UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
Fiscal Year Ended September 30, 2009
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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FOR THE
TRANSITION PERIOD FROM ______ TO ______
COMMISSION
FILE NUMBER 272199 100
(Name of
small business issuer in its charter)
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Iowa
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20-4195009
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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2108
140th
Avenue, P.O. Box 21
Algona,
IA 50511
(Address
of principal executive offices)
(515)
395-8888
(Registrant’s
telephone number; including area code)
Securities
registered under Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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None
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None
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Securities
registered under Section 12(g) of the Act:
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Limited
Liability Company Membership Units
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No
x
The
number of shares outstanding of the registrant’s Common Stock as of December 1,
2009 was there were 49,159 membership units issued.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions
of the East Fork Biodiesel, LLC Definitive Proxy Statement to be filed in
January 2010 are incorporated by reference in Part III of this Form
10-K.
Transitional
Small Business Disclosure Format (Check one): Yes No
x
2
TABLE OF CONTENTS
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PART I
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ITEM
1.
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2
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ITEM
1A.
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12
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ITEM
2.
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21
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ITEM
3.
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21
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ITEM
4.
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22
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PART II
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ITEM
5.
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22
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ITEM
7.
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25
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ITEM
8.
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37
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ITEM
9.
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38
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ITEM
9A(T).
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38
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ITEM
9B.
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39
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PART III
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ITEM
10.
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39
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ITEM
11.
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40
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ITEM
12.
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40
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ITEM
13.
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40
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ITEM
14.
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40
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PART IV
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ITEM
15.
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40
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41
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44
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FORWARD-LOOKING
STATEMENTS
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements. This Annual Report on Form 10-K contains information
that may be deemed forward-looking that is based largely on our current
expectations and is subject to certain risks, trends and uncertainties that
could cause actual results to differ materially from those anticipated. Such
risks, trends and other uncertainties, which in some instances are beyond our
control, include: the impact and duration of the current recession,
the distressed economic environment of the biodiesel industry, continuing credit
crunch; our inability to secure replacement financing for our indebtedness under
our restated term loan agreement, our inability to obtain working capital and
capital improvement financing resulting in continued idling of our plant, our
inability to generate cash liquidity from operations sufficient to service our
significant debt levels and comply with our financial obligations under our
restated term loan agreement, our ability to repay our principal and interest
obligations and avoid foreclosure of the mortgage and security interest on our
real estate, plant and equipment under our restated term loan agreement, changes
in interest rates, prices of or demand for diesel fuel, refined soybean oil and
other commodity prices, energy costs, shipping costs, available production and
management personnel, changes or elimination of government subsidiaries or
incentives, loss of exports due to the European Commission’s imposition of
duties on imports of United States biodiesel, legislative and regulatory
developments, including additional duties or tariffs on United States biodiesel,
and other results of operations or financial conditions. Any statements that are
not statements of historical fact (including statements containing the words
“may,” “will,” “would,” “could,” “believes,” “expects,” “anticipates,”
“intends,” “plans,” “projects,” “considers” and similar expressions) generally
should be considered forward-looking statements. Readers are cautioned not to
place undue reliance on such forward-looking statements, which are made as of
the date of this Form 10-K. We do not publicly undertake to update or
revise our forward-looking statements, whether in response to new information,
unforeseen events, changed circumstances or otherwise.
PART I
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Item 1.
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Business.
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Unless
otherwise indicated in this report or the context otherwise requires, all
references in this report to “East Fork Biodiesel, LLC”, “East Fork Biodiesel”,
“East Fork”, “the company”, “we”, “us” and “our” refer to East Fork Biodiesel,
LLC. References to 2008, 2009 and 2010 and the like relate to the fiscal year
ended September 30th.
We are a
producer of biodiesel fuel manufactured from agricultural
inputs. Currently, our primary input is refined soybean oil. Our
facility is capable of producing 60 million gallons of biodiesel annually in a
continuous flow system when in full operation. In addition to
biodiesel, we also produce crude grade glycerin as a co-product of the biodiesel
manufacturing process.
We were
organized on January 5, 2006 as an Iowa limited liability company and we are
located in Algona, Iowa. We were formed to pool investors to build a
biodiesel and glycerin manufacturing plant.
As
explained below, we started production in December 2007 to verify the production
capabilities of our new plant and produced test-phase inventory, and then idled
the plant due to then-existent adverse market conditions and our subsequent
inability to obtain working capital to operate our plant. See Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”,
below. Our planned principal
operation has not commenced and we continue to be a development stage
company, devoting substantially all of our efforts to establishing our business
and obtaining financing to operate a new business. Our independent
registered public accounting firm has raised doubts about our ability to
continue as a going concern. These doubts, coupled with the
continuing credit crunch, make it difficult to obtain replacement and working
capital financing, especially given the distressed nature of the biodiesel
industry, uncertainty of commodity prices and Farm Credit’s foreclosure
proceedings. See “Financial Statements”, in Item 8, Note 7,
below. As a result, we are experiencing liquidity problems associated with the
cost of our raw material and lack of demand for our product at profitable
prices.
On
September 26, 2006 we entered into a Management and Operational Services
Agreement (Management Agreement) with Renewable Energy Group, LLC (Renewable
Energy Group) for the management, feedstock procurement and marketing
services for our plant.
Renewable
Energy Group is responsible to act as our marketer as well as our procurement
agent for feedstocks and other critical inputs. Since our plant is
not operating, we have not requested that Renewable Energy Group provide us with
our general manager and our operations manager, as provided under the Management
Agreement.
In
exchange for these services, we have agreed to pay Renewable Energy Group a flat
monthly fee (flat fee) and a per-gallon rate fee (rate fee). For the
first month in which our biodiesel is produced and sold, and for six months
thereafter (the initial period), we pay a flat fee of $112,500, plus a $0.0175
rate fee for each gallon of biodiesel produced. For the first month
after the initial period, and for six months thereafter, we will pay a flat fee
of $172,500, plus a $0.0175 rate fee for each gallon of biodiesel
produced. The flat fee and rate fee are adjusted beginning in the
month following the first anniversary of our sale of biodiesel and annually for
each month thereafter according to a complex formula based on movement in the
Consumer Price Index
for all-urban consumers, U.S. City Average, All Items, published by the
U.S. Department of Labor. In addition to the flat fee and rate fee,
the Management Agreement provides for the payment to Renewable Energy Group of a
yearly bonus equal to 6% of our net income. On December 1, 2007, we
and Renewable Energy Group amended the Management Agreement with the intent to
reflect a reduction of the monthly fee to the amount of the compensation costs
(including benefits) of our general manager and operations manager while our
plant is idle.
The total
expense we recognized under the Management Agreement was $50,121 and $117,567
during the years ended September 30, 2009 and 2008, respectively. Our
sales of biodiesel and glycerin to Renewable Energy Group for the years ended
September 30, 2009 and 2008 were none and $3,651,251 respectively. The related
accounts receivable due from REG as of September 30, 2009 and 2008 was none and
$25,789 respectively.
The
Management Agreement extends through December 31, 2010, but will continue
thereafter unless either party gives written notice to the other of a proposed
termination date at least twelve months in advance of the proposed termination
date.
The
strategic direction and overall management of our business is conducted by our
Chief Executive Officer.
On
September 15, 2008, our Board of Directors appointed Chris L. Daniel to serve as
our Chief Executive Officer. His responsibilities include, as part of
his service as our Chief Executive Officer, providing the strategic direction
and overall management of our business, including the management of our
relationship with Renewable Energy Group, under the terms of our September 8,
2008 Management Services Agreement (Management Services Agreement) with Mr.
Daniel’s employer, Renewable Fuels Management, LLC (Renewable Fuels
Management).
We paid
Renewable Fuels Management a flat fee of $20,000 per month to be paid
regardless of the gallons of biodiesel produced for the first 12 months of the
Management Services Agreement. Thereafter the monthly fee
continues at $20,000 per month until one of the parties request a
modification. Neither party has requested a modification of the
fee. Subject to meeting certain performance measurements, we will
offer, over the course of the Management Services Agreement, up to 2,500 of
its membership units to Renewable Fuels Management through unit purchase
options. The purchase price of units to be granted upon achievement of the
performance measurements will be $600 per unit. The Management Services
Agreement has an initial term of two (2) years, subject to earlier termination
by a party upon a change of control, bankruptcy or insolvency of or
uncured material breach by the other party and by us if Mr. Daniel ceases
to be available, fails perform or if we cease or suspend production of the
plant, each as described in the Management Services Agreement.
On
October 10, 2006, we entered into a Design-Build Agreement with REG Construction
Services, LLC (Design-Build Agreement), now known as REG Construction &
Technology Group, LLC (REG Construction), to design, engineer and build the
processing facility.
The
Design-Build Agreement provided for the construction of our biodiesel plant at a
price of $57,238,000. As of December 31, 2007 the stated price under
the Design-Build Agreement had been increased by $1,390,095 to account for
change orders. On March 4, 2009 the Company negotiated a final
settlement on the construction contract resulting in a $259,010 reduction in the
total contract price. The final $30,000 payment under the
construction contract was made in March 2009. We paid REG
Construction a total of $58,369,085 to construct our plant.
Based
upon mid-November 2009 commodity prices, we estimate the need for $20,000,000 in
working capital financing to operate the plant optimally at its full capacity
using 100% refined soybean oil. We believe a facility of less than
$12,000,000 would not allow us to operate at meaningful volumes.
We
obtained our certificate of substantial completion of our plant on December 6,
2007 from Renewable Energy Group. Our plant is designed to chemically
transform triglycerides (fatty acids) into biodiesel (methyl
esters). Our primary feedstock is refined soybean oil. The
prices of the various commodities we use to make biodiesel represent the
majority of our production costs. See Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”,
below.
The
start-up and testing phases of our plant commenced on December 6,
2007. The plant went through normal start-up and reached expected
production targets. In December 2007, we processed all of the soybean
oil that had been previously purchased. We had our biodiesel
independently tested to certify that it meets the American Society for Testing
and Materials (ASTM) standards.
On
December 15, 2006, we entered into two put option agreements whereby the sellers
can require us to purchase property adjacent to the plant. One agreement
provides for a purchase price of $120,750 plus 105% of the cost of any
improvements or additions made to the property prior to the exercise of the
option and the other provides for a purchase price of $236,250. The options
expire two years after the announced date of operation of the biodiesel
facility. If the options expire unexercised, they will be resurrected upon the
expansion of 25% of the initial capacity of the plant or upon the construction
or operation of any new separate facility. We paid $5,000 for each option and
believe that the purchase price approximated the fair market values of the
property at the dates of the agreements.
In May
2006, we entered into an option agreement which we subsequently exercised to
purchase our current property. Part of the agreement also provided us the option
to purchase additional adjacent land for $12,500 per acre in 10 acre increments.
The option covers approximately 44 acres and will expire in May
2011.
In
September 2006, we executed an agreement with a natural gas company to
provide the natural gas required by us for a period commencing on August 1, 2007
and continuing for a period of 15 years. The contract was amended in October
2006 to delay the start date until November 1, 2007. We will pay a
monthly delivery charge plus the applicable maximum rates and surcharges under
the applicable rate schedule on file with the Iowa Commerce Commission for the
gas that we use. The contract reserves pipeline capacity of 984 dekatherms/day,
at a cost of approximately $15,000 per month. We have hired a broker to market
the excess pipeline capacity. The broker successfully marketed a
large percentage of this volume through the early part of the year with lesser
percentages marketed over the warmer months as overall natural gas demand
declines.
Principal
Products and Markets
Our
business involves the production and marketing of biodiesel and crude glycerin
products produced at our plant. Biodiesel is a clean-burning
alternative fuel produced from domestic, renewable resources for use in
compression ignition (diesel) engines. Biodiesel is comprised of mono-alkyl
esters of long chain fatty acids derived from vegetable oils or animal fats. A
chemical process called transesterification removes the free fatty acids from
the base oil and creates the desired esters. Transesterification is
the reaction of vegetable oil or animal fat when combined with an alcohol, such
as methanol or ethanol, in the presence of a catalyst. The process
yields four products: mono-alkyl ester (biodiesel), glycerin, feed
quality fat and methanol, which can be used again in the
process. Biodiesel can then be used in neat (pure) form or blended
with petroleum diesel. Biodiesel’s physical and chemical properties,
as they relate to operations of diesel engines, are similar to petroleum-based
diesel fuel. As a result, biodiesel may be used in most standard
diesel engines without making any engine modifications.
Co-Products
Glycerin
is the primary co-product of the biodiesel production process and equals
approximately nine-tenths of one pound per gallon of
biodiesel produced. Glycerin possesses a unique combination of physical and
chemical properties that are used in a large variety of products. It
is highly stable under typical storage conditions, and compatible with a wide
variety of other chemicals and is non-toxic. Glycerin is an ingredient or
processing aid in cosmetics, toiletries, personal care, pharmaceutical and food
products. In addition, new uses for glycerin are frequently being
discovered and developed due to its versatility. We intend to market
our glycerin if our plant is re-started. However, increased
production of biodiesel may lead to an oversupply of glycerin and lower glycerin
prices. This may affect the market for this product and the profitability of our
business.
Biodiesel
Markets
Biodiesel
is primarily used as fuel for compression ignition (diesel) engines. It is
produced using renewable resources and provides environmental advantages over
petroleum-based diesel fuel, such as reduced vehicle emissions. Our ability to
market our biodiesel is heavily dependent on the price of petroleum-based diesel
fuel as compared to the price of biodiesel, as well as to the availability of
economic incentives to produce biodiesel.
Wholesale Market / Biodiesel
Marketers. The wholesale market includes selling biodiesel
directly to fuel blenders or through biodiesel marketers. Fuel
blenders purchase neat (B 100) biodiesel from biodiesel production plants, mix
it with regular diesel fuel according to specifications and deliver a final
product to retailers.
There are
very few wholesale biodiesel marketers in the United States. Two
examples are World Energy in Chelsea, Massachusetts and REG, Inc. in Ames,
Iowa. These companies use their existing marketing relationships to
market the biodiesel of individual plants to end users for a fee.
As noted
above, under the Management Agreement, Renewable Energy Group will market our
biodiesel to customers throughout the United States and internationally. The
sales and marketing functions include marketing all of our biodiesel, glycerin
and fatty acids. The sales and marketing services of Renewable Energy
Group include certain transportation services such as: arranging for
transportation, logistics and scheduling of biodiesel shipments; where
advantageous, arranging for leased tankers for rail shipments; analyzing and
auditing bulk transportation providers; overseeing reconciliation of shipments,
invoicing and payments on a weekly basis; and providing invoicing and accounts
receivable management for biodiesel shipments. Under the terms of the Management
Agreement, Renewable Energy Group takes title to the product when loaded for
delivery FOB the plant and sells it under Renewable Energy Group’s brand
name. Renewable Energy Group will pay us all proceeds received from
sales of our products. Renewable Energy Group will remit by
electronic transfer to us by the close of business each Wednesday all such
proceeds received during the previous seven days. In exchange for
these and other services, we pay Renewable Energy Group the flat fee and rate
fee (as adjusted, as explained above).
Retail. The
retail market consists of biodiesel distribution primarily through fueling
stations to transport trucks and jobbers who supply farmers, maritime customers
and home heating oil users. Retail level distributors include oil companies,
independent station owners, marinas and railroad operators. However,
the biodiesel retail market is still in its very early stages as compared to
other types of fuel. The present marketing and transportation network
must expand significantly in order for us to market our biodiesel effectively at
the retail level.
Government
& Public Sector
The
government and public sector have increased their use of biodiesel since the
implementation of the Energy Policy Act (EPACT) of 1992, amended in 1998, which
authorized federal, state and public agencies to use biodiesel to meet the
alternative fuel vehicle requirements of EPACT. Although it is
possible that individual plants could sell directly to various government
entities, it is unlikely that our plant could successfully market our biodiesel
through such channels. Government entities have very long sales
cycles based on the intricacies of their decision-making and budgetary
processes.
New
Products
For a
description of other products we may be able to produce in our plant, see Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”, below.
Competition
We
operate in a highly competitive environment. Biodiesel is a
commodity. It is sold substantially based on price, consistent fuel
quality and to a lesser extent delivery service. We compete with
large, multi-product companies and other biodiesel plants with varying
capacities. Some of these companies can produce biodiesel in a more efficient
manner than we can. We must compete for customers with much larger
competitors, some of which have more products than we can offer. Many
of these competitors have extensive experience and financial and other resources
substantially greater than ours. Some of our competitors have
soy-crushing facilities and are not reliant upon third parties for their
feedstock supply. The National Biodiesel Board estimates that as of
November 2009 that just its approximately 170 member biodiesel companies have
the capability of producing 2.69 billion gallons of biodiesel in the United
States. Also, approximately 29 of its members are expanding or are in
various stages of construction to provide an additional 427.8 million
gallons of capacity.
Renewable
Energy Group, Inc. owns or manages biodiesel plants in Ralston, Farley, Newton,
Wall Lake and Washington, Iowa, Danville, Illinois, Seabrook, Texas and
Glenville, Minnesota. In May 2009, Renewable Energy Group announced it has
entered into agreements to consolidate with three commercial scale biodiesel
plants: Western Iowa Energy, which operates a facility in Wall Lake,
Iowa with a capacity to produce annually 30 million gallons; Central Iowa
Energy, LLC, which operates a facility in Newton, Iowa with a capacity to
produce annually 30 million gallons; and Blackhawk Biofuels, LLC, which operates
a facility in Danville, Illinois with a capacity to produce annually 45 million
gallons. The facilities represent an additional 105 million gallons
per year of wholly-owned production capacity which would allow the combined
entity to better position itself to meet anticipated demand from the petroleum
industry’s distillate fuel market. Ownership of the operations of all
four companies will be consolidated in a new holding company to be named
Renewable Energy Group, Inc.
Renewable
Energy Group and Renewable Energy Group, Inc. are in direct competition with us,
including competition for feedstock procurement, biodiesel production and
marketing. We also have to compete with Renewable Energy Group for employees.
Because Renewable Energy Group, Inc. operates its own biodiesel production
facilities and will compete with us in many aspects of our business, Renewable
Energy Group may have a conflict of interest as our key service provider. Even
with our agreements with Renewable Energy Group, there is no assurance that its
performance of these services is not compromised by its own biodiesel production
operations.
We have
entered into a Management Agreement with Renewable Energy Group, and its
affiliate, REG Construction, built and designed our plant. We are
dependent on Renewable Energy Group and it is a direct competitor of
ours.
Sources
and Availability of Raw Materials
The cost
of feedstock is the largest single component of the cost of biodiesel
production, accounting for 75% to 90% of the overall cost of producing
biodiesel. As a result, increased prices for feedstock greatly impact the
biodiesel industry. Soybean oil is the most abundant oil feedstock
available in the United States. The 20-year average
price for soybean oil is approximately $0.24 per pound. Prices of
feed stock have been quite volatile – most notable are soybean oil and methanol
(which is used to a much lesser degree than soybean oil). Between January 2008
and November 2009, soybean oil has traded in a range of less than $0.30 to over
$0.65 per pound delivered to Algona. As of mid-November 2009, refined
soybean oil delivered to Algona is priced near $0.42 per pound, based on market
data reported by The Jacobsen®.
Many of
our competitors have plants that can make biodiesel from animal fats as well as
soybean oil. The cost of soybean oil has precluded us from profitable
operations throughout much of the time since we completed the successful
test-phase of our plant in December 2007. Our plant technology is
capable of converting multiple refined oils to biodiesel. We can
convert alternative oils with a lower input cost, such as corn oil and animal
fats, provided these oils, or others, meet the input specifications for our
biodiesel process. These materials are typically sold as a crude product. In
order to utilize these feedstocks at our facility, we will be required to make
additional capital investment to adapt and enable our plant to refine and
pretreat these alternative feedstocks to meet feedstock input specifications for
our biodiesel production process, known as pretreatment
equipment.
The
market price for biodiesel has been equally volatile: in March 2007,
the Upper Midwest market price for biodiesel was approximately $2.89 per gallon
and spiked over $5.20 per gallon in late-July 2008, approximately an 80%
increase; pricing as of mid-November 2009 is near $3.35 per gallon, according
to The Jacobsen®.
