OBLIGATIONS AND LIABILITY.

 

If we are not taxed as a partnership, we will pay taxes on all of our net income and you will be taxed on any earnings we distribute, and this will reduce the amount of cash available for distributions to holders of our units.

 

We consider Heron Lake BioEnergy, LLC to be a partnership for federal income tax purposes. This means that we will not pay any federal income tax, and our members will pay tax on their share of our net income. If we are unable to maintain our partnership tax treatment or qualify for partnership taxation for whatever reason, then we may be taxed as a corporation. We cannot assure you that we will be able to maintain our partnership tax classification. For example, there might be changes in the law or our company that would cause us to be reclassified as a corporation. As a corporation, we would be taxed on our taxable income at rates of up to 35% for federal income tax purposes. Further, distributions would be treated as ordinary dividend income to our unit holders to the extent of our earnings and profits. These distributions would not be deductible by us, thus resulting in double taxation of our earnings and profits. This would also reduce the amount of cash we may have available for distributions.

 

Your tax liability from your allocated share of our taxable income may exceed any cash distributions you receive, which means that you may have to satisfy this tax liability with your personal funds.

 

As a partnership for federal income tax purposes, all of our profits and losses “pass-through” to our unit holders. You must pay tax on your allocated share of our taxable income every year. You may incur tax liabilities from allocations of taxable income for a particular year or in the aggregate that exceed any cash distributions you receive in that year or in the aggregate. This may occur because of various factors, including but not limited to, accounting methodology, the specific tax rates you face, and payment obligations and other debt covenants that restrict our ability to pay cash distributions. If this occurs, you may have to pay income tax on your allocated share of our taxable income with your own personal funds.

 

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You may not be able to fully deduct your share of our losses or your interest expense.

 

It is likely that your interest in us will be treated as a “passive activity” for federal income tax purposes. In the case of unit holders who are individuals or personal services corporations, this means that a unit holder’s share of any loss incurred by us will be deductible only against the holder’s income or gains from other passive activities, e.g., S corporations and partnerships that conduct a business in which the holder is not a material participant. Some closely held C corporations have more favorable passive loss limitations. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. Upon disposition of a taxpayer’s entire interest in a passive activity to an unrelated person in a taxable transaction, suspended losses with respect to that activity may then be deducted.

 

Interest paid on any borrowings incurred to purchase units may not be deductible in whole or in part because the interest must be aggregated with other items of income and loss that the unit holder has independently experienced from passive activities and subjected to limitations on passive activity losses.

 

Deductibility of capital losses that we incur and pass through to you or that you incur upon disposition of units may be limited. Capital losses are deductible only to the extent of capital gains plus, in the case of non-corporate taxpayers, the excess may be used to offset up to $3,000 of ordinary income. If a non-corporate taxpayer cannot fully utilize a capital loss because of this limitation, the unused loss may be carried forward and used in future years subject to the same limitations in the future years.

 

You may be subject to federal alternative minimum tax

 

Individual taxpayers are subject to an “alternative minimum tax” if that tax exceeds the individual’s regular income tax. For alternative minimum tax purposes, an individual’s adjusted gross income is increased by items of tax preference. We may generate such preference items. Accordingly, preference items from our operations together with other preference items you may have may cause or increase an alternative minimum tax to a unit holder. You are encouraged and expected to consult with your individual tax advisor to analyze and determine the effect on your individual tax situation of the alternative minimum taxable income you may be allocated, particularly in the early years of our operations.

 

Preparation of your tax returns may be complicated and expensive.

 

The tax treatment of limited liability companies and the rules regarding partnership allocations are complex. We will file a partnership income tax return and will furnish each unit holder with a Schedule K-1 that sets forth our determination of that unit holder’s allocable share of income, gains, losses and deductions. In addition to United States federal income taxes, unit holders will likely be subject to other taxes, such as state and local taxes, that are imposed by various jurisdictions. It is the responsibility of each unit holder to file all applicable federal, state and local tax returns and pay all applicable taxes. You may wish to engage a tax professional to assist you in preparing your tax returns and this could be costly to you.

 

Any audit of our tax returns resulting in adjustments could result in additional tax liability to you.

 

The IRS may audit our tax returns and may disagree with the positions that we take on our returns or any Schedule K-1. If any of the information on our partnership tax return or a Schedule K-1 is successfully challenged by the IRS, the character and amount of items of income, gains, losses, deductions or credits in a manner allocable to some or all our unit holders may change in a manner that adversely affects those unit holders. This could result in adjustments on unit holders’ tax returns and in additional tax liabilities, penalties and interest to you. An audit of our tax returns could lead to separate audits of your personal tax returns, especially if adjustments are required.

 

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Item 2. Defaults Upon Senior Securities

 

At January 31, 2013, we were in default of covenants of our Fifth Amended and Restated Master Loan Agreement with AgStar Financial Services, PCA (“AgStar”) requiring us to maintain at least $5.0 million minimum working capital; at least $39.5 million of tangible net worth; and a fixed charge ratio of 1.20 to 1.00 or greater.  We also failed to make monthly principal payments to AgStar on February 1, 2013, March 1, 2013, April 1, 2013 and May 1, 2013.  As a result of these defaults, we have entered into multiple forbearance agreements with AgStar, under which AgStar forbear its rights.

 

On May 17, 2013, we entered into a Sixth Amended and Restated Master Loan Agreement and related loan documents with AgStar to replace and supersede our Fifth Amended and Restated Master Loan Agreement dated as of September 1, 2011, our Fifth Amended and Restated Forbearance Agreement dated May 10, 2013, and related loan documents.  Under the Sixth Amended and Restated Master Loan Agreement, AgStar agreed to restructure our Term Loan and our Term Revolving Loan based upon our submission of a loan restructuring proposal and payment of approximately $1.4 million in cash for Term Loan principal payments in arrears and reduction of the Term Revolving Note.

 

Item 3. Mine Safety Disclosures

 

None.

 

Item 4. Other Information

 

None.

 

Item 5. Exhibits

 

The following exhibits are included in this report:

 

Exhibit
No.

 

Exhibit

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act.

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act.

 

 

 

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Certification pursuant to 18 U.S.C. § 1350.

 

 

 

101.1

 

The following materials from Heron Lake BioEnergy’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

HERON LAKE BIOENERGY, LLC

 

 

Date: June 11, 2013

/s/ Robert J. Ferguson

 

Robert J. Ferguson

 

President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

Date: June 11, 2013

/s/ Michael L. Mattison

 

Michael L. Mattison

 

Chief Financial Officer

 

(Principal Accounting and Financial Officer)

 

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