Since
March 2007, methanol pricing has ranged from $0.80 per gallon to $2.70 per
gallon delivered to Algona, to $1.15 per gallon delivered price in mid-November
2009.
A
significant negative impact on United States biodiesel producers has been the
imposition of substantial duties by the European Union on the import of
biodiesel originated in the United States to European Union
members. On July 7, 2009, the European Union announced that these
duties will be extended for the next five years.
In June
2009, about one-third of the nation's biodiesel plants were idle, according to a
published report citing information provided by officials with the National
Biodiesel Board; plants that are operating are those that rely heavily on
alternative feedstocks such as waste greases and fats. We do not
believe this situation has changed significantly since June.
Although
we would have been able to operate at positive margins throughout several months
of 2008 and 2009 if operating capital had been available to us, we would have
been unable to operate
the plant profitably given the specific market conditions present in
mid-November 2009.
Under the
Management Agreement, Renewable Energy Group acquires feedstock and basic
chemicals necessary for the operation of the plant, and these services
include:
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·
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Procure
all feedstocks necessary for
production;
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·
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Provide
analysis and audit of feedstock
suppliers;
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·
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Purchase
feedstocks at competitive prices meeting specifications and in adequate
quantities to fill our production
schedule;
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·
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Negotiate
for discounts where obtainable on
feedstocks;
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·
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Arrange
for transportation, logistics and scheduling of feedstock
deliveries;
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·
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Provide
analysis and audit of bulk transportation
providers;
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·
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Procure
all basic chemicals necessary for our
production;
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·
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Perform
due diligence requirements for investigation of our chemical
suppliers;
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·
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Provide
analysis and audit of our chemical
suppliers;
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·
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Purchase
our chemicals at competitive prices meeting specifications for our
use;
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·
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Negotiate
for discounts where obtainable on
chemicals;
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·
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Procure
adequate chemicals to meet our production
schedules;
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·
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Provide
analysis and audit of bulk transportation suppliers;
and
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·
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Arrange
for transportation, logistics and scheduling services for delivery of our
chemicals.
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In
exchange for these and other services, we pay Renewable Energy Group the flat
fee and rate fee (as adjusted, as explained above). As noted,
Renewable Energy Group is a competitor of ours and provides these same services
to our competitors. If Renewable Energy Group cannot purchase
adequate feedstock and chemicals at reasonable prices when we are able to
operate our plant, we may not be able to purchase adequate amounts of
alternative feedstock at reasonable prices and we may not be able to
successfully operate our plant or have to suspend operations, either temporarily
or permanently.
Dependence
on One or a Few Customers
As
indicated, under the Management Agreement, Renewable Energy Group will market
our biodiesel to customers throughout the United States and
internationally. If we commence normal operations, our strategic plan
contemplates that most of our customers will come from the United States, as a
result of Renewable Energy Group’s marketing efforts on our
behalf. The loss of Renewable Energy Group as our marketer could have
a materially negative impact on our revenues. We presently have no
alternative marketers to Renewable Energy Group, but we believe alternative
marketing firms would be available to us if such a situation
arises.
Patents,
Trademarks, Etc.
We have
no patents, trademarks (other than our common law rights to our East Fork mark
and design), non-governmental licenses, franchises or concessions, royalty
agreements or labor contracts.
Governmental
Regulation and Federal Biodiesel Supports
The
biodiesel industry is dependent on economic incentives to produce biodiesel,
including federal renewable fuel supports. The federal laws
benefiting the biodiesel industry may lead to increased demand for biodiesel in
the United States over the next 10 years.
Federal
biodiesel supports are contained in the Energy Policy Act of 2005
(2005 Act). The 2005 Act, among other things, creates a
7.5 billion gallon renewable fuels standard. The renewable fuels
standard requires refiners to use several billion gallons of renewable
fuels each year following enactment increasing to 7.5 billion gallons by
2012. U.S. Environmental Protection Agency (EPA) rules require that a
specified percentage of all the gasoline sold or dispensed to United States
motorists starting in the year 2007 be renewable fuel. It is unclear
how much the 2005 Act will benefit the biodiesel industry, because experts
believe that ethanol producers will receive most of the
benefits.
The Energy Independence and Security Act
of 2007 (2007 Energy Act) expands the existing renewable fuels standard
to require the use of 9 billion gallons of renewable fuel in 2008, increasing to
36 billion gallons of renewable fuel by 2022. Only a portion of the
renewable fuel used to satisfy the expanded renewable fuels standard may come
from conventional corn-based ethanol. The 2007 Energy Act requires
that 600 million gallons of renewable fuel used in 2009 must come from advanced
biofuels, such as ethanol derived from cellulose, sugar or crop residue and
biomass-based diesel, increasing to 21 billion gallons in 2022. The 2007 Energy
Act also includes a requirement that 500 million gallons of biodiesel and
biomass-based diesel fuel be blended into the national diesel pool in 2009,
gradually increasing to 1 billion gallons by 2012.
The 2007
Energy Act sets a minimum usage requirement for biodiesel and other types of
biomass-based diesel. It is unclear how much increase in demand for
biodiesel will occur because of the likelihood that most of the additional
demand will be satisfied by corn-based ethanol and other types of ethanol,
including cellulose-based ethanol.
The 2005
Act also created a new credit for small agri-biodiesel producers, which is
similar to the small ethanol producers’ credit. Producers with an annual
capacity not exceeding 60 million gallons are eligible to receive a credit of
$0.10 per gallon for up to 15 million gallons of agri-biodiesel
produced. The agri-biodiesel must (1) be sold by such producer to
another person: (A) for use by such other person in the production of a
qualified biodiesel mixture in such person’s trade or business (other than
casual off-farm production); (B) for use by such other person as a fuel in a
trade or business; or (C) who sells such agri-biodiesel at retail to another
person and places such agri-biodiesel in the fuel tank of such other person; or
(2) be used or sold by the producer for any of the foregoing purposes. Because
we expect to be classified as a partnership for tax purposes, we would expect to
pass the tax credits through to our members. Our members would then
be able to report and utilize the tax credits on their own income tax
returns. When operational, we anticipate that our plant will produce
60 million gallons of biodiesel annually. Thus, we expect to be
eligible for the credit. However, if our production exceeds
production limits of 60 million gallons a year, we will be ineligible for the
credit.
The Alternative Fuel Refueling
Infrastructure Tax Credit was also established as part of the 2005
Act. This provision establishes a tax credit for the installation of
certain qualifying fueling infrastructure that dispense alternative fuel,
including biodiesel blends B20 and higher.
On
October 3, 2008, the Emergency
Economic Stabilization Act (2008 Extension) was signed into law and
provided, effective upon enactment, for extension of certain income tax credits,
including: the volumetric biodiesel credit, known as the Blenders
Credit, and the small producer tax credit that make up the biodiesel tax
incentives. The extension runs through December 31,
2009. Although Congress may further extend or make permanent these
credits under the 2008 Extension, there is no assurance that the tax credit will
be extended beyond 2009. In 2008, our federal incentives in the form
of Blenders Credits were $994,804. The 2008 Extension also provided,
effective January 1, 2009, that all biodiesel, including that produced from
yellow grease, qualifies for the $1.00 per gallon biodiesel
incentive. The 2008 Extension further provides, effective upon
enactment, that the $1.00 renewable diesel tax incentive excludes co-processed
renewable diesel. Representatives Earl Pomeroy (D-ND) and
John Shimkus (R-IL) recently introduced H.R. 4070 legislation to reform and
extend the biodiesel tax incentive. H.R. 4070, if passed, will help provide
stability and reliability in the marketplace by extending the biodiesel tax
incentive for five years. In addition, the legislation would change
the biodiesel tax incentive from a blenders excise tax credit to a production
excise tax credit. Although Congress may pass H.R.
4070, there is no assurance that the tax credit will be extended
beyond 2009.
In May
2009, the Environmental Protection Agency (EPA) released its analysis of the
renewable fuel standard enacted by the 2007 Energy Act as part of a proposed
rule subject to public comment and further refinement before the rule becomes
final. The EPA’s analysis indicated that soy-based biodiesel fails to
meet targets for reducing greenhouse gas emissions, and found that soy-based
biodiesel reduces greenhouse gas emissions by just 22% compared to conventional
diesel. The EPA’s findings have been questioned by the biodiesel and
soybean industries and others. The biodiesel industry has been making
its case in Washington for further review of the EPA’s findings. If the industry
is unsuccessful, demand for soy-based biodiesel could be further adversely
affected by the EPA’s findings in the proposed rule.
In 2001,
the U.S. Department of Agriculture established the Commodity Credit Corporation
(CCC) Bioenergy
Program. Under the BioEnergy Program, the CCC makes payments to eligible
bioenergy producers to encourage increased purchases of agricultural commodities
for the purpose of expanding production of bioenergy, including biodiesel, and
to encourage the construction of new production capacity. The 2002 Farm Bill
continued the program through fiscal year 2006, providing $150 million
annually. The 2008 Farm Bill reauthorizes the program, providing $300
million in mandatory funding for the program over the 5-year duration of the
Farm Bill. The program provides support to, among others, biodiesel producers to
help offset feedstock costs.
In
addition, the 2008 Farm Bill authorizes an additional $25 million in funding
each year from fiscal year 2009 through fiscal year 2012, subject to Congress
providing this additional funding during the course of the annual appropriations
process.
Producers
with a production capacity smaller than 150 million gallons will be eligible for
95% of the money provided by the program; those with a capacity over 150 million
gallons will qualify for 5% of program funds.
The 2008
Farm Bill allows the Secretary of Agriculture to structure the program in a
manner that will allow all gallons of production to qualify for the
program.
Also, the
2008 Farm Bill reauthorizes the Biodiesel Education Program at $5 million over 5
years, or $1 million per year. The program provides funding to support increased
fuel quality measures, increase acceptance of biodiesel by engine and equipment
manufacturers, petroleum partners, users and the general public.
Environmental
Matters
Our
biodiesel operations are subject to numerous federal, state and local laws and
regulations covering air, water and other matters. REG Construction
has obtained all of the permits required to construct the plant. We
have all of the necessary permits to begin plant operations
except: (a) we have suspended our registration and have a
waiver on reporting under our air quality permits; we will be required to notify
the Iowa Department of National Resource (IDNR) and resume compliance monitoring
and reporting if we resume operations; (b) we have suspended registration with
the EPA as an ultra low sulfur diesel fuel producer; we will be required to
resume registration and compliance if we resume operations; (c) we will be
required to register with applicable environmental regulatory agencies and
rejoin the National Biodiesel Board to have access to health effects testing
data required for registration; and (d) we will need to be reclassified as a
Public Water Supply if we resume operations and serve more than 25 people or
have greater than 15 secure connections for more than 60 days per
year. If we are able to obtain funding to implement pretreatment, we
will need to obtain a new or modify our existing air quality permits to
reflect the
pretreatment process. As of September 30, 2009, we have not incurred
any material expense in complying with any environmental laws, including the
costs of obtaining environmental permits. If we are able to start our plant and
utilize pretreatment, we expect the cost of restoring, or obtaining and/or
performing any of these environmental actions will be approximately $13,600 for
initial startup, and an estimated $28,100 for ongoing compliance, permit
renewals, testing and reporting. Nevertheless, changes in existing
environmental laws and regulations or their interpretations could have a
significant impact on the results of our operations as well as our industry in
general. We are unable to predict the ultimate cost and effects of
future changes in environmental laws and regulations.
Employees
As of
December 1, 2009, we had two (2) part-time employees plus our Chief Executive
Officer provided by Renewable Fuels Management. None of our employees
is covered by a collective bargaining agreement.
Under the
terms of the Management Agreement with Renewable Energy Group, we were furnished
with a General Manager and Operations Manager to direct the operations of our
plant. The General Manager and Operations Manager are employees of
Renewable Energy Group. Renewable Energy Group provides for the
compensation of our General Manager and Operations Manager, and such
compensation is part of the monthly fees we pay to Renewable Energy Group under
the Management Agreement. Since our plant remains idle, we have not
had a General Manager since Dave Rosenmeyer resigned his employment in April
2008 with Renewable Energy Group and his position as our General Manager to
accept a position with a former employer. We have not had
an Operations Manager since Lance White resigned his employment in March 2009
with Renewable Energy Group and his position as our Operations Manager under the
Management Agreement. Since our plant remains idle, we have not
requested Renewable Energy Group to provide a new General Manager or Operations
Manager.
However,
since September 2008, Chris L. Daniel has served as our Chief Executive Officer
and has generally performed the responsibilities of our General
Manager.
Public
Information
At www.eastforkbiodiesel.com, you may access a wide variety of
information, including our Securities and Exchange Commission (SEC) filings and
governance documents. We make available via our website all filings
made by us under the Securities Exchange Act of 1934, including Forms 10-K, 10-Q
and 8-K and related amendments and our proxy statements, as soon as reasonably
practicable after they are filed with, or furnished to, the SEC. All
such filings are available free of charge. The content of any website
referred to in this Form 10-K is not incorporated by reference into this Form
10-K unless expressly noted.
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Item 1A.
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Risk
Factors.
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Risk
exists that our past results may not be indicative of future results. A
discussion of certain of the most significant of these risks
follows. See also, “Forward-Looking Statements”, included
herein. In addition, a number of other factors (those identified
elsewhere in this document and others, both known and unknown) may cause actual
results to differ materially from expectations.
We did not make our $1,825,000
principal payment due in May 2009. We are in default under our Restated
Term Loan Agreement with Farm
Credit, and in June 2009 it began foreclosure of its mortgage on and security
interest in the Farm Credit Collateral. Such action may result in the loss of
these assets, a permanent shut-down of our plant and could cause our members to
lose most or all of their investment in East Fork. We have a $24,500,000
Restated Term Loan Agreement with Farm Credit Services of America, FLCA (Farm
Credit), and related security agreement (collectively referred to as the
Restated Term Loan Agreement) covering our real estate, plant, fixtures and
equipment (collectively referred to as the Farm Credit
Collateral). The Restated Term Loan Agreement can be accessed via the
SEC's EDGAR system found at www.eastforkbiodiesel.com
by clicking on “Link to SEC Reports.”
In May
2009 Farm Credit’s agent, CoBank, ACB (CoBank), declared and notified us of a
payment default, terminated any commitment to us and accelerated the amounts
owed under our $24,500,000 Restated Term Loan Agreement. In June
2009, Farm Credit commenced the foreclosure proceedings. It may seek appointment
of a receiver to take possession of the Farm Credit Collateral. Our
foreclosure proceedings remain in an early stage. We cannot predict
the outcome of these proceedings. The foreclosure proceedings would
ultimately result in the conveyance of our plant, equipment, fixtures and real
property to Farm Credit, if a foreclosure proceeding were concluded before the
indebtedness under the Restated Term Loan Agreement could be otherwise repaid or
restructured in or outside of bankruptcy proceedings. Conclusion of the
foreclosure process would have a material adverse impact on our financial
condition and results of operations, result in the loss of most of our operating
assets and a permanent shut-down of our plant and cause our members to lose most
or all of their investment in East Fork. Since the foreclosure proceedings are
in an early stage, we are unable to predict their duration.
We have yet to attain profitable
operations and because we need additional financing to fund our operations, our
independent registered public accounting firm has raised doubts about our
ability to continue as a going concern. Through September 30, 2009,
we were in the development stage, have undertaken significant borrowings to
finance the construction of our biodiesel plant and have experienced a
significant increase in the cost of soybean oil which is currently the primary
ingredient in our planned production of biodiesel. As a result of the high cost
of soybean oil we suspended plant operations in December 2007 after initial
testing and production start-up. We have not been able to obtain working capital
funds to start-up the plant and operate profitably. As noted, in May
2009, Farm Credit’s agent declared us in default, and in June 2009 Farm Credit
initiated foreclosure proceedings against the Farm Credit
Collateral.
Thus, we
face significant liquidity obstacles that raise substantial doubt about whether
we will continue as a going concern. To address our liquidity
challenge, we are exploring various alternatives to infuse capital into our
business including alliances, partnerships and mergers with other entities, as
well as pursuing avenues to obtain additional financing or raise additional
capital. To date, these efforts have been
unsuccessful. Additionally we are examining alternatives to allow
utilization of a wider range of oil sources in our process which allow our plant
to improve its process to operate profitably in a wider range of market
conditions. We cannot predict the outcome of these
efforts.
Our Board
of Directors has determined that it is necessary to raise additional
capital. The doubts relating to our ability to continue as a going
concern expressed by our independent registered public accounting firm in the
accompanying financial statements may make raising additional capital difficult,
if not unlikely, due to the current recession, our shut-down status, sizeable
debt and credit crunch that continues to grip many U.S. companies in distressed
industries. If we are unable to raise the necessary working capital
to operate our plant profitably, our members could lose most or all of their
investment. It is important to note that even if the appropriate
financing is received, there is no guarantee that we will ever operate
profitably or derive any significant revenues from operations.
We have a history of losses, limited
operating history and may not ever operate profitably. We have
incurred an accumulated net loss of $42,621,921, from our inception in January
2006 through September 30, 2009. Since our inception in January 2006 through
September 30, 2009, we had no revenues or earnings from operations, other than
$4,646,055 that was secured from the sale of 1,100,000 gallons of product
produced during our testing phase. We have no operating history upon which an
evaluation of our operations and our prospects can be based. Our prospects must
be evaluated with a view to the risks encountered by a company in an early stage
of development. This is particularly true for us in light of our inability to
obtain working capital financing which, coupled with market conditions, and our
inability to utilize alternative feedstocks as of mid-November 2009, precludes
profitable operation of our plant. There is no assurance
that we will be successful in our efforts to operate our plant or to do so
profitably, given current market conditions and our inability to obtain working
capital.
We have substantial indebtedness
which could adversely affect our ability to raise additional capital to fund our
operations to avoid foreclosure. At
September 30, 2009, the net amount of our debt due Farm Credit was
$24,500,000. Our level of indebtedness could make it more difficult
for us to obtain operating capital, pretreatment equipment
financing and capital to restructure our Farm Credit indebtedness.
Our
substantial amount of indebtedness:
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requires
us to dedicate a substantial portion of our cash flow from operations (if
we had such revenues) to payments on our indebtedness, thereby reducing
the availability of our cash flow to fund working capital, capital
expenditures and other general corporate
purposes;
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increases
our vulnerability to the current recession and biodiesel industry
conditions;
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limits
our flexibility to plan and react to changes in our business and the
biodiesel industry, which places us at a competitive disadvantage compared
to our competitors that have less debt;
and
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limits,
along with the financial and other restrictive covenants under the
Restated Term Loan Agreement, among other things, our ability to raise or
borrow additional funds.
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Given
that we are not operating, and as a result, do not generate sufficient revenues
to fund our sizeable indebtedness, we must seek third party financing. Such
financing is not currently available to us. If we are unable to
obtain such financing, we may not be able to avoid foreclosure or bankruptcy
proceedings and our members may lose most or all of their
investment.
Our efforts to effect a Business
Combination, arrange new financing and/or restructure our substantial Farm
Credit indebtedness may not be successful. To date, we have been
unsuccessful in facilitating one or more of the following possible strategic
alternatives on a timely or sufficient basis: (a) the possible merger or sale of
all or a portion of our capital stock or assets or other business combination;
(b) obtaining operating capital and pretreatment equipment financing to make
biodiesel from animal fats as well as soybean oil; (c) arranging new financing;
and/or (d) restructuring of our Farm Credit indebtedness. Our failure to achieve
one or more of these strategic alternatives will likely require us to seek
bankruptcy court relief.
The current U.S. and global recession
and credit crunch have had and may continue to have a material adverse impact on
our business. The U.S. and global recession and credit crunch,
coupled with the distressed biodiesel business, have negatively impacted our
ability to obtain working capital financing to re-start our plant amid a severe
tightening of credit and liquidity. As a result, we are experiencing serious
cash flow problems, threatening our survival and the investment of our members.
In conjunction with the recession, oil prices have been dropping as demand for
fuel has decreased. Although demand for biodiesel typically declines
in colder winter months due to its cold flow properties, we believe that these
factors have contributed to an even greater decrease in demand for biodiesel,
which may persist throughout all or parts of 2010. We are uncertain
how long and to what extent these economic troubles may negatively affect
biodiesel demand in the future. If demand for biodiesel declines our
ability to start operations and operate profitably will be adversely
impacted. We do not expect that the difficult economic conditions,
and their effect on us, are likely to improve significantly in the near future,
and any continuation or worsening of the credit crunch could intensify for us
the adverse effects of these difficult market conditions.
If we are forced to continue to delay
commencement of operations of our plant for any reason, we will likely have no ability to
produce revenue. We do not have any source of revenues other than
production of biodiesel and glycerin at our biodiesel plant. As of September 30, 2009, we
had current assets of approximately $1,667,593. We project that these
assets will allow us to fund continued plant shutdown until the third quarter of
2010.
Several biofuels companies throughout
the U.S. have recently filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code, and we may also be forced to
consider filing for bankruptcy protection if economic conditions and our
liquidity problems do not improve. A notable number of biodiesel
producers have recently filed bankruptcy petitions, including Freedom Fuels, LLC
and Nova Biosource Fuels. Additionally, GreenHunter Energy Inc.
(GreenHunter), the nation's largest biodiesel refinery, halted production of
biodiesel in March of this year due to adverse market
conditions. GreenHunter is currently selling non-biodiesel-related
assets in order to attempt to avoid foreclosure of its plant. Other
biofuel companies have made bankruptcy filings, including one of the country’s
largest ethanol producers, VeraSun Energy Corporation, which is now liquidating.
Unfavorable worldwide economic conditions, the decreasing availability of credit
and volatile biofuel prices and input costs have likely contributed to the
necessity of these bankruptcy filings and idling of plants. We, too, are
experiencing liquidity problems due to our inability to secure working capital
and low cash reserves. If our current liquidity problems persist, we may also
have to consider bankruptcy as an option to cope with our financial
difficulties. This could reduce or eliminate the value of our members’
investments in our company.
There is currently excess production
capacity and low utilization in the biodiesel industry and if demand does not
significantly increase, the price at which we could sell biodiesel may be
depressed and our revenues and ability to operate may be harmed. Many
biodiesel plants do not operate at full capacity. The National
Biodiesel Board estimates the dedicated biodiesel production capacity of
biodiesel plants as of June 2009 was approximately 2.69 billion gallons per
year. Further, plants under construction and expansion in the U.S. as
of June 2009, if completed, are expected to result in another 428 million
gallons of annual biodiesel production capacity within the next 12-18 months,
for total annual production capacity in the U.S. of 3.2 billion
gallons. The estimated annual production capacity of existing plants
and plants under construction as of June 2009 far exceeds the current annual
consumption of biodiesel in the U.S.
When
Congress wrote the 2007 Energy Act, diesel consumption had been trending upwards
since 1984 and it appeared to many that the world would be able to use
considerably more diesel and biodiesel in the future. Diesel and
biodiesel consumption hit a peak of 63.2 billion gallons in 2007. But
diesel and biodiesel demand fell in 2008, after soaring diesel prices earlier in
the year were followed by the economic crisis. Combined consumption
for 2008 has been estimated at slightly more than 59.4 billion gallons; current
forecasts suggest that 2009 consumption could end at about 56.2 billion
gallons.
The
manufacturer’s price of B100 biodiesel as of mid-November 2009 was near $3.35
per gallon, according to The
Jacobsen®.
Biodiesel producers also struggle to compete on price in relation to
petroleum diesel. After recognizing the benefit of the $1.00 per
gallon blenders tax credit, the implied cost for a gallon of biodiesel is
approximately $2.35 per gallon. For the same period, the U.S. average
retail diesel price was near $2.78 per gallon and the estimated average
wholesale price was approximately $2.06 per gallon, according to the Energy
Information Administration.
The
spread in price between petroleum diesel and biodiesel creates an economic
barrier to increasing biodiesel consumption. In order to compete
directly with petroleum diesel in the current market, biodiesel producers may
actually be forced to sell at a loss. A return of $3.50 diesel might
change things, by making biodiesel a relative bargain in comparison to petroleum
diesel and spur wider use. So would an unexpected increase in total
fuel demand. Otherwise, it is not at all clear how the world’s
surplus of biodiesel production capacity can be absorbed.
Loss of favorable tax benefits and
other governmental incentives for biodiesel production could hinder our
potential ability to operate at a profit and achieve necessary operating
margins. The
biodiesel industry has been substantially aided by federal tax incentives.
Because biodiesel has historically been more expensive to produce than diesel
fuel, the biodiesel industry has depended on governmental incentives that have
effectively brought the price of biodiesel more in line with the price of diesel
fuel to the end user. These incentives have supported a market for
biodiesel that might not exist without the incentives. The most
significant of these incentives for biodiesel is the federal blender’s tax
credit. The blenders’ tax credit provides a $1.00 tax credit per
gallon of pure biodiesel, or B100, to the first blender of biodiesel with
petroleum based diesel fuel. The blenders’ tax credit is scheduled to expire
on
December 31, 2009. This tax incentive may not continue beyond its
scheduled expiration date or, if it continues, it may not be at the same
level. In addition, there are other federal and state incentives that
have been enacted to encourage the use of biodiesel, which, if discontinued,
would also harm our ability to sell biodiesel profitably. The
elimination or reduction of tax incentives to the biodiesel industry could
result in our inability to produce and sell biodiesel profitably.
Duties imposed by the European Union
on imports of United States biodiesel for the next five years could cause a
significant decrease in the demand for biodiesel produced in the United
States. According to news reports, about half of the United States
production of biodiesel in 2008 was shipped to Europe. On March 12, 2009 the
European Commission applied temporary duties on imports of biodiesel from the
United States for a period of four months while it investigated the evidence of
unfair subsidies and dumping of United States biodiesel imports into the
European Union. On July 7, 2009 the European Union said it was extending the
duties on United States biodiesel exported to European Union countries for five
years.
These
duties appear to be having the effect of, and may, over the next five years,
significantly increase the selling cost of the biodiesel in European markets,
making it difficult or impossible for companies in the United States to compete
with European biodiesel producers and could significantly harm our revenues and
financial performance, if we are able to obtain sufficient financing to re-start
our plant.
Our members could be subject to
additional Iowa income tax due to the recapture of Iowa investment tax
credits. On June 10, 2006, we entered into a Master Contract
Agreement (Master Contract) with the Iowa Department of Economic Development
(IDED) which provided us with two funding sources and benefits, the VAAPFAP
Funding Agreement and the EZ Funding Agreement. Under the VAAPFAP
Funding Agreement, we were awarded a $100,000 forgivable loan to be forgiven
over 36 months and a $300,000 non-interest bearing
loan. As of September 30, 2009, $300,000 was outstanding
on the loans. The agreement provides for a monthly principal payment
of $5,000 per month. The occurrence of a default under the Restated
Term Loan Agreement also constitutes an event of default under the VAAPFAP
Funding Agreement which would allow IDED, at its option, to provide a
notice of default, which among other things, would result in the full amount
being immediately due and payable (including the $100,000 forgivable loan) and
impose a 6% annual default interest rate.
The
primary benefit under the EZ Funding Agreement is investment tax
credits. The investment tax credits total $5.2 million and are
claimed over a five-year period beginning July 1, 2007 in the amount of
$1,041,000 each December 31st. To
date, only the first two years of credits have been claimed. The
annual credits were included on members’ Schedule K-1 (Partner’s Share of
Income, Deductions, Credits, etc.) for calendar years 2007 and
2008. In addition, under the EZ Funding Agreement, we were entitled
to receive certain enterprise zone benefits, including value-added property tax
exemption and a refund in the amount of $851,214 of Iowa sales and use taxes
paid to contractors, subcontractors and suppliers.
Under the
VAAPFAP Funding Agreement and the EZ Funding Agreement, we were obligated to
create 36 full-time equivalent jobs, with 30 of the created jobs having starting
wages, including benefits, that meet or exceed $16.09 per hour with an average
rate per hour including benefits of $19.47. Under the VAAPFAP Funding
Agreement, such job creation was required to be complete by July 31, 2009; under
the EZ Funding Agreement, such job creation is required to be complete by July
31, 2010. Accordingly, as of September 30, 2009, we were not in
compliance with these job creation requirements with respect to the VAAPFAP
Funding Agreement and therefore the loans made pursuant to the VAAPFAP Funding
Agreement are in default and could, at the option of the IDED, become
immediately due and payable.
Further,
if we fail to meet the job creation requirements by July 31, 2010, then, under
the EZ Funding Agreement, the Company may be obligated to repay any benefits it
has received and the State of Iowa may recapture the tax credits that have been
passed through to our members. Such recapture may result in additional Iowa
income tax for the calendar years 2007 and 2008 to our members who received such
credits on the 2007 and 2008 Schedule K-1s distributed to them.
Since our inception in January 2006,
we have made no distributions to our members. Since our
inception, we have not declared or paid any distributions on our units to our
members. Revenues generated from our operations, if any, may be distributed to
our members by our directors, in their discretion, in proportion to units held
subject to, and to the extent permitted by, any loan covenants or restrictions
on such distributions agreed to by us in any loan agreements with our lenders in
effect from time to time, and our being profitable at such time. Our directors
will endeavor to provide for cash distributions at such times and in such
amounts as will permit our members to make timely payment of income taxes,
subject to, and to the extent permitted by, any loan covenants or restrictions
on such distributions agreed to by us in any loan agreements with our lenders
from time to time in effect, and our being profitable at such
time.
Our business is not diversified, and
is primarily dependent upon one product. As a consequence, we may not be able to
adapt to changing market conditions or endure the current decline in the
biodiesel industry. Our
business focuses almost entirely on the production and sale of biodiesel, with
glycerin sales representing only a small portion of revenues. Our
success depends largely upon our ability to profitably operate our biodiesel
plant. We do not have any other lines of business or other sources of
revenue if we are unable to operate our biodiesel plant and manufacture
biodiesel and glycerin. Our reliance on biodiesel means that we may
not be able to adapt to changing market conditions or to withstand the current
significant decline in the biodiesel industry.
We are not capable of making
biodiesel from unrefined animal fats as well as soybean
oil. Many of our competitors have plants that can make
biodiesel from animal fats as well as soybean oil. The cost of
soybean oil has precluded us from profitable operations throughout much of the
time since we completed the successful test-phase of our plant. Our
plant technology is capable of converting multiple refined oils to
biodiesel. We can convert alternative oils with a lower input cost,
such as corn oil and animal fats, provided these oils, or others, meet the input
specifications for our biodiesel process. These materials are typically sold as
a crude product. In order to utilize these feedstocks at our facility, we will
be required to make additional capital investment to adapt and enable our plant
to refine and pretreat these alternative feedstocks to meet feedstock input
specifications for our biodiesel production process, known as pretreatment
equipment. We estimate the cost to retrofit our plant to add
pretreatment equipment will be $10,000,000 to $15,000,000 depending on the
technology selected, which will require us to obtain additional financing or
raise additional capital.
We have limited experience in the
biodiesel industry, which increases the risk of our inability to operate our
biodiesel plant. Also, the loss of key management and our minimal
staffing could negatively affect our ability to produce, even if we obtain
operating capital. We are presently, and will likely continue
to be, dependent on Chris L. Daniel, our Chief Executive Officer provided by
Renewable Fuels Management, some of our directors and our Management Agreement
under which Renewable Energy Group, our competitor, is responsible to provide us
with a General Manager and an Operations Manager and other support personnel to
operate our biodiesel plant. If our plant remains idle for an
extended period of time, we may have difficulty retaining Mr. Daniel, even if we
have sufficient funds to pay him and meet our limited payroll. We may have
difficulty in attracting and retaining a replacement for Mr. Daniel should he
leave us. Likewise, Renewable Energy Group may have difficulty
providing us with a General Manager and Operations Manager or providing
additional personnel to operate our plant until we hire the necessary employees.
As our plant remains idle, we have not replaced our General Manager and
Operations Manager since these managers left us. We now have minimal
management and support personnel. Most of our directors are
experienced in business generally, but have limited or no experience in
operating a biodiesel plant or in governing and operating a public
company.
Our
eventual success is also dependent on our ability to attract and retain
qualified employees to meet our operational needs. We face competition for
qualified employees, many of whom are subject to offers from competing
employers. We may not be able to attract and retain trained employees to operate
our business. Even if we obtain additional financing or raise additional
capital, we will be faced with hiring key management and operations
personnel. There can be no assurance that we will be able to make
such hires and do so in a timely fashion. Any one of these factors
could result in the loss of all or substantially all of our member’s equity
interest.
Our business is highly sensitive to
the spread between feedstock costs and biodiesel prices. If the cost of
feedstock increases and the price of biodiesel does not proportionately increase
or if the price of biodiesel decreases and the cost of feedstock does not
proportionately decrease, our gross margins will decrease and our results of
operations will be negatively impacted. Our
gross margins depend principally on the spread between feedstock costs and
biodiesel prices. The spread between biodiesel prices and soybean oil prices has
varied significantly during recent periods.
If we
experience a sustained period of high feedstock costs as we experienced in
recent years, such pricing may reduce our ability to generate revenues and our
profit margins may significantly decrease or be eliminated which could decrease
or eliminate the value of our units.
Biodiesel
is marketed primarily as an additive or alternative to petroleum-based diesel
fuel. Biodiesel prices are primarily influenced by the supply and
demand for petroleum-based diesel fuel, rather than biodiesel production costs.
This lack of correlation between production costs and product prices means that
generally we are unable to pass increased feedstock costs on to our customers.
Any decrease in the spread between biodiesel prices and feedstock costs, whether
as a result of an increase in feedstock prices or a reduction in biodiesel
prices, would adversely affect our financial performance and cash
flow.
Demand for soy-based biodiesel could
be further adversely affected if it fails to meet targets for reducing
greenhouse gas emissions, further impacting our financial situation. In
May 2009, the Environmental Protection Agency released its analysis of the
renewable fuel standard enacted by the 2007 Energy Act, as part of a proposed
rule subject to public comment and further refinement before the rule becomes
final. This standard requires that biodiesel reduce greenhouse gas
emissions by 40% to 50% when compared to conventional diesel in order to count
toward the 2007 Energy Act’s mandate. The EPA’s analysis indicated that
soy-based biodiesel fails to meet targets for reducing greenhouse gas emissions,
and found that soy-based biodiesel reduces greenhouse gas emissions by just
22% compared to petroleum diesel. The EPA’s findings have been questioned
by the biodiesel and soybean industries and others. The biodiesel industry
has been making its case in Washington for further review of the EPA’s
findings. The EPA is still reviewing the appropriate testing method
for evaluating greenhouse gas emissions. If the EPA adopts the
proposed testing method, pure soy-based biodiesel will not count toward the
renewable fuel standard and demand for biodiesel made from soybean oil will
likely be reduced. Under the proposed testing method, animal fat
based biodiesel will meet the standard, which may increase animal fat prices and
harm our potential ability to produce animal fat-based biodiesel
profitably. If the proposed testing method is adopted and we are
unable to obtain non-soy feedstocks in sufficient quantities and at acceptable
prices, the demand for our biodiesel may decrease, which would further harm our
prospects.
The development of alternative fuels
and energy sources may reduce the demand for biodiesel, negatively impacting our
potential revenues and profitability. Alternative
fuels, including a variety of energy alternatives to biodiesel, are continually
under development. Petroleum-based fuels and other energy sources
that can compete with biodiesel in the marketplace are already in use and more
efficient or environmentally friendly alternatives may be developed in the
future, which may decrease the demand for biodiesel or the type of biodiesel
that we could produce. Technological advances in engine and exhaust
system design and performance could reduce the use of biofuels, which would
reduce the demand for biodiesel. Further advances in power generation
technologies, based on cleaner hydrocarbon-based fuels, fuel cells and hydrogen
are actively being researched and developed. If these technological advances and
alternatives prove to be economically feasible, environmentally superior and
accepted in the marketplace, the market for biodiesel could be significantly
diminished or replaced, which could substantially reduce our potential revenues
and profitability.
We will be in competition with
Renewable Energy Group, our provider of management and operation services, which
could place us at a competitive disadvantage and cause a conflict of interest
for Renewable Energy Group. Based on our agreements with
Renewable Energy Group, we anticipate being highly dependent on Renewable Energy
Group to procure our feedstock at competitive prices and market our products. If
we are able to start our plant, we will be highly dependent on Renewable Energy
Group’s experience and for staffing of our plant, including the general manager
and operations manager, until we are able to hire new employees. Also, we will
be dependent on Renewable Energy Group to train our employees in the operation
of our plant. Renewable Energy Group, Inc. operates its own biodiesel production
facilities and anticipates increasing its biodiesel production through
wholly-owned and third-party managed biodiesel plants in the future. See Item 1,
“Business”, above.
In May
2009, Renewable Energy Group announced it has entered into consolidation
agreements with three commercial scale biodiesel plants: Western Iowa
Energy, which operates a facility in Wall Lake, Iowa with a capacity to produce
annually 30 million gallons; Central Iowa Energy, LLC, which operates a facility
Newton, Iowa with a capacity to produce annually 30 million gallons; and
Blackhawk Biofuels, LLC, which operates a facility in Danville, Illinois with a
capacity to produce annually 45 million gallons. The facilities
represent an additional 105 million gallons per year of wholly-owned production
capacity which would allow the combined entity to better position itself to meet
anticipated demand from the petroleum industry’s distillate fuel
market. Ownership of the operations of all four companies will be
consolidated in a new holding company to be named Renewable Energy Group,
Inc.
Renewable
Energy Group and Renewable Energy Group, Inc. are in direct competition with us,
including competition for feedstock procurement, biodiesel production and
marketing. We also have to compete with Renewable Energy Group for employees.
Because Renewable Energy Group, Inc. operates its own biodiesel production
facilities and will compete with us in many aspects of our business, Renewable
Energy Group may have a conflict of interest as our key service provider. Even
with our agreements with Renewable Energy Group, there is no assurance that its
performance of these services is not compromised by its own biodiesel production
operations.
If we are able to restart our plant,
we will be dependent on others for sales of our products, which may place us at
a competitive disadvantage and reduce profitability. We do not
have a sales force of our own to market our biodiesel and glycerin if we obtain
operating capital and commence operations. Under the Management Agreement,
Renewable Energy Group will market our biodiesel and our glycerin. If Renewable
Energy Group breaches the contract or does not have the ability or interest, for
financial or other reasons, to market all of the biodiesel we produce, we will
not have any readily available means to sell our biodiesel. Our lack of a sales
force and reliance on third parties to sell and market our products may place us
at a competitive disadvantage. Our failure to sell all of our biodiesel and
glycerin products may result in less income from sales, reducing our revenue,
which could decrease or eliminate the value of our units.
If biodiesel does not gain broad
market acceptance and consumer confidence in the quality and availability of
biodiesel, our prospects will be negatively impacted. If
biodiesel does not gain broad market acceptance as a diesel fuel alternative or
additive, and consumer confidence in the quality and availability of biodiesel,
our potential opportunities for sales and profits will be negatively
impacted. In addition, if automobile manufacturers and other industry
groups express reservations regarding the use of biodiesel, our ability to sell
our biodiesel will be negatively impacted. Because it is a
relatively new product, the research on biodiesel use in automobiles and its
effect on the environment is ongoing. Some industry groups,
including the World Wide Fuel Charter, have recommended that blends of no more
than 5% biodiesel be used for automobile fuel due to concerns about fuel
quality, engine performance problems and possible detrimental effects of
biodiesel on rubber components and other parts of the engine. Although some
manufacturers have encouraged use of biodiesel fuel in their vehicles,
cautionary pronouncements by other manufacturers or industry groups may impact
our ability to market its biodiesel.
In
addition, certain studies have shown that nitrogen oxide emissions increase by
10% when pure biodiesel is used. Nitrogen oxide is the chief contributor to
ozone or smog. New engine technology is available and is being implemented to
eliminate this problem. However, these emissions may decrease the appeal of
biodiesel to environmental groups and agencies who have been historic supporters
of the biodiesel industry, potentially harming our ability to market its
biodiesel.
We engage in hedging transactions
which involve risks that can harm our business. We are exposed to market
risk from changes in commodity prices. Exposure to commodity price risk results
from our dependence on soybean oil in the biodiesel production process. During
our test phase in December 2007, we sought to minimize the risks from
fluctuations in the prices of soybean oil and the price of biodiesel through the
use of hedging instruments.
Hedging
means protecting the price at which we will buy feedstock and the price at which
we will sell our products in the future. The effectiveness of our hedging
strategies is dependent on the cost of soybean oil and our ability to sell
sufficient amounts of our products to use all of the soybean oil for which we
have futures contracts. There is no assurance that our hedging activities will
successfully reduce the risk caused by price fluctuation which may leave us
vulnerable to high soybean oil prices. We have entered into derivative contracts
to hedge our exposure to price risk related to forecasted soybean oil purchases
and forecasted biodiesel sales, as permitted under our hedging and risk
management policy. We have a trading account with FC Stone LLC to facilitate our
trades.
We did
not have an open position during the year ended September 30, 2009 and do not
expect to have any unless we obtain operating capital. Although we
had no net loss from hedging in 2009, we recognized a net loss of $119,530 in
2008 and $843,696 during the period from inception to September 30,
2009.
Hedging
activities themselves can result in costs because price movements in soybean oil
contracts are highly volatile and are influenced by many factors that are beyond
our control. There are several variables that could affect the extent to which
such derivative instruments as soybean oil contracts are impacted by price
fluctuations in the cost of soybean oil. However, it is likely that commodity
cash prices will have the greatest impact on the derivative instruments with
delivery dates nearest the current cash price. We may incur such costs and they
may be significant.
We expect to be taxed as a
partnership. However, if we are taxed as a corporation we could be subject to
corporate level taxes which could decrease our net income, if any, and decrease
the amount of cash, if any, available to distribute to our
members. We expect that East Fork will continue to be taxed as
a partnership. If we are not taxed as a partnership, East Fork could be liable
for corporate level taxes which would decrease our net income, if any, which may
decrease the cash, if any, we have to distribute to our members.
If we are audited by the IRS
resulting in adjustments to our tax returns, this could cause the IRS to audit
members’ tax returns, which could lead to additional tax liability for our
members. The IRS could audit our tax returns and could disagree with tax
decisions we have made on our returns. This could lead to the IRS requiring us
to reallocate items of income, gain, losses, deductions or credits that could
change the amount of our income or losses that were allocated to members. This
could require adjustments to members’ tax returns and could lead to audits of
members’ tax returns by the IRS. If adjustments are required to members’ tax
returns, this could lead to additional tax liabilities for members as well as
penalties and interest being charged to members.
Lack of market for our membership
units. To maintain our partnership tax status, our units may
not be traded on an established securities market or readily tradable on a
secondary market. There is no public market for our membership
units. We do not intend to list our units on the New York Stock
Exchange, the NASDAQ Stock Market or any other stock
exchange. Accordingly, our members may have difficulty reselling any
of their membership units.
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Item 2.
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Properties.
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Our
property consists primarily of our plant and the real estate upon which the
plant sits near Algona, Iowa. The plant is fully operational, but currently
idle. The plant site is approximately 45 acres, located 1 mile east of Algona,
Iowa, and is approximately 50 miles from Interstate 35. The site is adjacent to
the main line of the Iowa Chicago & Eastern Railroad, which serves the
plant. The plant consists of the following buildings:
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|
·
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Principal
office building;
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|
|
·
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Processing
building;
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|
|
·
|
Maintenance
building;
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|
|
·
|
Waste
water treatment facility; and
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|
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·
|
Storage
tank farm.
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The site
also contains improvements such as rail tracks and a rail spur, landscaping,
drainage systems, a water storage facility and paved access roads. Construction
of the plant was substantially complete in December 2007.
Our
Restated Term Loan Agreement is secured by a mortgage and security agreement in
favor of Farm Credit creating a first lien on substantially all of our plant,
equipment, fixtures and real estate. On June 22, 2009 a Petition for
Foreclosure was filed by Farm Credit against us, in the Iowa District Court for
Kossuth County, Iowa.
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Item 3.
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Legal
Proceedings.
|
On June
22, 2009 a Petition for Foreclosure was filed by Farm Credit against us in the
Iowa District Court for Kossuth County, Iowa. This foreclosure filing
resulted from our failure to make a $1,825,000 principal payment to Farm Credit
which was due on May 20, 2009 under our $24,500,000 Restated Term Loan
Agreement. Farm Credit has a first mortgage in all of our real
property and a first security interest in all of our equipment and fixtures,
including our plant (Farm Credit Collateral). Farm Credit seeks
foreclosure of its mortgage and security interest covering the Farm Credit
Collateral for the amount of its unpaid principal and interest, attorney’s fees
and other costs and court-ordered sale of such collateral.
Although
we cannot predict the outcome of these proceedings, Farm Credit will likely seek
appointment of a receiver to take possession of the Farm Credit Collateral
securing the Restated Term Loan Agreement. The foreclosure
proceedings would ultimately result in the conveyance of our real estate, plant,
fixtures and equipment to Farm Credit, if a foreclosure proceeding were
concluded before the indebtedness under the Restated Term Loan Agreement could
be otherwise repaid or restructured in or outside of bankruptcy proceedings.
Conclusion of the foreclosure process would have a material adverse impact on
our financial condition and results of operations, result in the loss of the
most of our operating assets and a permanent shut-down of our plant and cause
our members to lose most or all of their investment in East
Fork. Since the foreclosure proceedings remain in an early stage, we
are unable to predict their duration.
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Item
4.
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Submission
of Matters to a Vote of Security
Holders.
|
No
matters were submitted to a vote of security holders during the fourth quarter
of our fiscal year.
PART II
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Item 5.
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Market
for Registrant’s Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Market
Information
We have
only one class of membership units. Our membership units are not traded on any
public market.
Unit
Holders
As of
December 1, 2009, we have 1,655 unit holders of record and 49,159 units
issued and outstanding.
Distributions
We have
not declared or paid any distributions on our units to our members. Revenues
generated from our operations will be distributed to our members by our
directors, in their discretion, in proportion to units held subject to, and to
the extent permitted by, any loan covenants or restrictions on such
distributions agreed to by us in any loan agreements with our lenders in effect
from time to time, and our being profitable at such time. Our
directors will endeavor to provide for cash distributions at such times and in
such amounts as will permit our members to make timely payment of income taxes,
subject to, and to the extent permitted by, any loan covenants or restrictions
on such distributions agreed to by us in any loan agreements with our lenders
from time to time in effect, and our being profitable at such time.
Our
Restated Term Loan Agreement restricts our ability to declare or pay dividends,
make any distribution of assets to the members, purchase, redeem, retire or
otherwise acquire for value any of our capital stock, or allocate or otherwise
set apart any sum. The only exception is that in any fiscal year we
may distribute to our members up to 40% of our net profits (as defined) for each
fiscal year after receipt of our audited financial statements for the pertinent
fiscal year, provided that we are and will remain in compliance with all loan
covenants, terms and conditions. Also, in each fiscal year, we may make a
distribution in excess of 40% of the net profit for such fiscal year if we have
made the required “Free Cash Flow” payment to Farm Credit for such fiscal
year. However, in order to do so, we must remain in compliance with
all loan covenants, terms and conditions on a pro forma basis net of said
additional payment.
Options,
Warrants or Convertible Securities
Under the
terms of our Management Services Agreement with Renewable Fuels Management, we
will offer, over the course of the Management Services Agreement, up to 2,500 of
our membership units to Renewable Fuels Management through unit purchase
options, subject to Renewable Fuels Management meeting certain performance
measurements. The purchase price of units to be granted upon
achievement of the performance measurements will be $600 per
unit. Except for these options granted to Renewable Fuels Management,
we have no outstanding options or warrants to purchase, or securities
convertible into, our membership units.
Except as
noted in the table below, we have not offered any compensation plans under which
equity securities are authorized for issuance.
EQUITY
COMPENSATION PLAN INFORMATION
Information
as of September 30, 2009 with respect to equity compensation plans is as
follows:
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Plan
Category
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|
Number
of Securities
to
be Issued Upon
Exercise
of Outstanding
Options,
Warrants
and
Rights
|
|
Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
and
Rights
|
|
Number
of Securities
Remaining
Available for
Future
Issuance
Under
Equity
Compensation
Plans
|
|
|
Equity
compensation plans approved by security holders
|
|
0
|
$0.00
|
0
|
|||
|
Equity
compensation plans not approved by security holders
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|
4,550(1)(2)(3)
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(1)(2)(3)
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0(3)
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(1)
|
In
connection with an individual compensation arrangement, on October 16,
2006 our Board of Directors issued 50 units valued at $1,000 per unit to
Ag Visions in lieu of cash payment of $50,000 for consulting services we
received from Ag Visions. In March 2006, we entered into a
consulting agreement with Ag Visions to serve as our Project Consultant.
The fee for the service was $3,200 per month, plus bonuses for reaching
certain milestones relative to the signing of the consulting agreement,
completion of our business plan, obtaining our loan commitment, achieving
our loan closing and the starting of our equity drive. For
fiscal year 2006, we incurred consulting charges of $132,258,
which includes $50,000 of services exchanged for 50 units issued to Ag
Visions, and for 2007, $92,801 in consulting
costs.
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(2)
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In
connection with an individual compensation arrangement, on April 29, 2008,
we, Farm Credit and REG Construction & Technology Group, LLC entered
into the Construction Payment Agreement, which provides for satisfaction
and release of REG Construction’s mechanic’s lien through Farm Credit’s
advance of $2,349,217 under the Restated Term Loan Agreement and through
the acquisition by REG Ventures, LLC, an affiliate of REG Construction, of
2,000 of our units, valued at $1,000 per unit and issued on May 1, 2008,
in lieu of cash payment of $2,000,000 for the construction
services.
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|
(3)
|
In
connection with an individual compensation arrangement, under the terms of
our September 8, 2008 Management Services Agreement with Renewable Fuels
Management, we will offer, over the course of the Management Services
Agreement, up to 2,500 of our membership units to Renewable Fuels
Management through unit purchase options, subject to Renewable Fuels
Management meeting certain performance measurements. The
purchase price of units to be granted upon achievement of the performance
measurements will be $600 per unit. Except for these options
granted to Renewable Fuels Management, we have no outstanding options or
warrants to purchase, or securities convertible into, our membership
units. The aggregate number of our remaining authorized membership units
available for issuance for general corporate purposes, including for the
Board to issue under individual compensation arrangements, is 150,841
units.
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Sale
of Unregistered Securities
In the
first calendar quarter of 2006, we sold:
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|
·
|
200
of our membership units to our founding members at a price of $250 per
unit and received a total of
$50,000;
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|
|
·
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1,553
of our membership units to three of our founding members and 19 additional
members at a price of $333 per unit and received a total of $517,666;
and
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·
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7,015
of our membership units to our seed capital members at a price of $500 per
unit and received a total of $3,507,500. These units were
issued under a private placement memorandum in which we offered a maximum
of 10,000 units at an offering price of $500 per unit for a total offering
of $5,000,000. On March 31, 2006 the private placement memorandum for the
seed capital offering was closed and the seed capital subscription
agreements from the seed capital were accepted and
approved.
|
We
claimed exemption from federal registration with respect to these membership
unit sales due to the application of Section 3(a)(11) of the Securities Act of
1933 (regarding intra-state offerings) and Rule 147 of the Securities Act of
1933. We also claimed exemptions from registration in the State of Iowa pursuant
to the private placement and accredited investor exemptions of the Iowa Uniform
Securities Act.
On June
22, 2006, we conducted our primary capital offering that was a registered
offering in the State of Iowa, but was exempt from registration with the
Securities and Exchange Commission under Section 3(a)(11) of the Securities Act
of 1933. This offering was amended to increase the offering size on
September 7, 2006. We registered a minimum of 31,000 membership units
and a maximum of 40,000 membership units at an offering price of $1,000 per
unit. On October 16, 2006 we accepted 34,294 membership units at a
sale price of $1,000 per unit. There were six additional closings
occurring on various dates between November 20, 2006 and June 15, 2007 in which
an additional 4,047 membership units were accepted at $1,000 per
unit. From our sales of membership units we received total aggregate
proceeds of approximately $38,341,000.
On
October 16, 2006 our Board of Directors issued 50 units valued at $1,000 per
unit to Ag Visions, in lieu of cash payment of $50,000 for consulting services
we received from Ag Visions. We also claimed exemptions from
registration in the State of Iowa pursuant to the private placement and
accredited investor exemptions of the Iowa Uniform Securities Act.
On May 1,
2008, our Board of Directors issued 2,000 units valued at $1,000 per unit to REG
Ventures, LLC in lieu of cash payment for $2,000,000 for construction services
we received from REG Construction Services under the Design-Build
Agreement. Our Board determined the $1,000 per unit price was
consistent with our June 22, 2006 Iowa registered offering of membership units
(amended September 7, 2006) at a sale price of $1,000 per unit.
We
believe the Ag Visions and REG Ventures, LLC issuances are exempt from federal
registration with respect to these sales of our membership units under Section
3(a)(11) of the Securities Act of 1933 (regarding intra-state
offerings).
On
September 8, 2008, we agreed under our Management Services Agreement with
Renewable Fuels Management to offer over the course of this agreement, up to
2,500 of our membership units to Renewable Fuels Management through unit
purchase options, subject to Renewable Fuels Management meeting certain
performance measurements and subsequent issuance of our units. The
purchase price of units to be granted upon achievement of the performance
measurements will be $600 per unit, a price arrived at through negotiations by
the parties.
We were
able to rely on Section 3(a)(11) for the seed capital offering, Iowa registered
offering and Ag Visions and REG Ventures, LLC issuances because we sold units
only to residents of the State of Iowa and the recipients of securities in each
transaction represented their intention to acquire the securities for investment
only and not with a view to, or for sale in connection with, any distribution
thereof, and appropriate legends were affixed to unit certificates and
instruments issued in such transactions. We gave each investor information about
us and gave them opportunities to ask questions regarding the terms and
conditions of the offering.
Also, we
believe the issuance of securities to REG Ventures, LLC and Ag Visions are
exempt from federal registration under Section 4(2) of the Securities Act of
1933. Prior to issuing the securities, we had reasonable grounds to believe and
believed that REG Ventures, LLC and Ag Visions were capable of evaluating the
merits and risks of the investment and that REG Ventures, LLC and Ag Visions
were able to bear the economic risk of the investment. Neither we, nor any
person acting on our behalf, offered or sold the securities by means of any form
of general solicitation or advertising. The purchasers represented in
writing that the securities were being acquired for investment for such
purchaser’s own account and agreed that the securities would not be sold without
registration under the Securities Act or an exemption therefrom. Also
appropriate legends were affixed to unit certificates issued in such
transactions, along with restrictions on the transferability of the
units.
Repurchases
of Equity Securities
Neither
we nor anyone acting on our behalf has repurchased any of our outstanding
units
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Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Executive
Overview
We are a
development stage company, devoting substantially all of our efforts to
establishing a new business. However, because of continuing adverse financial
and economic conditions explained below, our planned principal operation of our
plant has not commenced.
In
December 2007, our plant was substantially complete and we started production to
verify the production capabilities of our new plant and produced in the
aggregate approximately 1.1 million gallons of test-phase biodiesel and
glycerin. After this production, we idled the plant due to then–existent adverse
pricing for refined soybean oil. These pricing issues and our subsequent
inability to obtain working capital have not allowed us to operate our plant for
a sustained period since December 2007.
Due to
our continued inability to secure the working capital required to conduct normal
operations at our plant, our plant remains idle. As indicated in our financial
statements, exclusive of the sale of the product produced during our testing
phase, we have not had revenues from operations from our inception in January
2006 through September 30, 2009. See Item 8, “Financial Statements”,
below.
In 2008,
subsequent to the production of test-phase biodiesel and glycerin, we sold the
entire test-phase inventory. For the years ended September 30, 2008 and 2009,
sales of biodiesel and glycerin and federal incentives payments totaled
$4,646,055 and none, respectively. For the years ended
September 30, 2008 and 2009, we received $994,804 and none, respectively, in
federal incentives payments.
Although
we would have been able to operate at positive margins throughout several months
of 2008 and 2009 if operating capital had been available to us, we would have
been unable to operate
the plant profitably given the specific market conditions present in
mid-November 2009.
Our
independent registered public accounting firm has raised doubts about our
ability to continue as a going concern. See “Financial Statements” in Item 8,
Note 7, below.
Debt
and Liquidity
On May
20, 2009 we had a scheduled principal payment of $1,825,000 due to our lender,
Farm Credit. We did not make this payment because we did not have
sufficient unrestricted cash. On May 26, 2009, Farm Credit’s agent,
CoBank, ACB (CoBank) declared us in default, terminated any commitment to us and
accelerated the amounts owned under our $24,500,000 Restated Term Loan
Agreement. On June 22, 2009 Farm Credit initiated foreclosure
proceedings against our plant, equipment, fixtures and real
property. As a result of the default, Farm Credit increased the
interest rate on the borrowings by 4.0%, effective May 21,
2009. Effective May 21, 2009, we are being charged interest of
7.6250% on $24,000,000 of the loan balance and 8.50% on the remaining $500,000
of the loan balance. As of September 30, 2009, $24,500,000 was
outstanding under the Restated Term Loan Agreement.
At
September 30, 2009, CoBank held $265,910 of our funds in an escrow account to be
used for monthly interest and other fees due Farm Credit. Beginning May 21,
2009, CoBank has been accruing interest under our Restated Term Loan Agreement
at the rate of $5,201.38 per day. As our interest comes due and is billed each
month, CoBank withdraws the amount from the escrow. At September 30, 2009 we had
$524,300 in accrued interest not yet withdrawn. In addition, in early
December 2009, after the payment of our annual insurance premium, we estimate
that we will have approximately $750,000 in unrestricted cash.
As of
September 30, 2009, we had an agreement with a natural gas company that requires
a restricted escrow balance of $518,789 consisting of a $45,589 deposit and
$473,200 to cover storage transportation and/or construction of the town border
station. Under the terms of the agreement the escrow will be released annually
beginning October 1, 2008 at the discretion of the natural gas company but no
less than 1/15 of the original deposit of $507,000 to cover storage
transportation and/or construction of the town border station.
Impairment
of Long-Lived Assets
We
evaluate the appropriateness of the carrying amounts of its long-lived assets at
least annually, or more frequently whenever indicators of impairment are deemed
to exist. In accordance with these policies, we previously evaluated
our plant for possible impairment based on projected future cash flows from
operations assuming that we would be able to obtain a working capital loan and
commence operations.
Based on
recent developments with Farm Credit and our inability to find alternative
sources for our required working capital, we determined that an impairment
existed at March 31, 2009. As a result, during the period ending March 31, 2009,
our plant and processing equipment were reduced to fair value by recording a
$20,224,067 impairment charge. Due to the lack of any sales of
facilities similar to ours or a quoted market price for our units, we estimated
fair value based on the range of values discussed in a potential merger
transaction and an independent appraisal. The valuation was
considered to be level 3 under ASC 820, Fair Value Measurements and
Disclosures.
Since
March 31, 2009 there has been further deterioration in the biodiesel industry
and Farm Credit initiated foreclosure proceedings against our plant, equipment,
fixtures and real property. We do not believe that our facility could
be sold for greater than the amount due Farm Credit. Our most
probable recovery would be the proceeds from the loan extinguishment from the
foreclosure process. As a consequence, as of September 30, 2009, we reduced our
plant and processing equipment to the net amount due Farm Credit of
approximately $24,700,000, by recording an additional impairment charge of
$9,140,363. The two charges resulted in recognition of a $597.34 loss
per membership unit for the twelve months ending September 30,
2009.
Our
property and equipment are stated at cost. We compute depreciation using the
straight-line method over the estimated useful lives ranging from 3 to 7 years
for office and other equipment, 15 to 20 years for plant and process equipment
and 20 years for our office building.
We
expense maintenance and repairs as incurred and major improvements and
betterments are capitalized. As of September 30, 2009, we capitalized
$345,416 of interest and financing costs in property and equipment.
Income
Taxes
We are
organized as a limited liability company which is accounted for like a
partnership for federal and state income tax purposes and generally does not
incur income taxes. Instead, our earnings and losses are included in the income
tax returns of our members. Therefore, no provision or liability for federal or
state income taxes has been included in our financial statements.
Results
for Twelve Months Ended September 30, 2009 and 2008
We have
incurred an accumulated net loss of $42,621,921 from our inception in January
2006 through September 30, 2009. For the twelve months ended September 30, 2009
and 2008, our net loss was $35,822,020 and $6,391,745, respectively. The
reasons for our continuing loss during 2009 include:
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We
had no revenues from sales (and related federal incentives) for the twelve
months ended September 30, 2009 due to the continued idling of our
plant. We did earn $82,830 of rental income as a result of
short term leases for the use of our storage tanks. Sales (and
related federal incentives) for the twelve months ended September 30, 2008
were $4,646,055, all of which relate to product that was produced in
December 2007.
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In
December 2007, construction of our plant was completed and as a result we
started to depreciate the assets and discontinued the capitalization of
the construction period interest expense. Prior to plant
completion, we capitalized interest incurred as part of the construction
costs. Depreciation and interest expense for the twelve months ended
September 30, 2009 were $3,097,100 and $1,568,117, respectively.
Depreciation and interest expense for the twelve months ended September
30, 2008 were $3,219,378 and $1,304,821, respectively. The increase in
interest expense between the two periods is primarily due to our higher
average borrowings, Farm Credit’s imposition of default interest on May
21, 2009 and the amortization of the remaining $134,086 of deferred
financing costs as a result of Farm Credit’s acceleration of the due date
on the unpaid principal balance under our Restated Term Loan
Agreement. The reduction in the depreciation expense was the
result of the reduction in the net book value of our fixed asset due to
the previously discussed impairment
charges.
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General
and administration expenses for the twelve months ended September 30, 2009
and September 30, 2008 were $1,594,125 and $1,411,290,
respectively. These expenses primarily consisted of
professional fees incurred in connection with our SEC compliance matters,
foreclosure proceedings, ongoing bank and strategic negotiations, payroll
and insurance.
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Product
and Production Input Pricing
The cost
of feedstock is the largest single component of the cost of biodiesel
production, accounting for 75% to 90% of the overall cost of producing
biodiesel. As a result, increased prices for feedstock greatly impact the
biodiesel industry. Soybean oil is the most abundant oil feedstock available in
the United States. The 20-year average price for soybean oil is approximately
$0.24 per pound. Prices for feedstock have been quite volatile – most notable is
soybean oil and methanol (which is used to a much lesser degree than soybean
oil). Between January 2008 and November 2009, soybean oil has traded in a range
of less than $0.30 to over $0.65 per pound delivered to Algona. As of
mid-November 2009, refined soybean oil delivered to Algona is priced near $0.42
per pound, based on market pricing as reported in the The Jacobsen®.
Many of
our competitors have plants that can make biodiesel from animal fats as well as
soybean oil. The cost of soybean oil has precluded us from profitable
operations throughout much of the time since we completed the successful
test-phase of our plant. Our plant technology is capable of
converting multiple refined oils to biodiesel. We can convert
alternative oils with a lower input cost, such as corn oil and animal fats,
provided these oils, or others, meet the input specifications for our biodiesel
process. These materials are typically sold as a crude product. In order to
utilize these feedstocks at our facility, we will be required to make additional
capital investment to adapt and enable our plant to refine and pretreat these
alternative feedstocks to meet feedstock input specifications for our biodiesel
production process, known as pretreatment equipment.
We
continue to monitor soybean oil and biodiesel prices which might allow future
profitable operation of our biodiesel plant. Farm Credit’s
foreclosure proceeding makes it very unlikely that we will be able to obtain
working capital financing. As a result, we have not been exploring
working capital financing, but instead have explored transactions that would
result in a sale of our plant, a merger with another entity or additional
investment to implement pretreatment and provide operating capital.
Between
January 2008 and November 2009, methanol pricing has ranged from $0.80 per
gallon to $2.70 per gallon delivered to Algona. As of mid-November
2009, the price of methanol delivered to Algona was $1.15 per
gallon. The market price for biodiesel has been equally volatile:
since January 2008, the Upper Midwest market price for biodiesel has ranged from
approximately $2.70 per gallon to a July 2008 spike near $5.40 per gallon --
approximately a 100% price variation. The Upper Midwest B100 pricing
as of mid-November 2009 approached $3.35 per gallon, on
average, according to The
Jacobsen®.
The
market conditions, as reported by The Jacobsen®, as of
mid-November 2009 would not allow us to operate the plant profitably with an
input of 100% refined soybean oil. We cannot predict the duration of these
conditions. This situation is reflected by the overall reduction of biodiesel
production to near 2006 levels.
A
significant negative impact on United States biodiesel producers has been the
imposition of substantial duties by the European Union on the import of
biodiesel originated in the United States to European Union
members. On July 7, 2009, the European Union announced that these
duties will be extended for the next five years.
In May
2009, the EPA released its analysis of the renewable fuel standard enacted by
the 2007 Energy Act as part of a proposed rule subject to public comment and
further refinement before the rule becomes final. The Act requires
11.1 billion gallons of renewable fuel to displace petroleum fuel in 2009,
increasing each year until reaching 36 billion gallons of renewable fuels by
2022, and the EPA to determine annual volumes of biomass-based diesel fuel
required under the renewable fuel standard. The EPA’s analysis
indicated that soy-based biodiesel fails to meet targets for reducing greenhouse
gas emissions, and found that soy-based biodiesel reduces greenhouse gas
emissions by just 22% compared to petroleum diesel. The EPA’s
findings have been questioned by the biodiesel and soybean industries and
others. The biodiesel industry has been making its case in Washington
for further review of the EPA’s findings. If the industry is unsuccessful,
demand for soy-based biodiesel could be further adversely affected by the EPA’s
findings in the proposed rule.
In June
2009, about one-third of the nation's biodiesel plants were idle, according to a
published report citing information provided by officials with the National
Biodiesel Board; plants that are operating are those that rely heavily on
alternative feedstocks such as waste greases and fats. We do not
believe this situation has changed significantly since June.
We
produce about approximately nine-tenths of one pound of glycerin for
each gallon of biodiesel. From January 2008 to November 2009, crude glycerin
pricing has ranged from approximately $0.04 to $0.30 per pound. As of
mid-November 2009, the price of crude glycerin was reported to be selling at
$0.04 per pound, shipped FOB from our plant. Our soy oil-based glycerin commands
a higher price than glycerin generated by animal fat.
We
believe the best long-range alternative is to secure feedstock for biodiesel
plants that does not compete with food oils; one option that we believe holds
particular promise is the use of corn oil generated as a co-product from ethanol
processes. We believed that soybean oil, although food oil, would provide a
bridge to the non-food oils such as corn oil from DDGS produced at ethanol
plants. The recent high prices for soybean oil highlight the need for us to use
non-food oil.
We are
currently unable to operate the plant given our inability to obtain working
capital financing. Based upon mid-November 2009 commodity prices, we estimate
the need for $20,000,000 in working capital financing and $10,000,000 to
$15,000,000 for pretreatment to operate the plant optimally at its full
capacity. We
believe a working capital facility of less than $12,000,000 would not allow us
to operate at meaningful volumes.
Previously,
we had a $12,000,000 revolving loan to fund purchases of soybean oil and other
raw materials in periods where the plant could operate profitably. We
were not, however, able to come to terms with Farm Credit to permit us draw
funds against the revolving loan. As a result, in June 2008 our
access to the $12,000,000 under the revolving loan for working capital was
terminated under our Restated Term Loan Agreement with Farm
Credit. To date, our efforts to obtain working capital financing from
other potential sources have been unsuccessful. See “Debt Financing”
below.
Our lack
of access to operating capital, coupled with the recent volatile financial,
credit and commodity market conditions, including periods of high refined
soybean oil prices timed with an unfavorable market price for biodiesel, have
not allowed us to operate the plant profitably for a sustained period of time
since December 2007. As a result, we are not able to produce and sell
our products. Without access to replacement working capital financing, we have
been unable to secure the cash required to purchase the inputs required to
operate our plant during those periods during which positive margins could have
been realized from operation.
Our goal
is to operate profitably. This is a difficult proposition considering the recent
volatile financial, credit and commodity market conditions in 2009 and our
inability to obtain sufficient working capital financing. If such financing
becomes available, our decision to run the plant will be predicated on our
ability to generate positive cash flow margins. We believe we can achieve that
margin when the per gallon spread between biodiesel and soybean oil is between
$0.30 to $0.35. It is, however, difficult to lock in back-to-back margins in the
spot market. Forward pricing is similarly difficult to achieve.
We cannot
predict how commodity prices and the market price for our products will
fluctuate in the future.
Debt
Financing
On
January 3, 2007 we executed a $36,500,000 Master Loan Agreement with Farm Credit
and related loan supplements outstanding under such agreement. The Credit
Agreement consisted of a $24,500,000 Construction and Term Loan dated as of
January 30, 2007 (Term Loan) and a $12,000,000 Construction and Revolving Term
Loan Supplement, all dated as of January 30, 2007 (Revolving Loan).
We were
notified by letter dated November 29, 2007 that Farm Credit determined our
outstanding Term Loan and Revolving Loan to be “distressed loans,” because of
material adverse changes in the markets for soybean oil and soybean biodiesel
which then precluded profitable operation of our plant. At the time we were
notified by Farm Credit of the “distressed loan” status, Farm Credit had made
available to us (a) a $17,539,646 advance against the $24,500,000 maximum of our
Term Loan, and (b) $260,378 advance against the $12,000,000 maximum of our
Revolving Loan.
We are
party to a Design-Build Agreement with REG Construction Services, LLC (Design
Build Agreement), now known as REG Construction & Technology Group, LLC (REG
Construction), under which it designed, engineered and built our biodiesel
plant. In November, 2007, and thereafter, we submitted to Farm Credit requests
for advances under the Term Loan seeking disbursement of funds to REG
Construction to pay for the outstanding unpaid bills owing to REG Construction
under the Design-Build Agreement, but Farm Credit refused to advance the
requested funds to REG Construction because of the “distressed loan” status. On
March 24, 2008, REG Construction filed of record a mechanic’s lien against our
biodiesel plant alleging an outstanding unpaid bill for construction of our
plant under the Design-Build Agreement in the amount of $4,349,217.
On April
30, 2008, we consummated the transactions contemplated by an Agreement regarding
Payment for Construction effective April 29, 2008 (Construction Payment
Agreement) with Farm Credit and REG Construction. The Construction Payment
Agreement provided for satisfaction and release of REG Construction’s mechanic’s
lien through Farm Credit’s advance of $2,349,217 under the Term Loan and through
the acquisition by REG Ventures, LLC, an affiliate of REG Construction, of 2,000
of our units, valued at $1,000 per unit, in lieu of cash payment of $2,000,000
for the construction services. Under the Construction Payment Agreement, on
April 30, 2008, Farm Credit funded an additional $2,349,217, as a draw under the
Term Loan. REG Construction received the $2,349,217 payment and we issued 2,000
units to REG Ventures, LLC. On March 4, 2009 we negotiated a final settlement on
the Design-Build Agreement resulting in a $259,010 reduction in the total
contract price. The final $30,000 payment under the Design-Build
Agreement was made in March 2009.
On June
17, 2008, we entered into a Restated Term Loan Agreement with Farm Credit. Also,
on June 17, 2008, in connection with our Security Agreement dated January 30,
2007 with Farm Credit, we entered into Amendment No. 1 to our Security Agreement
with Farm Credit (Amended Security Agreement) and an Agreement with Farm Credit
regarding the compromise and settlement of disputes and claims (Settlement
Agreement). The Restated Term Loan Agreement, Amended Security Agreement and
Settlement Agreement are collectively referred to as the Restated Term Loan
Agreement. The following is a summary of certain terms of the
Restated Term Loan Agreement:
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Principal
payments in the individual amounts of $912,500 due May 20, 2008, August
20, 2008 and November 20, 2008 were deferred with quarterly principal
payments of $912,500 resuming and being due on February 20, 2009, and due
quarterly thereafter. The due date for the final payment was August 20,
2015.
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We
had no right to make a prepayment and then draw again the amount of the
prepayment under the Restated Term Loan
Agreement.
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The
balance outstanding on the $12,000,000 Revolving Loan in the principal
amount of $260,378, plus interest due and unpaid, was transferred to the
Restated Term Loan Agreement. A reserve of $600,000 was established for
the interest due through December 31, 2008 under our Restated Term Loan
Agreement. Also, a reserve of $289,010 was established under our Restated
Term Loan Agreement for the final payments due REG
Construction.
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Our
access to the $12,000,000 unused balance under the Revolving Loan for
working capital was terminated. The Construction and Revolving Loan
Supplement was terminated and
cancelled.
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Our
ability to declare or pay dividends, make any distribution of assets to
our members, purchase, redeem, retire or otherwise acquire for value any
of our capital stock or allocate or otherwise set apart any sum remained
restricted. The only exception was that in any fiscal year distribution to
our members up to 40% of our net profits (as defined) for each fiscal year
after receipt of our audited financial statements for the pertinent fiscal
year was permitted, provided that we remained in compliance with all loan
covenants, terms and conditions. Also, in each fiscal year, a distribution
in excess of 40% of the net profit for such fiscal year was permitted if
we had made the required “Free Cash Flow” payment to Farm Credit for such
fiscal year. However, in order to do so, we had to remain in compliance
with all loan covenants, terms and conditions on a pro forma basis net of
said additional payment.
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Farm
Credit released its security interest lien in our inventory and accounts
receivable as well as intangible personal property (such as cash, bank
accounts, contract rights, etc.).
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Farm
Credit retained a first mortgage in all of our real property and a first
security interest in all of our plant, fixtures and
equipment.
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Farm
Credit billed unused line fees of approximately $5,000 per month since
February 2008 that had not been paid by us. These fees were waived. Farm
Credit was not required to refund any other fees or any expenses incurred
by us.
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The
financial covenants were eliminated. Our requirement to pay the scheduled
interest and principal payments when due, as well as other affirmative and
negative covenants set forth in the Restated Term Loan Agreement
remained.
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We
retained our right to make changes to our Articles and Operating
Agreement, management contracts and other material contracts without the
approval of Farm Credit.
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We
could prepay the balance owing under the Restated Term Loan Agreement at
any time with no prepayment
penalty.
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In
exchange for these restructuring terms, we gave Farm Credit and its five
participating lenders a full release of all claims and
disputes.
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As noted
above, on February 20, 2009, Farm Credit granted us a payment deferral until May
20, 2009 of our $912,500 quarterly principal payment due February 20,
2009. As part of the agreement, we deposited $460,000 with CoBank to
be used for monthly interest and other fees due under the Restated
Term Loan Agreement. As of September 30, 2009, $265,910 was in this
account.
Beginning
May 21, 2009, CoBank has been accruing interest under our Restated Term
Loan Agreement at the rate of $5,201.38 per day. As our interest and fees come
due and are billed each month, CoBank withdraws the amount from the escrow. At
September 30, 2009 we had $524,300 in accrued interest not yet
billed.
We agreed
to restrict our ability to incur cash expenses in excess of $400,000 in any
month commencing in February 2009, without first obtaining Farm Credit’s
approval which was not to be unreasonably withheld. Also, commencing in February
2009, we could not make expenditures for fixed assets nor make any distributions
to our members, without further agreement of the parties. We are required to
provide Farm Credit’s agent with additional documentation and budget
reconciliations.
As of
September 30, 2009, $24,500,000 was outstanding under the Restated Term Loan
Agreement.
We record
expenditures directly related to securing long-term financing as a deferred cost
on our balance sheet. These costs were being amortized using the effective
interest method over the term of our Restated Term Loan
Agreement. During the year ended September 30, 2008 and the period
from inception to September 30, 2009, we amortized $11,266 and $27,766
respectively of these costs to construction in progress. No amounts
were amortized to construction in progress during the year ended September 30,
2009. As a result of our default under our Restated Term Loan
Agreement, Farm Credit has terminated any commitment to us and accelerated the
due date of the unpaid principal balance outstanding. We included the
remaining $134,086 of deferred financing costs in interest expense for the year
ended September 30, 2009.
Available
Cash and Cash Requirements
Our
February 2009 payment deferral agreement required us to make a principal payment
in the amount of $1,825,000 on May 20, 2009. On May 20th we had
unrestricted cash of approximately $1,710,000, and did not make our $1,825,000
payment to Farm Credit due on that date because we did not have adequate
funds. As of
September 30, 2009, we had current assets of $1,667,593. We have
drawn all available amounts under our Restated Term Loan
Agreement. In addition, in early December 2009, after the payment of
our annual insurance premium, we estimate that we will have approximately
$750,000 in unrestricted cash.
On May
26, 2009, we were notified that our failure to make the $1,825,000 principal
payment due on May 20, 2009 constituted an event of default (the Default Notice)
under our Restated Term Loan Agreement. The Default Notice, provided
by CoBank, advised us that it had terminated any commitment to us and
accelerated the due date of the unpaid principal balance outstanding on our
$24,500,000 loan and all accrued but unpaid interest on the loan, by declaring
such sum to be immediately due and payable. The remaining
$134,086 of deferred financing costs were included in interest expense for the
quarter ending June 30, 2009.
On May
27, 2009, we were notified by CoBank that it had imposed, effective May 21,
2009, a default rate of interest, being 4% in excess of the rate(s) of interest
that would otherwise apply, from time to time, on the $24,500,000 loan balance,
as permitted by the Restated Term Loan Agreement. Prior to CoBank’s
declaration of default, interest on $24,000,000 of the loan balance accrued at
an annual fixed rate equal to LIBOR at the date selected, plus 3.25%, and
interest on the remaining $500,000 of the loan balance accrued at a variable
interest rate equal to the rate established by CoBank, plus three-quarters of
one percent (0.75%) per annum. As of September 30, 2009, $24,000,000 of the
borrowings were at the LIBOR option of 7.625% and $500,000 of the borrowings
were at the Agent Base Rate option of 8.50%.
As of
September 30, 2009, $24,500,000 was outstanding under the Restated Term Loan
Agreement.
As noted
above, at September 30, 2009, CoBank held $265,910 of our funds in an escrow
account. As our interest and fees comes due and are billed each month,
CoBank withdraws the amount from the escrow.
As noted
above, our Master Contract Agreement with the IDED provided us with two funding
sources and benefits, the VAAPFAP Funding Agreement and the EZ Funding
Agreement. Under the VAAPFAP Funding Agreement, we were awarded a
$100,000 forgivable loan to be forgiven over 36 months and a $300,000
non-interest bearing loan. As of September 30, 2009, $300,000
was outstanding on the loans. The agreement provides for a monthly
principal payment of $5,000 per month. The occurrence of a default
under the Restated Term Loan Agreement also constitutes an event of default
under the VAAPFAP Funding Agreement which would allow IDED, at its option, to
provide a notice of default, which among other things, would result in the full
amount being immediately due and payable (including the $100,000 forgivable
loan) and impose a 6% annual default interest rate.
The
primary benefit under the EZ Funding Agreement is investment tax
credits. The investment tax credits total $5.2 million and are
claimed over a five-year period beginning July 1, 2007 in the amount of
$1,041,000 each December 31st. To date, only the first two years of
credits have been claimed. The annual credits were included on
members’ Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) for
calendar years 2007 and 2008. In addition, under the EZ Funding
Agreement, we were entitled to receive certain enterprise zone benefits,
including value-added property tax exemption and a refund in the amount of
$851,214 of Iowa sales, and use taxes paid to contractors, subcontractors and
suppliers.
Under the
VAAPFAP Funding Agreement and the EZ Funding Agreement, we were obligated to
create 36 full-time equivalent jobs, with 30 of the created jobs having starting
wages, including benefits, that meet or exceed $16.09 per hour with an average
rate per hour including benefits of $19.47. Under the VAAPFAP Funding
Agreement, such job creation was required to be complete by July 31, 2009; under
the EZ Funding Agreement, such job creation is required to be complete by July
31, 2010. Accordingly, as of September 30, 2009, we were not in
compliance with these job creation requirements with respect to the VAAPFAP
Funding Agreement and therefore the loans made pursuant to the VAAPFAP Funding
Agreement are in default and could, at the option of the IDED, become
immediately due and payable.
Further,
if we fail to meet the job creation requirements by July 31, 2010, then, under
the EZ Funding Agreement, the Company may be obligated to repay any benefits it
has received and the State of Iowa may recapture the tax credits that have been
passed through to our members. Such recapture may result in additional Iowa
income tax for the calendar years 2007 and 2008 to our members who received such
credits on the 2007 and 2008 Schedule K-1s distributed to them.
On June
22, 2009 a Petition for Foreclosure was filed by Farm Credit against us, in the
Iowa District Court for Kossuth County, Iowa. This foreclosure filing
resulted from our failure to make a $1,825,000 principal payment to Farm Credit
which was due on May 20, 2009 under our Restated Term Loan
Agreement. Farm Credit has a first mortgage in all of our real
property and a first security interest in all of our equipment and fixtures,
including our plant (collectively, the Farm Credit Collateral). Farm
Credit seeks foreclosure of its mortgage and security interest covering the Farm
Credit Collateral for the amount of its unpaid principal and interest,
attorney's fees and other costs and court-ordered conveyance of such
collateral.
Although
we cannot predict the outcome of these proceedings, Farm Credit will likely seek
appointment of a receiver to take possession of the Farm Credit Collateral
securing the Restated Term Loan Agreement. The foreclosure
proceedings would ultimately result in the conveyance of the Farm Credit
Collateral to Farm Credit, if a foreclosure proceeding were concluded before the
indebtedness under the Restated Term Loan Agreement could be otherwise repaid or
restructured in or outside of bankruptcy proceedings. Conclusion of the
foreclosure process would have a material adverse impact on our financial
condition and results of operations, result in the loss of the most of our
operating assets and a permanent shut-down of our plant and cause our members to
lose most or all of their investment in East Fork. Since the
foreclosure proceedings remain in an early stage, we are unable to predict their
duration.
Liquidity
As noted
above, we are currently unable to operate the plant profitably given our
inability to obtain working capital financing. Doubts about our
ability to continue as a going concern, coupled with the continuing credit
crunch, make it difficult to obtain replacement and working capital financing,
especially given the distressed nature of the biodiesel industry, uncertainty of
commodity prices and Farm Credit’s foreclosure
proceedings. See “Financial Statements”, in Item 8, Note 7,
below. As a result, we are experiencing liquidity problems associated with the
cost of our raw material and lack of demand for our product at profitable
prices. Also, if our operations begin, we would face the ordinary
delay between when we would purchase raw materials and when we would receive
payments from REG for our finished products.
When
Congress wrote the 2007 Energy Act, diesel consumption had been trending upwards
since 1984 and it appeared to many that the world would be able to use
considerably more diesel and biodiesel in the future. Diesel and
biodiesel consumption hit a peak of 63.2 billion gallons in 2007. But
diesel and biodiesel demand fell in 2008, after soaring diesel prices earlier in
the year were followed by the economic crisis. Combined consumption
for 2008 has been estimated at slightly more than 59.4 billion gallons; current
forecasts suggest that 2009 consumption could end at about 56.2 billion
gallons.
As noted,
the manufacturer’s price of B100 biodiesel as of mid-November 2009 was near
$3.35 per gallon, according to
The Jacobsen®.
Biodiesel producers also struggle to compete on price in relation to
petroleum diesel. After recognizing the benefit of the $1.00 per
gallon blenders tax credit, the implied cost for a gallon of biodiesel is
approximately $2.35 per gallon. For the same period, the U.S. average
retail diesel price was near $2.78 per gallon and the estimated average
wholesale price was approximately $2.06 per gallon, according to the Energy
Information Administration.
The
spread in price between petroleum diesel and biodiesel creates an economic
barrier to increasing biodiesel consumption. In order to compete
directly with petroleum diesel in the current market, biodiesel producers may
actually be forced to sell at a loss. A return of $3.50 diesel might
change things, by making biodiesel a relative bargain in comparison to petroleum
diesel and spur wider use. So would an unexpected increase in total
fuel demand. Otherwise, it is not at all clear how the world’s
surplus of biodiesel production capacity can be absorbed.
Working
Capital Financing
In 2008,
we developed a financing plan, presented to over 40 financial firms during the
2008 calendar year, which requested a minimum working capital facility of
$10,000,000. These financial firms included money center banks, regional banks,
community banks, finance companies, factors and high net worth individuals. In
addition, we sought working capital from potential lenders in the agriculture
industry, those with commodity experience and those with experience in renewable
fuels. We engaged placement agents to approach lenders that we would otherwise
not have approached. These placement agents had access to both traditional
lending sources and non traditional lenders. We offered potential lenders a
first security interest in our inventory and accounts
receivable. However, we have been unable to secure working capital to
date.
New
Financing
On
December 26, 2008 we retained Chicago-based William Blair & Company, L.L.C.
(William Blair) to act as our financial advisor in connection with our continued
exploration of possible strategic alternatives. William Blair has assisted us in
our search for new financing (a Financing Transaction). On
August 21, 2009, we terminated William Blair's engagement. To
date we have not been successful in arranging a Financing
Transaction.
On April
29, 2009 we met with Farm Credit and representatives of our existing lender
group to restructure the Restated Term Loan Agreement and to seek additional
financing for working capital and pretreatment equipment (our Farm Credit
Financing Proposal). On May 7, 2009, we received
correspondence from Farm Credit informing us that our Farm Credit
Financing Proposal had been denied for two general reasons: (a) our
insufficient capital position in Farm Credit's view, coupled with our present
inability to provide a significant contribution of capital, and (b) the
unwillingness of Farm Credit and the rest of our existing lender group to incur
additional lending exposure considering the uncertainty of the profit margins in
the biodiesel industry and our ability to tolerate additional risk.
Other
Strategic Alternatives
We
retained William Blair also to act as our financial advisor in connection with
the possible merger or sale of all or a portion of our capital stock or assets
or other business combination (a Business Combination). During the three months
ended March 31, 2009, William Blair contacted approximately 130 potential
strategic and financial buyers located in North America, South America, Europe
and Asia seeking interest in a Business Combination. Although William
Blair received 13 preliminary indications of interest, for a variety of reasons,
none of these potential buyers submitted a bid proposing a Business
Combination. On August 21, 2009 we terminated William Blair's
engagement. We have had no subsequent success in arranging a Business
Combination.
Our
foreclosure proceedings remain in an early stage. We cannot predict
the outcome of these proceedings. The foreclosure proceedings would
ultimately result in the conveyance of our plant, equipment, fixtures and real
property to Farm Credit, if a foreclosure proceeding were concluded before the
indebtedness under the restated term loan agreement could be otherwise repaid or
restructured in or outside of bankruptcy proceedings. Conclusion of the
foreclosure process would have a material adverse impact on our financial
condition and results of operations, result in the loss of the most of our
operating assets and a permanent shut-down of our plant and cause our members to
lose most or all of their investment in East Fork. Since the foreclosure
proceedings are in an early stage, we are unable to predict their
duration. In the meanwhile, we continue to have discussions with Farm
Credit about alternative solutions. Farm Credit’s foreclosure
proceeding makes it very unlikely that we will be able to obtain working capital
financing. As a result, we have not been exploring obtaining just working
capital financing, but instead have explored transactions that would result in a
sale of our plant, merger with another entity or additional investment to
implement pretreatment, provide operating capital and to restructure our
Restated Term Loan Agreement. Additionally we are examining
alternatives to allow utilization of a wider range of oil sources in our process
which allow our plant to improve its process to operate profitably in a wider
range of market conditions. We cannot predict the outcome of these
efforts.
On August 25, 2009, we retained Corval Group, Inc., based
in St. Paul, Minnesota, which assists companies with operational plans,
financial restructuring and new financing. For more information about
our agreement with Corval, see Item 9B, “Other Information”,
below. It is advising us on the possibility of obtaining additional
investment to implement pretreatment and provide operating capital and
restructure our Restated Term Loan Agreement. Based on our current
assessment and our work with Corval, we currently estimate that the cost to add
pretreatment equipment and the necessary working capital to support the
operational plan will total approximately $20 - $25 million (provided we are
able to reach agreement with Farm Credit to restructure our Restated Loan
Agreement and dismiss its foreclosure petition). If these
options appear feasible, we expect to provide more detail about how we intend to
proceed and the potential sources of these funding requirements in future SEC
filings.
There are
a number of technology companies that offer pretreatment solutions to process
crude oil and animal fat feedstocks to a refined level suitable for use in our
biodiesel production process. However, a majority of these
companies are either start-up companies, that have limited or no commercial
scale implementation, or are companies that do not have strong balance sheets
and/or construction partners. As a result, most are unable to
provide us with sufficient comfort of their ability to perform.
To
address these concerns, we are examining proposals from two technology companies
which we believe are capable of serving our needs to modify our existing plant
enabling it to process a wide variety of feed stocks, including corn oil, into
biodiesel. Both of these prospective vendors are well known technology providers
with multiple implementations of their technologies in the biodiesel and oil
seed processing industries. We believe the technology offered by both of these
companies will enable us to modify the plant with minimal technology
risk.
Additionally,
we must engage a proven construction partner with the ability to guarantee plant
construction cost and operating performance. We are seeking proposals
from contractors who have such abilities and have identified one such contractor
with the interest to work with us on this project, the financial resources and
experience in completing numerous renewable fuel projects on time and within
budget.
Our
ability to process alternative feedstocks and establish reliable supplies of
these materials is critical to our future. With the assistance of
Corval, we are focused on establishing supply agreements with multiple sources
of alternative feedstocks including animal fat suppliers and ethanol producers
that are or will be extracting crude corn oil as part of their production
process, as well as with brokers and marketers representing producers of these
materials. Our approach is designed to offer financial motivation as
well as a reliable outlet for crude fats and oils provided by these suppliers
over a defined period of time. For more information about our
agreement with Corval, see Item 9B, “Other Information”, below.
We may
consider pursuing other alternatives in addition to those noted
above. Given the current uncertainties in the credit and commodity
markets and in the biodiesel industry and Farm Credit’s foreclosure proceedings,
whether these efforts will be successful is uncertain.
Distribution
to Unit Holders
As of
September 30, 2009, our board of directors has not declared any
dividends.
Critical
Accounting Estimates
Management
uses estimates and assumptions in preparing our financial statements in
accordance with generally accepted accounting principles. These
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities and the reported revenues
and expenses.
Revenue
Recognition
Revenue
from the production of biodiesel and related products is recorded upon transfer
of the risks and rewards of ownership and delivery to customers and the selling
price is fixed and determinable. Revenue from federal incentive programs is
recorded when we have sold blended biodiesel and satisfied the reporting
requirements under the applicable program. When it is uncertain that we will
receive full allocation and payment due under the federal incentive program, we
derive an estimate of the incentive revenue for the relevant period based on
various factors including the most recently used payment factor applied to the
program. The estimate is subject to change as we become aware of
increases or decreases in the amount of funding available under the incentive
programs or other factors that affect funding or allocation of funds under such
programs. Interest income is recognized as earned.
Derivative
Instruments and Hedging Activities
We have
entered into derivative contracts to hedge our exposure to price risk related to
forecasted soybean oil purchases and forecasted biodiesel
sales. These derivative contracts are accounted for under Accounting
Standards Codification (ASC) 815. ASC 815 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires
that we recognize all derivatives as either assets or liabilities in our balance
sheet and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction.
Although
we believe our derivative positions are economic hedges, none have been
designated as hedges for accounting purposes. Therefore, derivative positions
are recorded on our balance sheet at their fair market value, with changes in
fair value recognized in the statements of operations. We did not have an open
position during the year ended September 30, 2009 and recognized a net loss of
none and $119,530 during the years ended September 30, 2009 and 2008,
respectively, and $843,696 during the period from inception to September 30,
2009.
Off-balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
|
Item 8.
|
Financial Statements
and Supplementary Data.
|
See
below.
|
INDEX TO FINANCIAL
STATEMENTS
|
||
|
Contents
|
||
|
Report
of Independent Registered Public
Accounting Firm
|
F-2
|
|
|
Financial
Statements
|
||
|
Balance
sheets
|
F-3
|
|
|
Statements
of operations
|
F-4
|
|
|
Statements
of members’ equity
|
F-5
|
|
|
Statements
of cash flows
|
F-6
|
|
|
Notes
to financial statements
|
F-7
– F-15
|
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Members
East Fork
Biodiesel, LLC (A Development Stage Company)
We have
audited the balance sheets of East Fork Biodiesel, LLC (A Development Stage
Company) as of September 30, 2009 and 2008, and the related statements of
operations, members’ equity and cash flows for the years ended September 30,
2009 and 2008 and the period from January 5, 2006 (date of inception) to
September 30, 2009. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of East Fork Biodiesel, LLC as of
September 30, 2009 and 2008, and the results of its operations and its cash
flows for the years ended September 30, 2009 and 2008 and the period from
January 5, 2006 (date of inception) to September 30, 2009, in conformity with
U.S. generally accepted accounting principles.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 7 to the financial
statements, the Company has experienced significant increases in the input costs
of its products causing it to suspend plant operations in December 2007 after
initial testing and production start-up and has not been able to obtain working
capital funds to start-up the plant and operate profitably, which raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 7. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We were
not engaged to examine management's assessment of the effectiveness of East Fork
Biodiesel, LLC’s internal control over financial reporting as of September 30,
2009, included in Item 9A(T) and, accordingly, we do not express an opinion
thereon.
/s/
McGladrey & Pullen LLP
Davenport,
Iowa
December
4, 2009
McGladrey
& Pullen, LLP is an independent member firm of RSM
International,
an
affiliation of separate and independent legal entities.
|
East
Fork Biodiesel, LLC
|
||||||||
|
(A
Development Stage Company)
|
||||||||
|
Balance
Sheets
|
||||||||
|
September 30,
|
September 30,
|
|||||||
|
Assets
(Note 3)
|
2009
|
2008
|
||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,281,250 | $ | 124,073 | ||||
|
Restricted
cash with lender (Note 3)
|
265,910 | - | ||||||
|
Accounts
receivable (Note 6)
|
- | 25,789 | ||||||
|
Federal
incentive receivable
|
- | 4,046 | ||||||
|
Inventory
|
70,300 | 88,642 | ||||||
|
Prepaid
expenses
|
50,133 | 56,425 | ||||||
|
Total
current assets
|
1,667,593 | 298,975 | ||||||
|
Property
and Equipment:
|
||||||||
|
Land
|
539,291 | 539,291 | ||||||
|
Construction
in progress
|
- | 348,151 | ||||||
|
Plant
and processing equipment
|
59,317,164 | 59,561,579 | ||||||
|
Office
building, furniture and fixtures
|
489,154 | 489,154 | ||||||
| 60,345,609 | 60,938,175 | |||||||
|
Accumulated
depreciation including impairment charge
|
35,645,609 | 3,229,587 | ||||||
| 24,700,000 | 57,708,588 | |||||||
|
Other
Assets:
|
||||||||
|
Restricted
cash in escrow
|
518,789 | 552,589 | ||||||
|
Deferred
financing costs, net of accumulated amortization
|
- | 168,808 | ||||||
| 518,789 | 721,397 | |||||||
| $ | 26,886,382 | $ | 58,728,960 | |||||
|
Liabilities
and Members' Equity
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
maturities of long-term debt (Note 3)
|
$ | 24,800,000 | $ | 20,860,000 | ||||
|
Accounts
payable and accrued expenses
|
592,493 | 264,041 | ||||||
|
Construction
payable, including $150,000 of retainage (Note 6)
|
- | 289,010 | ||||||
|
Total
current liabilities
|
25,392,493 | 21,413,051 | ||||||
|
Commitments
(Notes 6, 7 and 8)
|
||||||||
|
Members'
Equity (Note 2):
|
||||||||
|
Member
contributions, net of issuance costs, units outstanding
September 30, 2009 and 2008 49,159
|
44,115,810 | 44,115,810 | ||||||
|
Deficit
accumulated during the development stage
|
(42,621,921 | ) | (6,799,901 | ) | ||||
| 1,493,889 | 37,315,909 | |||||||
| $ | 26,886,382 | $ | 58,728,960 | |||||
|
See
Notes to Financial Statements.
|
||||||||
|
East
Fork Biodiesel, LLC
|
||||||||||||
|
(A
Development Stage Company)
|
||||||||||||
|
Statements
of Operations
|
||||||||||||
|
January
5, 2006
|
||||||||||||
|
Year
Ended
|
(Date
of
|
|||||||||||
|
September 30,
|
September 30,
|
Inception)
to
|
||||||||||
|
2009
|
2008
|
September
30, 2009
|
||||||||||
|
Revenues:
|
||||||||||||
|
Sales
(Note 6)
|
$ | - | $ | 3,651,251 | $ | 3,651,251 | ||||||
|
Federal
incentives
|
- | 994,804 | 994,804 | |||||||||
|
Rental
Income
|
82,830 | - | 82,830 | |||||||||
| 82,830 | 4,646,055 | 4,728,885 | ||||||||||
|
Expenses:
|
||||||||||||
|
Cost
of sales, including plant operating expenses
|
3,454,194 | 8,084,931 | 11,539,125 | |||||||||
|
Impairment
of plant and processing equipment
|
29,364,430 | - | 29,364,430 | |||||||||
|
Loss
on sale contract
|
- | 158,000 | 158,000 | |||||||||
|
Loss
on derivative instruments
|
- | 119,530 | 843,696 | |||||||||
|
Consulting
fees (Note 4)
|
- | 27,000 | 284,359 | |||||||||
|
General
and administrative
|
1,594,125 | 1,411,290 | 3,696,072 | |||||||||
| 34,412,749 | 9,800,751 | 45,885,682 | ||||||||||
|
Loss
before other income (expense)
|
(34,329,919 | ) | (5,154,696 | ) | (41,156,797 | ) | ||||||
|
Other
income (expense):
|
||||||||||||
|
Grants
and other income
|
51,314 | 28,559 | 93,353 | |||||||||
|
Interest
income
|
24,702 | 39,213 | 1,314,461 | |||||||||
|
Interest
expense
|
(1,568,117 | ) | (1,304,821 | ) | (2,872,938 | ) | ||||||
| (1,492,101 | ) | (1,237,049 | ) | (1,465,124 | ) | |||||||
|
Net
(loss)
|
$ | (35,822,020 | ) | $ | (6,391,745 | ) | $ | (42,621,921 | ) | |||
|
Weighted
average basic and diluted units outstanding
|
49,159 | 47,995 | 41,760 | |||||||||
|
Net
(loss) per unit - basic and diluted
|
$ | (728.70 | ) | $ | (133.18 | ) | $ | (1,020.64 | ) | |||
|
See
Notes to Financial Statements.
|
||||||||||||
|
East
Fork Biodiesel, LLC
|
||||
|
(A
Development Stage Company)
|
||||
|
Statements
of Members’ Equity
|
||||
|
Balance,
January 5, 2006 (date of inception)
|
$ | - | ||
|
Issuance
of 200 membership units at $250 per unit (Note 2)
|
50,000 | |||
|
Issuance
of 1,553 membership units at $333 per unit (Note 2)
|
517,666 | |||
|
Issuance
of 7,015 membership units at $500 per unit in March 2006 (Note
2)
|
3,507,500 | |||
|
Member
units earned for consulting services but not issued (Note
4)
|
50,000 | |||
|
Net
loss
|
(318,069 | ) | ||
|
Balance,
September 30, 2006
|
3,807,097 | |||
|
Issuance
of 38,341 membership units at $1,000 per unit (Note 2)
|
38,341,000 | |||
|
Offering
costs
|
(371,623 | ) | ||
|
Issuance
of 50 member units for services
|
- | |||
|
Membership
units subscription receivable
|
(135,000 | ) | ||
|
Net
loss
|
(90,087 | ) | ||
|
Balance,
September 30, 2007
|
41,551,387 | |||
|
Collection
of unit subscription receivable, including interest
|
156,267 | |||
|
Issuance
of 2,000 membership units for construction payable
|
2,000,000 | |||
|
Net
loss
|
(6,391,745 | ) | ||
|
Balance,
September 30, 2008
|
37,315,909 | |||
|
Net
loss
|
(35,822,020 | ) | ||
|
Balance,
September 30, 2009
|
$ | 1,493,889 | ||
|
See
Notes to Financial Statements.
|
||||
|
East
Fork Biodiesel, LLC
|
||||||||||||
|
(A
Development Stage Company)
|
||||||||||||
|
Statements
of Cash Flows
|
||||||||||||
|
January
5, 2006
|
||||||||||||
|
Year
Ended
|
(Date
of
|
|||||||||||
|
September 30,
|
September 30,
|
Inception)
to
|
||||||||||
|
2009
|
2008
|
September
30, 2009
|
||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
(loss)
|
$ | (35,822,020 | ) | $ | (6,391,745 | ) | $ | (42,621,921 | ) | |||
|
Adjustments
to reconcile net (loss) to net cash (used in) operating
activities:
|
||||||||||||
|
Depreciation
|
3,097,100 | 3,219,378 | 6,326,687 | |||||||||
|
Amortization
|
168,808 | 197,563 | 366,371 | |||||||||
|
Impairment
of plant and processing equipment
|
29,364,430 | - | 29,364,430 | |||||||||
|
Unrealized
(gain) on derivative financial instruments
|
- | (517,724 | ) | - | ||||||||
|
Member
units earned for consulting services
|
- | - | 50,000 | |||||||||
|
Changes
in working capital components:
|
||||||||||||
|
(Increase)
decrease in receivables
|
29,835 | (29,835 | ) | - | ||||||||
|
(Increase) decrease
in inventories
|
18,342 | (88,642 | ) | (70,300 | ) | |||||||
|
Decrease
in due from broker
|
- | 1,190,558 | - | |||||||||
|
(Increase)
decrease in prepaid expenses
|
6,292 | (7,520 | ) | (50,133 | ) | |||||||
|
Increase
in accounts payable and accrued expenses
|
328,452 | 116,204 | 592,493 | |||||||||
|
Net
cash (used in) operating activities
|
(2,808,761 | ) | (2,311,763 | ) | (6,042,373 | ) | ||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||
|
Purchase
and construction of property and equipment, net of sales tax
refund
|
258,048 | (8,593,308 | ) | (58,363,351 | ) | |||||||
|
(Increase)
in restricted cash with lender
|
(265,910 | ) | - | (265,910 | ) | |||||||
|
(Increase)
decrease in restricted cash in escrow, net
|
33,800 | 165,961 | (518,789 | ) | ||||||||
|
Net
cash provided by (used in) investing activities
|
25,938 | (8,427,347 | ) | (59,148,050 | ) | |||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Issuance
of membership units
|
- | - | 42,281,166 | |||||||||
|
Collection
of membership unit subscription receivable
|
- | 156,267 | 156,267 | |||||||||
|
Payments
of offering costs
|
- | - | (371,623 | ) | ||||||||
|
Payments
of financing costs
|
- | - | (394,137 | ) | ||||||||
|
Payments
of long-term debt
|
(60,000 | ) | (40,000 | ) | (100,000 | ) | ||||||
|
Proceeds
from long-term borrowings
|
4,000,000 | 10,577,990 | 24,900,000 | |||||||||
|
Net
cash provided by financing activities
|
3,940,000 | 10,694,257 | 66,471,673 | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,157,177 | (44,853 | ) | 1,281,250 | ||||||||
|
Cash
and cash equivalents:
|
||||||||||||
|
Beginning
|
124,073 | 168,926 | - | |||||||||
|
Ending
|
$ | 1,281,250 | $ | 124,073 | $ | 1,281,250 | ||||||
|
Supplemental
Disclosure of Cash Flow Information, cash payments for interest,
net of amount capitalized
|
$ | 973,246 | $ | 1,009,021 | $ | 1,982,267 | ||||||
|
Supplemental
Disclosures of Noncash Operating and Financing Activities:
|
||||||||||||
|
Construction
in progress included in accounts and construction payable
|
$ | - | $ | 289,010 | $ | - | ||||||
|
Membership
units issued in exchange for construction payable
|
- | 2,000,000 | 2,000,000 | |||||||||
|
Amortized
financing costs included in construction in progress
|
- | 11,266 | 27,766 | |||||||||
|
See
Notes to Financial Statements.
|
||||||||||||
East
Fork Biodiesel, LLC
(A
Development Stage Company)
|
Notes to Financial
Statements
|
|
Note
1.
|
Nature
of Business, Basis of Presentation and Significant Accounting
Policies
|
Nature
of business:
East Fork
Biodiesel, LLC (the Company), located in Algona, Iowa, was formed on January 5,
2006 to pool investors to build a 60 million gallon annual production biodiesel
manufacturing plant. The Company is in the development stage with its efforts
being principally devoted to organizational, equity-raising activities and
construction of the biodiesel plant. The plant was substantially complete and
started production on December 5, 2007 to verify the production capabilities of
the plant. In December 2007 the plant produced approximately 1.1 million gallons
of biodiesel and then shut down due to the then existing adverse market
conditions (See Note 7).
Significant
accounting policies:
Use of estimates: The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Concentrations of credit
risk: The Company’s cash balances are maintained in bank deposit accounts
which at times may exceed federally insured limits.
Cash and cash
equivalents: The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
Accounts
receivable: Accounts receivable are presented at face value,
net of the allowance for doubtful accounts. The allowance for doubtful accounts
is established through provisions charged against income and is maintained at a
level believed adequate by management to absorb estimated bad debts based on
historical experience and current economic conditions. Receivables are
considered past due based upon payment terms set forth at the date of the
related sale. There are no outstanding receivables as of September 30,
2009.
Inventory: Inventory
is valued at the lower of cost or market using the first-in, first out (FIFO)
method. Inventory consists of the following as of September 30, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Raw
material
|
$ | 70,300 | $ | 88,642 | ||||
|
Finished
goods
|
- | - | ||||||
| $ | 70,300 | $ | 88,642 | |||||
East
Fork Biodiesel, LLC
(A
Development Stage Company)
|
Notes to Financial
Statements
|
|
Note
1.
|
Nature
of Business, Basis of Presentation and Significant Accounting Policies
(Continued)
|
Property and
equipment: Property and equipment is stated at cost. Depreciation is
computed using the straight-line method over the following estimated useful
lives:
|
Years
|
|
|
Plant
and process equipment
|
15
- 20
|
|
Office
building
|
20
|
|
Furniture
and fixtures
|
3 -
7
|
Maintenance
and repairs are expensed as incurred and major improvements and betterments are
capitalized. As of September 30, 2009, the Company has capitalized $345,416 of
interest and financing costs in property and equipment.
Asset Impairment: The
Company evaluates the appropriateness of the carrying amounts of its long-lived
assets at least annually, or more frequently whenever indicators of impairment
are deemed to exist. In accordance with Company policies, management
previously had evaluated the plant for possible impairment based on projected
future cash flows from operations assuming that the Company would be able to
obtain a working capital loan and commence operations.
Based on
recent developments with the Company’s current lender and the Company’s
inability to find alternative sources for its required working capital,
management determined that an impairment existed at March 31, 2009. Therefore,
during the period ending March 31, 2009, the Company’s plant and processing
equipment were reduced to fair value by recording a $20,224,067 impairment
charge. Due to the lack of any sales of facilities similar to the
Company’s or a quoted market price for the Company’s units, the Company
estimated fair value based on the range of values discussed in a potential
merger transaction and an independent appraisal. The valuation was
considered to be level 3 under ASC 820, Fair Value Measurements and
Disclosures.
Since
March 31, 2009 there has been further deterioration in the biodiesel industry
and the Company’s lender has initiated foreclosure proceedings against the
Company’s plant, equipment, fixtures and real property. The Company
does not believe that the facility could be sold for greater than the amount due
the lender. The most probable recovery for the Company would be the
proceeds from the loan extinguishment from the foreclosure
process. Therefore, as of September 30, 2009, the Company’s plant and
processing equipment were reduced to the net amount due the lender of
$24,700,000, by recording an additional impairment charge of
$9,140,363.
Restricted cash in
escrow: As of September 30, 2009 the Company had an agreement
with a natural gas company that requires a restricted escrow balance of $518,789
consisting of a $45,589 deposit and $473,200 to cover storage transportation
and/or construction of the town border station. Under the terms of the agreement
the escrow will be released annually beginning October 1, 2008 at the discretion
of the natural gas company but no less than 1/15 of the original deposit of
$507,000 to cover storage transportation and/or construction of the town border
station.
Offering
costs: The Company classifies all costs directly related to
raising capital as deferred offering costs until the capital is raised, at which
point the costs are reclassified as an offset to equity as issuance costs.
Offering costs of $371,623 were offset against equity during the year ended
September 30, 2007.
East
Fork Biodiesel, LLC
(A
Development Stage Company)
|
Notes to Financial
Statements
|
|
Note
1.
|
Nature
of Business, Basis of Presentation and Significant Accounting Policies
(Continued)
|
Deferred financing
costs: Expenditures directly related to securing long-term
financing are recorded as a deferred cost on the balance sheet. These costs were
being amortized using the effective interest method over the term of the credit
agreement. During the year ended September 30, 2008 and the period
from inception to September 30, 2009, the Company amortized $11,266 and $27,766
respectively of these costs to construction in progress. No amounts
were amortized to construction in progress during the year ended September 30,
2009. As a result of the Company’s default under its Restated Term
Loan Agreement discussed in Note 3, the lender has terminated any commitment to
the Company and accelerated the due date of the unpaid principal balance
outstanding. The remaining $134,086 of deferred financing costs was
included in interest expense for the year ended September 30, 2009.
Derivative
instruments: The Company has entered into derivative contracts
to hedge its exposure to price risk related to forecasted soybean oil purchases
and forecasted biodiesel sales. These derivative contracts are accounted for
under Accounting Standards Codification (ASC) 815. ASC 815 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction.
Although
the Company believes its derivative positions are economic hedges, none have
been designated as hedges for accounting purposes. Therefore, derivative
positions are recorded on the balance sheet at their fair market value, with
changes in fair value recognized in the statements of operations. The Company
did not have an open position during the year ended September 30, 2009 and
recognized a net loss of none and $119,530 during the years ended
September 30, 2009 and 2008, respectively, and $843,696 during the period from
inception to September 30, 2009.
Due to
restrictions placed upon the Company by its lender, the Company was required to
subcontract the production of 163,000 gallons of biodiesel to another biodiesel
plant. This resulted in a loss of approximately $158,000 which was recognized
during the year ended September 30, 2008.
Revenue recognition:
Revenue from the production of biodiesel and related products is recorded upon
transfer of the risks and rewards of ownership and delivery to customers and the
selling price is fixed and determinable. Revenue from federal incentive programs
is recorded when the Company has sold blended biodiesel and satisfied the
reporting requirements under the applicable program. When it is uncertain that
the Company will receive full allocation and payment due under the federal
incentive program, it derives an estimate of the incentive revenue for the
relevant period based on various factors including the most recently used
payment factor applied to the program. The estimate is subject to change as
management becomes aware of increases or decreases in the amount of funding
available under the incentive programs or other factors that affect funding or
allocation of funds under such programs. Interest income is recognized as
earned.
Shipping and handling
costs: Shipping and handling costs are expensed as incurred and are
included in the cost of sales.
East
Fork Biodiesel, LLC
(A
Development Stage Company)
|
Notes to Financial
Statements
|
|
Note
1.
|
Nature
of Business, Basis of Presentation and Significant Accounting Policies
(Continued)
|
Income
taxes: The Company is organized as a limited liability company
which is accounted for like a partnership for federal and state income tax
purposes and generally does not incur income taxes. Instead, the Company's
earnings and losses are included in the income tax returns of its members.
Therefore, no provision or liability for federal or state income taxes has been
included in these financial statements.
(Loss) per
unit: (Loss) per unit has been computed on the basis of the
weighted average number of units outstanding during each period
presented.
Organizational and start-up
costs: The Company expenses all organizational and start-up
costs as incurred.
Fair value of financial
instruments: The estimated fair value of financial instruments
was determined by reference to various market data and other valuation
techniques as appropriate. The carrying amounts of cash and cash equivalents,
due from broker, restricted cash, accounts payable and accrued expenses
approximate fair value because of the short maturity of these financial
instruments. The carrying value of the debt also approximates fair value as the
interest rate reprices when market interest rates change. The fair values of the
derivative instruments are based on quoted prices in active exchange-traded or
over-the-counter markets.
|
Note
2.
|
Members'
Equity
|
The
Company was formed on January 5, 2006 to have a perpetual life. The Company has
one class of membership units with each unit representing a pro rata ownership
interest in the Company’s capital, profits, losses and distributions. Income and
losses are allocated to all members in proportion to units held.
The
Company was initially capitalized by founding members who contributed a total of
$50,000 in exchange for 200 units at $250 per unit. Subsequently, a total of
1,553 units valued at approximately $333 per unit for a total of $517,666 were
issued to three of the founding members and 19 additional members. The Company
was further capitalized by additional seed capital members who contributed an
aggregate of $3,507,500 in exchange for 7,015 units at $500 per unit. These
units were issued under a private placement memorandum in which the Company
offered a maximum of 10,000 units at an offering price of $500 per unit for a
total offering of $5,000,000. On March 31, 2006 the private placement memorandum
for the seed capital offering was closed and the seed capital subscription
agreements were accepted and approved.
On June
22, 2006, the Company issued an Iowa registered offering of membership units
which was amended to increase the offering size on September 7, 2006. The
intrastate offering was set for a minimum of 31,000 membership units up to a
maximum of 40,000 units for sale at $1,000 per unit, for a minimum offering
amount of $31,000,000 and a maximum offering amount of $40,000,000. The minimum
purchase requirements were 10 units for a minimum investment of $10,000. On
October 16, 2006, the Company accepted 34,294 units at $1,000 per unit. There
were six additional closings occurring on various dates between November 20,
2006 and June 15, 2007 in which an additional 4,047 units were accepted at
$1,000 per unit.
On May 1,
2008, $2,000,000 of the construction obligation was paid to REG Construction
& Technology Group, LLC through the issuance of 2,000 membership units to
such entity.
East
Fork Biodiesel, LLC
(A
Development Stage Company)
|
Notes to Financial
Statements
|
|
Note
3.
|
Long-Term
Debt
|
On
January 30, 2007, the Company entered into a $36,500,000 Master Loan Agreement
(credit agreement) which consisted of a $12,000,000 revolving-term loan and a
$24,500,000 construction-term loan used for working capital and to complete the
biodiesel project. The construction-term loan consisted of two
phases: a “start-up phase” during which the Company made periodic
requests for fund advances to meet construction obligations and at the
completion of construction and payment of construction costs, a "term loan
phase" in which the loan converted to a “senior debt instrument”. The
construction loan was secured by substantially all of the Company’s real
property, equipment, fixtures, furniture and articles of tangible personal
property (except inventory and supplies) and was payable in quarterly
installments of $912,500 beginning on May 20, 2008. The credit agreement
provided for a special annual payment equal to 75% of “free cash flow” as
defined in the agreement, limited to a total payment $2,000,000
annually.
The
Company selected one or more of the following interest rate options under the
credit agreement:
Agent base
rate: A variable interest rate equal to the rate established
by the Agent plus three-quarters of one percent (0.75%) per annum.
Quoted
rate: A fixed rate per annum to be quoted by the Agent in its
sole discretion in each instance.
LIBOR: A
fixed rate per annum equal to London Inter Bank Offered Rate at the date
selected plus 3.25%.
Interest
shall be calculated by multiplying the actual number of days elapsed in the
period for which interest is being calculated based on a 360-day
year.
The
credit agreement also contained an event of default if the lender determines
that there has been a material adverse change in the Company’s financial
condition, results of operations, or ability to perform its obligations under
the agreement. In November 2007, the Company was informed by its lender that the
senior credit facility was considered to be a distressed loan subject to
restructuring. The lender refused to make further advances under the
facility.
On June
17, 2008 the Company entered into a restructuring agreement with the lender and
executed a Restated Term Loan Agreement. The principal provisions of this
Agreement are:
|
|
·
|
The
Company’s access to the $12,000,000 revolving term loan was terminated.
The lender released its security interest in the Company’s inventory and
accounts receivable, as well as intangible personal
property.
|
|
|
·
|
A
reserve of $600,000 was established for interest due through March 31,
2009 and a reserve of $290,000 was established for the final payments due
REG Construction & Technology Group,
LLC.
|
|
|
·
|
The
Company was able to draw on the full amount of the $24,500,000 Term Loan
less the reserves discussed above.
|
|
|
·
|
Principal
payments in the individual amounts of $912,500 due May 20, 2008, August
20, 2008 and November 20, 2008 were deferred with quarterly principal
payments of $912,500 resuming and being due on February 20, 2009, and due
quarterly thereafter. The due date for the final payment will be August
20, 2015.
|
East
Fork Biodiesel, LLC
(A
Development Stage Company)
|
Notes to Financial
Statements
|
|
Note
3.
|
Long-Term
Debt (Continued)
|
|
|
·
|
The
Company shall select one or more of the following interest rate options
under the Restated Term Loan Agreement: a variable interest
rate equal to the rate established by the Agent plus three-quarters of one
percent (0.75%) per annum; or a fixed rate per annum equal to London Inter
Bank Offered Rate at the date selected plus
3.25%.
|
|
|
·
|
The
financial covenants were eliminated. The Restated Term Loan Agreement
contains various affirmative and negative
covenants.
|
On
February 20, 2009, the Company was granted a payment deferral until May 20, 2009
of its $912,500 quarterly principal payment due February 20, 2009. As part of
the Restated Term Loan Agreement, the Company deposited $460,000 with the agent
for the lender to be used for monthly interest and other fees due the lender. As
of September 30, 2009, $265,910 was in this account.
On May
20, 2009 the Company had a scheduled principal payment due of $1,825,000. This
payment was not made as the Company did not have sufficient unrestricted cash.
On May 26, 2009, the lender has declared the Company in default and on June 22,
2009 the lender initiated foreclosure proceedings against the Company’s plant,
equipment, fixtures and real property.
As a
result of the default, the lender increased the interest rate on the borrowings
by 4.0%, effective May 21, 2009. As of September 30, 2009, $24,000,000 of the
borrowings were at the LIBOR option of 7.625% and $500,000 of the borrowings
were at the Agent Base Rate option of 8.50%.
As of
September 30, 2009, $24,500,000 was outstanding under the term loan
agreement.
In June
2006, the Company entered into a financial assistance contract with the Iowa
Department of Economic Development whereby the Company was awarded a $100,000
forgivable loan and a $300,000 non-interest bearing loan. The Company is
obligated to create 36 full-time equivalent jobs, with 30 of the created jobs
having starting wages, including benefits, that meet or exceed $16.09 per hour
with an average rate per hour including benefits of $19.47. As of September 30,
2009 the Company was not in compliance with these job creation requirements and
therefore could become subject to certain financial penalties. As of
September 30, 2009, $300,000 was outstanding. The agreement provides for a
monthly principal payment of $5,000 per month. The occurrence of a default under
the Restated Term Loan Agreement also constitutes an event of default under the
contract which would allow IDED, at its option, to provide a notice of default
which among other things would result in the amount being immediately due and
payable (including the $100,000 forgivable loan) and impose a 6% annual default
interest rate.
East
Fork Biodiesel, LLC
(A
Development Stage Company)
|
Notes to Financial
Statements
|
|
Note
4.
|
Related
Party Transactions
|
The
Company paid a consulting company owned by a member for project coordination,
administration and consulting services, under the terms of an unwritten,
month-to-month consulting arrangement. The member is also the President, former
Chairman and current member of the Board of Directors. During the fiscal years
ended September 30, 2009 and 2008, the Company had incurred consulting charges
of approximately none and $27,000, respectively, under this
agreement. From inception through September 30, 2009, the Company
incurred consulting charges of approximately $99,300 under this
agreement.
In March
2006, the Company entered into a consulting agreement with an entity, owned by a
member of the Company, to serve as the Company’s project consultant. The fee for
the services was $3,200 per month, plus bonuses for reaching certain milestones
relative to the signing of the contract, completion of the business plan, loan
commitment, loan closing and the starting of the equity offering. The consulting
agreement ended in 2007. Since inception, the Company incurred consulting
charges totaling $225,059 under the agreement. The total included $50,000 of
services exchanged for 50 units issued to the consulting company and $40,000 of
fees that were capitalized as deferred financing costs.
|
Note
5.
|
Commitments
and Contingencies
|
The
Company entered into a design-build agreement with REG Construction Services,
LLC for construction of the biodiesel plant for $57,238,000 due in monthly
progress payments. The agreement provided for a 5% retainage to be withheld from
each invoice. The contract was increased by $1,390,095 by change
orders. On March 4, 2009 the Company negotiated a final settlement on
the construction contract resulting in a $259,010 reduction in the total
contract price. The final $30,000 payment under the construction
contract was made in March 2009.
On
December 15, 2006 the Company entered into two put option agreements whereby the
sellers can require the Company to purchase property adjacent to the plant. One
agreement provides for a purchase price of $120,750 plus 105% of the cost of any
improvements or additions made to the property prior to the exercise of the
option and the other provides for a purchase price of $236,250. The options
expire two years after the announced date of operation of the biodiesel
facility. If the options expire unexercised, they will be resurrected upon the
expansion of 25% of the initial capacity of the plant or upon the construction
or operation of any new separate facility. The Company paid $5,000 for each
option and believes that the purchase price approximated the fair market values
of the property at the dates of the agreements.
East
Fork Biodiesel, LLC
(A
Development Stage Company)
|
Notes to Financial
Statements
|
|
Note
5.
|
Commitments
and Contingencies (Continued)
|
In May
2006, the Company entered into an option agreement which it subsequently
exercised to purchase its current property. Part of the agreement also provided
the Company the option to purchase additional adjacent land for $12,500 per acre
in 10 acre increments. The option covers approximately 44 acres and will expire
in May 2011.
In
September 2006, the Company executed an agreement with a natural gas company to
provide the natural gas required by the Company for a period commencing on
August 1, 2007 and continuing for a period of 15 years. The contract was amended
in October 2006 to delay the start date until November 1, 2007. The Company will
pay a monthly delivery charge plus the applicable maximum rates and surcharges
under the applicable rate schedule on file with the Iowa Commerce Commission for
the gas that it uses. The contract reserves pipeline capacity of 984
dekatherms/day, at a cost of approximately $15,000 per month. The Company has
hired a broker to market the excess pipeline capacity. The broker
successfully marketed a large percentage of this volume through the early part
of the year with lesser percentages marketed over the warmer months as overall
natural gas demand declines.
On
September 8, 2008 the Company entered into an agreement with Renewable Fuels
Management, LLC to provide the services of a Chief Executive
Officer. Subject to meeting certain performance measurements, the
Company will offer, over the course of the Management Agreement, up to 2,500 of
its membership units to Renewable Fuels Management through unit purchase
options. The purchase price of the units to be granted upon
achievement of the performance measurements will be $600 per unit.
|
Note
6.
|
Major
Customer
|
On
September 26, 2006, the Company entered into a Management and Operational
Services Agreement with Renewable Energy Group, LLC. Under the agreement
Renewable Energy Group will place the general and operations managers, acquire
feedstocks and basic chemicals necessary for the operation of the facility, and
perform the administrative, sales and marketing functions for the Company. In
exchange for these services, the Company has agreed to pay Renewable Energy
Group a flat monthly fee ("flat fee") and a per-gallon rate fee ("rate fee").
For the first month in which the Company’s biodiesel is produced and sold, and
for six months thereafter (the "initial period"), it will pay a flat fee of
$112,500, plus a $0.0175 rate fee for each gallon of biodiesel produced. For the
first month after the initial period the Company will pay a flat fee of
$172,500, plus a $0.0175 rate fee for each gallon of biodiesel produced. The
flat fee and rate fee are adjusted beginning in the month following the first
anniversary of the Company’s producing biodiesel for sale and annually for such
month thereafter according to a complex formula based on movement in the Consumer Price Index for
All-Urban Consumers, U.S. City Average, All Items, published by the
United States Department of Labor. In addition to the flat fee and monthly fee,
the Management Agreement also provides for the payment to Renewable Energy Group
of a yearly bonus equal to 6% of the Company’s net income. The agreement has an
initial term ending December 31, 2010 and it will continue thereafter unless
either party gives written notice to the other of a proposed termination date at
least 12 months in advance of the proposed termination date. On December 1,
2007, the Company and REG amended the Management Agreement to reduce the monthly
fee to the amount of the compensation costs (including benefits) of the
Company’s General Manager and Operations Manager while its plant is
idle. The total expense recognized under the contract was
$50,121 and $117,567 during the years ended September 30, 2009 and 2008,
respectively. Sales of biodiesel and glycerin to REG for the years
ended September 30, 2009 and 2008 were none and $3,651,251 respectively. The
related accounts receivable due from REG as of September 30, 2009 and 2008 was
none and $25,789 respectively.
East
Fork Biodiesel, LLC
(A
Development Stage Company)
|
Notes to Financial
Statements
|
|
Note
7.
|
Going
Concern
|
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. Through September 30, 2009, the Company was in
the development stage, has undertaken significant borrowings to finance the
construction of its biodiesel plant and has experienced a significant increase
in the cost of soybean oil which is currently the primary ingredient in the
Company’s planned production of biodiesel. As a result of the high cost of
soybean oil the Company suspended plant operations in December 2007 after
initial testing and production start-up. The Company has not been able to obtain
working capital funds to start-up the plant and operate profitably. On May 26,
2009, the lender’s agent declared the Company in default and on June 22, 2009
the lender initiated foreclosure proceedings against the Company’s plant,
equipment, fixtures and real property.
To
address the Company’s liquidity challenge, the Company is exploring various
alternatives to infuse capital into its business including alliances,
partnerships and mergers with other entities, as well as pursuing avenues to
obtain additional financing or raise additional capital. Additionally
the Company is examining alternatives to allow utilization of a wider range of
oil sources in its process which allow the plant to improve its process to
operate profitably in a wider range of market conditions. To that
end, the Company has made modifications to the facility that will allow the
handling and utilization of refined animal-based inputs. The Company
cannot predict the outcome of these efforts.
|
Note
8.
|
Subsequent
Events
|
The
Company has performed an evaluation of subsequent events through the time the
September 30, 2009, Form 10-K was filed with the Securities and Exchange
Commission on December 4, 2009, which is the date the financial statements were
issued. No events have occurred subsequent to September 30, 2009 that
require disclosure or recognition in these financial
statements.
|
Item 9.
|
Changes in and
Disagreements With Accountants on Accounting and Financial
Disclosure.
|
None.
|
Item 9A(T).
|
Controls and
Procedures.
|
Evaluation
of Disclosure Controls and Procedures
Based on
management’s evaluation (with the participation of our principal executive
officer (PEO), Mr. Chris L. Daniel, and principal financial officer (PFO),
Mr. Jack W. Limbaugh, Jr.), as of the end of the period covered by this report,
our PEO and PFO have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act)), are effective to provide reasonable
assurance that information required to be disclosed by us in reports that we
file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms, and is
accumulated and communicated to management, including our PEO and PFO, as
appropriate, to allow timely decisions regarding required
disclosure.
Changes
in Internal Control Over Financial Reporting
There
were no changes to our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
Management
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted
accounting principles.
We
assessed our internal control over financial reporting as of September 30,
2009, the end of our fiscal year. We based our assessment on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Our assessment included
evaluation of elements such as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies and our
overall control environment.
Based on
our assessment, we have concluded that our internal control over financial
reporting was effective as of the end of our fiscal year to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles. We reviewed the results of
management’s assessment with the Audit Committee of our Board of
Directors.
This
Annual Report on Form 10-K does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this Annual Report on Form
10-K.
Inherent
Limitations on Effectiveness of Controls
Our
management, including the PEO and PFO, does not expect that our disclosure
controls or our internal control over financial reporting will prevent or detect
all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
|
Item 9B.
|
Other
Information.
|
On August
25, 2009, we retained Corval Group, Inc. (Corval), based in St. Paul, Minnesota,
which assists companies with operational plans, financial restructuring and new
financing. Corval is advising us on the possibility of obtaining
additional investment to implement pretreatment and provide operating capital
and restructure our Restated Term Loan Agreement. Also, Corval will
advise us in connection with our continued exploration of possible strategic
alternatives, including a Business Combination or arranging a Financing
Transaction (each a Possible Transaction).
To date,
we have paid Corval $100,000 and Corval is entitled to receive a monthly
advisory fee of $25,000, payable in advance every 30 days, unless the agreement
is terminated early. Corval will be compensated through a combination
of the monthly advisory fee and contingent success fees related to the nature of
the transaction consummated, if any. Under the terms of our agreement
with Corval, any monthly fees paid Corval will be credited against any success
fees Corval is entitled to. The agreement provides for different
success fees, depending on the nature of the Possible
Transaction. Success fees, if any, may be paid as a mix of (1) new
East Fork equity valued at 5% of the equity value retained by our existing unit
holders (excluding any new investment by existing unit holders) if any, (2) a
variable percentage of funds raised through debt or equity financing, if any,
(3) a variable percentage of transaction value upon a merger/acquisition or sale
of our assets, if any, and (4) a 1% of the principal obligation of any
restructured debt, if any. However, any funding (be it debt, equity,
or other) will not be subject to multiple success fees for the same
funds.
Also, we
agreed to indemnify Corval against various liabilities arising out of
performance of its services under the agreement, except for claims arising from
or as a result of breach by Corval of the agreement or gross negligence, fraud,
or willful misconduct by Corval or its agents.
Corval’s
engagement may be terminated by either party at any time, with or without cause,
upon written notice to the other party. If the agreement terminates or expires
and we subsequently close a Possible Transaction within 12 months of such
termination or expiration in which Corval was involved, we will be liable to
Corval for success fees under the agreement. The foregoing
description of the agreement does not purport to be complete and is qualified in
its entirety by reference to the agreement, which is filed as Exhibit 10.26 to
this Annual Report on Form 10-K.
PART III
|
Directors, Executive
Officers and Corporate
Governance.
|
The
information included in our 2010 Proxy Statement regarding Directors and
Executive Officers including that appearing under the captions “Proposal 1 –
Election of Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance,” is incorporated by reference in this section.
We have a
Code of Ethics (Code) that applies to all of our employees, including our
principal executive officer and principal financial officer. The Code is
monitored by the Audit Committee of our Board of Directors and is annually
affirmed by our directors and executive officers. We maintain a corporate
governance page on our website which includes the Code. The corporate governance
page can be found at www.eastforkbiodiesel.com by clicking on “Governance.” A
copy of the Code will also be provided without charge to any member who requests
it. Any future amendment to, or waiver granted by us from, a provision of the
Code will be posted on our website.
|
Item 11.
|
Executive
Compensation.
|
The
applicable information appearing in our 2010 Proxy Statement, including that
under the captions “Compensation of Non-Employee Directors” and “Executive
Compensation,” is incorporated in this section
|
Item 12.
|
Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.
|
The
applicable information appearing in our 2010 Proxy Statement, including that
under the caption “Voting Securities and Principal Holders Thereof” and “Equity
Compensation Plan Information” is incorporated in this section.
|
Item 13.
|
Certain Relationships
and Related Transactions, and Director
Independence.
|
The
applicable information appearing in our 2010 Proxy Statement, including that
under the captions "Corporate Governance," "Audit Committee," "Compensation
Committee" and "Nominating Committee" is incorporated in this
section.
|
Item 14.
|
Principal Accounting
Fees and Services.
|
The
information included in our 2010 Proxy Statement under the caption "Relationship
with Independent Registered Public Accounting Firm" is incorporated in this
section.
PART IV
|
Item 15.
|
Exhibits, Financial
Statement Schedules.
|
The
following documents are filed as part of this Annual Report on Form
10-K:
Financial
Statements
Report of
McGladrey & Pullen, LLP, our Independent Registered Public Accounting
Firm
Balance
sheets
Statements
of operations
Statements
of members’ equity
Statements
of cash flows
Notes to
financial statements
Exhibits
The
exhibits listed in the accompanying index to exhibits are filed or incorporated
by reference as part of this Form 10-K.
Exhibits
marked with an asterisk (*) are incorporated by reference to documents
previously filed by East Fork Biodiesel, LLC with the Securities and Exchange
Commission, as indicated. Exhibits marked with a plus (+) are
management contracts or compensatory plan contracts or arrangements filed
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K. All other
documents listed are filed with this Annual Report on Form 10-K.
|
Number
|
Description
|
|
|
3.1*
|
Articles
of Organization of East Fork Biodiesel, LLC dated January 5, 2006, as
amended on January 27, 2006 (Exhibit 3.1 to Form 10-SB12G/A filed on
January 29, 2008)
|
|
|
|
|
|
|
3.2.*
|
First
Amended and Restated Operating Agreement of East Fork Biodiesel, LLC,
Effective August 26, 2008 (Exhibit 3.1 to Form 8-K filed on September 2,
2008)
|
|
|
|
|
|
|
10.1*
|
Restated
Term Loan Agreement by and between Farm Credit Services of America, FLCA
and East Fork Biodiesel, LLC dated June 17, 2008 (Exhibit 10.1 to Form 8-K
filed on June 23, 2008)
|
|
|
10.2*
|
Amendment
No. 1 to Restated Term Loan Agreement between East Fork Biodiesel, LLC and
Farm Credit Services of America, FLCA dated February 20, 2009 (Exhibit
10.1 to Form 8-K filed on February 26, 2009)
|
|
|
10.3*
|
Administrative
Agency Agreement between Farm Credit Services of America, FLCA and East
Fork Biodiesel, LLC dated January 30, 2007 (Exhibit 10.2 to Form 10-SB12G
filed on January 28, 2008)
|
|
|
|
|
|
|
10.4*
|
Construction
and Term Loan Supplement between Farm Credit Services of America, FLCA and
East Fork Biodiesel, LLC dated January 30, 2007 (Exhibit 10.4 to Form
10-SB12G filed on January 28, 2008)
|
|
|
|
|
|
|
Security
Agreement by and between Farm Credit Services of America, FLCA and East
Fork Biodiesel, LLC dated January 30, 2007
|
||
|
10.6*
|
Amendment
No. 1 to Security Agreement by and between Farm Credit Services of
America, FLCA and East Fork Biodiesel, LLC dated June 17, 2008 (Exhibit
10.2 to Form 8-K filed on June 23, 2008)
|
|
|
10.7*
|
Agreement
by and between Farm Credit Services of America, FLCA and East Fork
Biodiesel, LLC dated June 17, 2008 (Exhibit 10.3 to Form 8-K filed on June
23, 2008)
|
|
|
10.8*
|
Amendment
No. 1 to Agreement between East Fork Biodiesel, LLC and Farm Credit
Services of America, FLCA dated February 20, 2009 (Exhibit 10.2 to Form
8-K filed on February 26, 2009)
|
|
|
10.9*
|
Management
and Operational Services Agreement between Renewable Energy Group, LLC and
East Fork Biodiesel, LLC dated September 26, 2006 (Exhibit 10.5 to Form
10-SB12G filed on January 28, 2008)
|
|
|
|
|
|
|
10.10*
|
First
Amendment to Management and Operational Services Agreement dated December
1, 2007 between Renewable Energy Group, Inc. and East Fork Biodiesel, LLC
(Exhibit 10.5.1 to Form 10-SB12G/A filed on March 31,
2008)
|
|
Number
|
Description
|
|
|
10.11*
|
Design-Build
Agreement between East Fork Biodiesel, LLC and REG Construction Services,
LLC dated October 10, 2006 (Exhibit 10.6 to Form 10-SB12G filed on January
28, 2008)
|
|
|
|
|
|
|
10.12*
|
Change
Order dated November 12, 2007 between Renewable Energy Group, Inc. and
East Fork Biodiesel, LLC (Exhibit 10.6.1 to Form 10-SB12G/A filed on March
31, 2008)
|
|
|
10.13*
|
Agreement
regarding Payment for Construction by and between East Fork Biodiesel,
LLC, Farm Credit Services of America, FLCA, and REG Construction &
Technology Group, LLC, formerly known as REG Construction Services, LLC
(Exhibit 10.1 to Form 8-K filed on May 2, 2008)
|
|
|
10.14*
|
Firm
Throughput Service Agreement between Northern Natural Gas Company and East
Fork Biodiesel, LLC dated September 11, 2006, as amended of even date
(Exhibit 10.7 to Form 10-SB12G filed on January 28,
2008)
|
|
|
10.15*+
|
East
Fork Biodiesel, LLC 2007 Unit Appreciation Agreement dated September 17,
2007 (Exhibit 10.8 to Form 10-SB12G filed on January 28,
2008)
|
|
|
|
|
|
|
10.16*+
|
Board
of Directors Nonqualified Deferred Compensation Plan Adoption Agreement of
East Fork Biodiesel, LLC dated September 17, 2007 and Lane & Waterman
LLP Prototype Nonqualified Deferred Compensation Plan Basic Plan Document
(Exhibit 10.9 to Form 10-SB12G filed on January 28,
2008)
|
|
|
|
|
|
|
10.17*+
|
Contract
between East Fork Biodiesel, LLC and Allen Kramer dated January 11, 2007
(Exhibit 10.10 to Form 10-SB12G filed on January 28,
2008)
|
|
|
|
|
|
|
10.18*+
|
Contract
between East Fork Biodiesel, LLC and Dan Muller dated January 11, 2007
(Exhibit 10.11 to Form 10-SB12G filed on January 28,
2008)
|
|
|
10.19*+
|
Written
Description of Compensation Arrangement with Kenneth M. Clark (Exhibit
10.12 to Form 10-SB12G/A filed on March 31, 2008)
|
|
|
10.20*+
|
Consulting
Agreement dated March 26, 2006 between AG Visions, LLC and East Fork
Biodiesel, LLC (Exhibit 10.13 to Form 10-SB12G/A filed on March 31,
2008)
|
|
|
10.21*
|
Put
Option Agreement dated December 15, 2006 between Quinn A. Baade, Jeanne M.
Baade and East Fork Biodiesel, LLC (Exhibit 10.14 to Form 10-SB12G/A filed
on March 31, 2008)
|
|
|
10.22*
|
Put
Option Agreement dated December 15, 2006 between David B. Golwitzer, Karen
B. Golwitzer and East Fork Biodiesel, LLC (Exhibit 10.15 to Form
10-SB12G/A filed on March 31, 2008)
|
|
|
10.23*
|
Option
Agreement dated May 3, 2006 between Mark Firstl, Gerdis Oil Company, Inc.
and East Fork Biodiesel, LLC (Exhibit 10.16 to Form 10-SB12G/A filed on
March 31, 2008)
|
|
|
10.24*+
|
Management
Agreement entered into as of September 8, 2008 by and between Renewable
Fuels Management, LLC and East Fork Biodiesel, LLC (Exhibit 10.1 to Form
8-K filed on September 12, 2008)
|
|
|
10.25*
|
Letter
Agreement between William Blair & Company East Fork Biodiesel, LLC
dated December 26, 2008 (Exhibit 10.1 to Form 10-Q filed on February 17,
2009)
|
|
Number
|
Description
|
|
|
Letter
Agreement between Corval Group, Inc. and East Fork Biodiesel, LLC dated
August 25, 2009
|
||
|
10.27*
|
Master
Contract by and between East Fork Biodiesel, LLC and the Iowa Department
of Economic Development, Contract Number: P0606M01004 entered into June
20, 2006, as amended on July 3, 2008 (Exhibit 10.1 to Form 8-K filed on
June 1, 2009)
|
|
|
Power
of Attorney
|
||
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
||
|
Certification
of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
||
|
Certification
of Principal Executive Officer and Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
EAST
FORK BIODIESEL, LLC
|
|
|
||
|
By:
|
/s/Chris
L. Daniel
|
By:
|
/s/Jack
W. Limbaugh, Jr.
|
|
|
Chris
L. Daniel
|
Jack
W. Limbaugh, Jr.
|
|||
|
Chief
Executive Officer
|
Treasurer
|
|||
|
Date: December
4, 2009
|
Date: December
4, 2009
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in their
capacities on the 4th day of December 2009.
|
Signature
|
||
|
/s/Kenneth
M. Clark
|
Director
|
|
|
Kenneth
M. Clark
|
||
|
/s/Lennon
Brandt
|
Director
|
|
|
Lennon
Brandt
|
||
|
/s/Allen
A. Kramer
|
Director
|
|
|
Allen
A. Kramer
|
||
|
/s/Daniel
Muller
|
Director
|
|
|
Daniel
Muller
|
||
|
/s/Jack
W. Limbaugh, Jr.
|
Treasurer
and Director
|
|
|
Jack
W. Limbaugh, Jr.
|
||
|
/s/Michael
L. Kohlhaas
|
Secretary
and Director
|
|
|
Michael
L. Kohlhaas
|
||
|
/s/James
A. Meyer
|
Chairman
and Director
|
|
|
James
A. Meyer
|
||
|
/s/Dean
Ulrich
|
Vice
President and Director
|
|
|
Dean
Ulrich
|
44